Life insurance from an Islamic perspective I

In modern business, one of the ways to reduce the risk of loss due to misfortunes is through insurance. The concept of insurance where resources are pooled to help the needy does not contradict Shariah.

The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept, in fact it had been practised by the Muhajrin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago. It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shariah.

Conventional insurance involves the elements of uncertainity (Al-gharar) in the contract of insurance, gambling (Al-maisir) as the consequences of the presence of uncertainty and interest (Al-riba) in the investment activities of the conventional insurance companies which contravene the rules of Shariah. Takaful is an alternative form of cover which a Muslim can avail himself against the risk of loss due to misfortunes.

It is a Muslim's belief that any misfortune that befalls him, that results in the loss of life or belongings, is by the will of the Almighty Allah. At the same time, we are also taught to take positive steps to avoid or reduce the possibility of these misfortunes as indicated by the hadith:

"The Prophet (s.a.w.) told a Bedouin who left his camel untied to the will of Allah: Tie your camel first, then put your trust in Allah" (Narrated by at-Tirmizi and Ibn Majah)

Nowadays, insurance is seen as a means of action undertaken to reduce the risk of loss due to misfortunes. An alternative form of cover a Muslim can avail himself against the consequences of catastrophe and disaster is by participating in Takaful schemes. It is a scheme based on solidarity, shared responsibility and brotherhood among members. Participants of this scheme all agree to mutually help each other by contributing financially on the basis of tabarru' (donation).

Insurance as a concept does not contradict the practices and requirements of Syari'ah. In essence, insurance is synonymous to a system of mutual help. It is the pooling of resources to help the needy, a scheme which is similar to the principles of compensation and shared responsibility among the community, as practised between the Muhajirin of Mecca and the Ansar of Medina following the hijra of the Prophet over 1400 years ago.

However, Muslim Jurists are of the opinion that the operation of the conventional insurance, in its presence form, does not conform to the rules and requirements of Syari'ah as it embodies the following three elements:

(i) Gharar The unknown or uncertain factors in operation of a contract in life insurance contracts.

(ii) Maisir Gambling arises as the consequence of the presence of Gharar, particularly in the case of life insurance.

(iii) Riba Interest and other related practices that do not conform to the Syari'ah in the investment activities.

Birth of Takaful in Malaysia The foundation for the development of Takaful or Islamic insurance was set by the wish of Muslim to realign more to Islamic practices in the economic activities coupled with the strong support from the Government for Islamic financial services. In the same manner as conventional banking requires the services of insurance, Islamic banking also needs the services of insurance. It is befitting that the insurance services for Islamic banking must be based on a system acceptable to Islam. Takaful Concept In Malaysia, the provision of insurance cover as a form of business in conformity with Syari'ah is based on the following Islamic principles: (i) Al-Takaful The pact among a group of people called participants, reciprocally guaranteeing each other against loss or damage that may befall any one of them.

(ii) Al-Mudharabah The commercial profit sharing contract between the provider(s) of funds (participants) for a business venture and the entrepreneur who actually conducts the business.

(iii) Tabarru' The agreement by a participant to relinquish as tabarru' (donation), a certain proportion of the Takaful contribution that he agrees or undertakes to pay, thus, enabling him to fulfil his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.

Thus, the operation of Takaful may be envisaged as a profit sharing business venture between Takaful operator and the individual members of a group of participants who wish to reciprocally guarantee each other against certain loss or damage endured by any one of them. The operation of Takaful is confined within the Tijari (commercial) sector or popularly known as the private sector.

The traditional aspects of the commercial activity of Takaful must be subject to Islamic contractual laws to ensure its compliance with Syari'ah. Within this fundamental framework contract of tijari, Takaful is therefore based on the Islamic principle of Al-Mudharabah.