Insurance and Shari’a

With the widespread availability of financing after the liberalisation of financial sector, insurance is fast becoming a necessity in Pakistan. Car financing, for example, by banks and other forms of lending by banks and other financial institutions require the borrowers to buy insurance on the items purchased through financing. While shari’a compliant financing is now widely available from the fully-fledged Islamic banks like Meezan, Dubai Islamic, Bank Islami and others and from conventional banks like Muslim Commercial Bank, Bank Al Falah etc, the same cannot be said for shari’a compliant insurance, which is still at an initial stage of development. Although there are five takaful companies operating in Pakistan, their market share in the insurance market remains insignificant.
Takaful, supposedly a shari’a compliant version of cooperative or mutual insurance, is being provided by a small number of players in Pakistan. While takaful is being presented by the proponents of Islamic insurance, as a mutual or cooperative form of insurance in line with the shari’a requirements, it remains a fact that takaful business by and large is not cooperative in its governance structure and operations. All takaful operators in Pakistan (five in number) are set up as joint stock companies and not as mutual organisations. This raises a fundamental question whether takaful business is actually cooperative and follows principles of mutuality.
From shari’a viewpoint, conventional insurance has problems because it is interest-based and involves elements of gambling and contractual uncertainty. How?
An insurance arrangement can be defined as a contract between two parties whereby one party (the insured) pays an amount of money (either in a lump-sum or in easy instalments during a certain time period) to another party (the insurer) who undertakes to pay certain amount of money (significantly larger than the money received from the insured) if and when the insured suffers a loss due to happening of an event in which the insured has a real interest. Thus, a person who buys car insurance pays a certain amount of money called insurance premium (either in a lump-sum or instalments) to an insurance company who undertakes to pay a certain amount of money in case the car’s value suffers a loss due to an accident or fire, or indeed is stolen. Many insurance policies also pay for the third party damages.
This arrangement is in effect exchange of unequal amounts of money between the insured (who pays less than what he receives) and the insured (who may actually get all the premia and pay nothing if no valid claim is made or pays a significantly higher sum following a valid claim by the insured). This is by definition a case of the prohibited interest or what is known as riba in Islam. Similarly, there are elements of gambling in the conventional insurance. The very fact that someone may receive a large sum of money by paying a relatively small “entry fee” (premium), dependent upon occurrence of a random event in its nature is gambling.
Given that insurance is now modern time commercial necessity, it was deemed important by the shari’a community to agree on a shari’a compliant alternative to this vital economic institution. Thus, cooperative insurance was deemed more in line with shari’a than the conventional insurance, which is commercial in its nature and practice.
The consequent takaful model that emerged is, however, also commercial in nature. Modern takaful businesses have a two-tier structure: a cooperative pool of funds and a commercial entity called takaful operator, which manages the takaful funds. In practice, it is the takaful operator that takes the lead role in takaful business, and hence controls all aspects of the business, which makes it more in line with the commercial insurance than cooperative takaful. In Pakistan, prominent shari’a scholars like Mufti Taqi Usmani have for long emphasised on the need for a pure cooperative takaful business, based on the institution of waqf, but it has yet to emerge as a significant business activity in the country. Given the near failure of Islamic banks to commit themselves meaningfully to social responsibility, is it the right time for takaful companies to develop a pure cooperative business model to serve the communities rather than profiting from the market forces? If takaful companies fail to take this challenge, it will be a lost opportunity for which the stakeholders in the industry may have to regret for a long time to come.

The writer is a Shari’a advisor to a number of banks and financial institutions and can be contacted at [email protected]