Islamic Insurance

[awaisaftab]

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The importance of insurance can not be denied but the present form of insurance is HARAM according to wast majority of Ulmahs of Pakistan. Maulana Maududi (R.A) raised 3 points against insurance (specially with reference to life insurance)

1.The premium of policy holders usually used in usurious businesses to ensure consistent profits

2.A person who suffers the loss enjoy profit and premium of all policy holders, so this thing involve the factor of chance and makes the insurance like gambling

3. In case of life insurance all amount of policy is given to the person who is nominated by deceased person rather distribution of policy money in accordance with the Law of Herritage of Islam.

The Islamic economist have been trying to develop Islamic Insurance System for many years. Prof Khurshid Ahmed (Karachi University) Prof. Najabat Ullah Sidiqui, Maulana Mufti Taq Usmani and other many reknowned scholars have been researching on this topic.

It will be a matter of great pleasure that Islamic Insurance has been introduced in Pakistan. The Islamic Insurance Company Pak Qatar Takaful has started his work.

If any one wants to know the working structure of Islamic Insurance then please read Islamic Economic written by M. Ikram published by Ilmi Kitab Khana Lahore.

For further information following web site can also be visisted. But keep it in mind that ussually this types of web site do not give arguments and detailed procedures rather these web sites mainly provide introduction of products.

http//www.pakqatar.com.pk/general/MediaRoom/EventsDetails.aspx?ID=2

Now we can expect that the launching of Islamic Insurance will lead toward the establishment of Islamic capital and finacial market in the country.
Regards,

Awais Aftab

[awaisaftab]

Queries,suggestions, views and any additional information will be highly obliged.

Regards,

Awais Aftab

[Odyssee]

The following links might be helpful in understanding the Takaful Model.
http//en.wikipedia.org/wiki/Takaful
http//www.takaful.com.sa/m1sub3.asp
http//www.takaful.com.sa/m4sub2.asp

[athal khan]

DEAR Awais Aftab do u think that there is any alternate way of providing banking system and one will do it practicle

[awaisaftab]

In Pakistan many Islamic banks have formed the names of Islamic banks are as follows
1.Al Barkah Bank
2.Meezan Bank
3.Bank Islami Pakistan
4.Emirates Islamic Banks

These banks have hundreds of branched in allover the country beside it many commercial banks are also providing Islamic Banking Facilities. Fast development of Islamic Banking sector suggest that we are moving towards formation of a Islamic Capital Market in Pakistan.

Regards,

Awais Aftab

[Odyssee]

I must however remind that there are objections over some of the products of the Islamic banks as they are way too similar to conventional banking products e.g. Ijarah-wal-iqtina, Sale and Leaseback, Murabaha.

Even in the case of Islamic Insurance (Takaful) an argument can be given that the person who suffers the loss will enjoy the premium of all policy holders and there is a factor of chance, so it makes insurance like gambling.

[awaisaftab]

An Islamic Jurist and a person having the knowledge of both Sharia and Economics can comment that which mode of finance is Islamic and which is Haram. The knowledge of many of us is limited to the B.Com Economics. At B.Com level very basic concepts of Economics are taught but in BA/B.Sc advance economics is being taught. Due to this difference of syllabus some universities of Pakistan don’t allow B.Commers to appear in M.A/M.Sc (Economics.

At M.A (Economics) a subject of Islamic Economics is being taught. In Islamic Economics we thoroughly read the structure of Islamic System, its social impact, comparison of socialism and capitalism, Islamic banking and insurance, institutions of Islamic economics system,guidelines of Islam about agriculture, industry, trade & commerce. Beside it not only dry theories of Islamic Economics are taught but arguments from Holy Quran and Hadis are also taught...

Note The above discussion is general and clearly not for any particular person.

