25-04-2014, 04:57 PM
Comparative Analysis of Islamic and Prevailing Insurance Practices
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Abstract
Purpose – Islam is believed to provide guidance in every sphere of life. This guidance is not limited to the
social aspects but also covers economic dimension of human life. Islamic economic system supports interest
free financial system. This paper addresses insurance, a part and parcel of modern financial and economic
system. We have compared prevailing insurance system with Islamic alternative, Takaful. We have attempted
to highlight its main features and discussed its suitability.
Methodology - Sources of Sharia (Islamic way of life) are sought to trace the roots of Takaful. A brief
comparison between Islamic insurance and prevalent system is given to find out whether Islamic insurance
can take over prevailing insurance system.
Introduction
Islam is one of the greatest religions of the world, second largest in terms of number of believers. Nearly 1.3
billion of Muslims live in this planet. Islam deals with every social and non-social issue. For financial and
economic systems it has given broader outlines. Takaful an Arabic word means “assuring each other”
(Takaful, 2010). Takaful is the Islamic term used to denote Islamic insurance. Takaful is based on the
principle that the pool of donations is created and is used to support each other. This is the principle of
Tabarru. To fully understand Takaful one can see principles of waqf, Kafalah, Tabarru etc... (Usmani, 2007).
Conventional insurance is Haram (forbidden) in Islam because it contains the element of Riba, Maisir and
Gharar. The funds pooled from large no of policy holders are reinvested in interest bearing instruments etc..
As the translation of the verse of the Quran S-ii, 274 says "God hath permitted trade and forbidden usury”.
Usury means giving loan at high interest.
Concept of Takaful in Sharia
Takaful principles have their roots in Sharia. Sacred Orders of Allah in Quran, religious, social and
commercial practices of The Holy Prophet (SAW), Qiyas (comparative arguments), and Ijma (the agreement
of whole Islamic world on an issue) form the basis of Sharia. Sharia is the constitution of Islamic world. The
basic principles of Sharia are necessary to be discussed before further discussion on Islamic insurance.
Why Islamic Sharia Prohibits Conventional Insurance?
An opinion was sought from a religious scholar Syed Ibn-Abdin about insurance related to sea. In his opinion
it is not according to Islamic Sharia that a trader pays amount of premium to insurance company so that he
may be indemnified (Mankabady, 1989). Conventional insurance include Riba, Maisir, and Gharar which are
against Islamic Sharia. Riba is used in Arabic language which means excess or addition in something. In Islam
loan without interest is allowed and if interest is charged then it is Haram and against Sharia however service
charges are allowed (Mahmood, 1991). It is narrated by Hazrat Jabir (R.A),”The Holy Prophet (SAW) cursed
the devourer of usury, its payer, its scribe and its two witnesses and they were equal (in sin)” (Karim).
Gharar is uncertainty in a contract in which one party is in benefit and loss is beard by other party. Gharar
may be in case of any insurance contract in which there is no idea about payment as promised or there is no
idea about how much amount should be paid at the time of its payment. Maisir in insurance is in which policy
holders invest small amount premium with hope to gain large profit and some time due to losses they lose
their premium invested and claims may be higher than contributions. Maisir refers to obtaining or acquiring
something without any effort. This is done in gambling (Mohammad, 1988). In Holy Quran Allah has clearly
declared Maisir (gambling) unlawful and there is no relaxation in it (Quran, 627 A.D). About 200 scholars
participated in a conference in Makkah and concluded that insurance practiced in conventional insurance
companies is against Sharia
( First international conference on Islamic economics, 1976). In this
conference it was also concluded that Islamic insurance system is different from conventional insurance
system and is according to Sharia. Council of Islamic Ideology of Pakistan in 1983 rejected all the models of
commercial insurance.
Conclusion
Britain is a Muslim minority country. A nationwide study in Britain revealed that 74% of Muslim participants
considered their religion were very important in living their lives, and 21% considered it fairly important.
Moreover, around 80% declared to visit mosque once or more than once in a week (Modood, et al., 1997).
Muslims represent a large portion of world population and are increasing at a greater pace than other religious
communities. Muslims are 20% of the world population and are expected to be 30% by 2025 (Shafie &
Othman, 2006). Fifty seven Islamic countries are regular members of the Organization of Islamic
Conference’s (OIC).
The Muslims all around the world wish to go side by side with modern commerce. They are not willing to
follow non- Islamic practices. They are looking for Islamic alternatives to prevailing financial instruments and
practices. Islamic banking is a great success not only in Muslim majority but also in Muslim minority
countries. Major international banks are today offering Sharia compliant products. In the similar manner
akafal presents an Islamic alternative to insurance.