Now I come back to my main topic. The concept of Takaful is not new. It is based on shared responsibility or mutual help. The contribution of policyholders is divided in two parts one part of contributions or premium is invested in the Halal businesses, Islamic Banks and Sakuks are priority for investment of Islamic insurance companies. Other part of premium is considered as Donation or Sadqa this amount is given to those persons who suffer losses. Thus both the benefits of protection as well as saving/investment are available in insurance. The Takaful contract is clearly mentions that to which extent the premium amount will be considered as donation or sadqa and how much amount will be used for investment.. Another big difference between conventional and Islamic insurance is that conventional insurance companies usually invest the amounts of premiums in interest based business like in conventional banks and in interest based securities

Here the importance of contract and its terms and conditions are apparent. Nikah (Marriage) is also a contract between one man and women.. Nikah allows man and women to establish Halal sexual relations with each other. If a man and women establish sexual relations without Nikah then it will be ZANA. In both Nikah and Zana the sexual relations between man and women are apparent but the differentiating thing is that Nikah is a contract in which offer and acceptance are made in the presence of witnesses. In many Hadis Hazrat Muhammad(SAW) has ordered Muslims to announce the nikah at large level. This example I quote only to differentiating that how a Haram thing can become Halal and appreciable in Islam. Some minor change can make a thing or act Halal or Haram. Another example is that if you slaughter a cow without saying TAKBIR than its meat will be Haram but only a minor thing that is reciting of Takbeer will make the meat of cow Halal.

The Islamic insurance has both the benefits of protection as well as saving/investment for the policyholders there is no factor of chance is involved in Islamic Insurance. Beside it policyholders also enjoy extra income. But in conventional insurance policy holder don’t take any benefit a person who suffers loss enjoys premiums of all other policyholders.

Regards,

Awais Aftab

[Odyssee]

may i inquire that how there isn't a factor of chance involved in Islamic Insurance?

Secondly, if we consider the case of sale and leaseback, the intent of the transaction is not to have a SALE and LEASEBACK, but the intent is to raise finance. Even the accounting practices for such a transaction is to record it is a MODE OF FINANCE rather than as a SALE and LEASEBACK transaction. In short, the real substance of the transaction is different from its legal form.

Similar is the case with Ijarah(the mode of finance through which Islamic banks lease cars). If the lessee defaults a lease payment, they are bound to pay a CHARITY to the bank(which is by the way always almost equal to the compound interest charged by conventional banks) under the terms of the Ijarah contract. Bounding a person to pay CHARITY to the bank is a very objectionable matter.

to the change the subject entirely; some people give an argument that the monetary system should be run according to the Gold Standard instead of the Fiat Currency in order to establish a purely Islamic economic system. The Austrian School of Economics also supports the Gold Standard, but the standard is considered to be one of the major causes of the Great Depression. Can anyone expand on the pros and cons of the Gold Standard and the difficulties involved in the establishment of such a system?

[awaisaftab]

Only the presence of factor of chance does not invalidate or makes Haram any thing. If the probability that relative of a young person will die in next one year is 9/10 and the said person receives inheritance on the death of his relative. This money will be Halal for him. But if factor of chance is apparent in a transaction that the money of all the participants will go in the pocket of a person or only few persons then it will be Haram because it is like gambling. That’s why all types of lotteries are Haram. In the same manner the premium of all policyholders goes in the pockets of some persons. Contrary to this, Islamic Insurance gives the concept of mutual fund in the insurance as well and contributories also receive a return on the part of premium that is used for the investment purpose.

Contrary to banking business, insurance started from the Islamic world. The maritime traders of Muslim Spain were the pioneers of insurance. The concept on insurance was introduced by these Muslim traders as mutual fund. Any merchants who suffered loss during voyage compensated from this mutual fund. Each merchant contributed an amount in this fund. In latter centuries this concept was adopted by European merchants and latter like other business factor of interest (Usury) was introduced in insurance.
Before Muslim Spain we also find an example of mutual responsibility in the life of Apostle of Allah (SAW).After the marriage with Hazrat Khadija Hazrat Muhammad (SAW) was involved in the trading on behalf of Ummul Momineen. During this period a trading caravan of Arab traders experienced a desert storm and lost many camels, horses and merchandise in the desert. Only some persons could be saved from this storm. They returned Makkah and told the whole story then a mutual fund established by the leaders of Makkah in which all traders contributed . Hazrat Muhammad (SAW) also contributed in this mutual fund.

As far as your question regarding penalty charged by the Islamic banks , Islamic banks usually use the governing rates of the money market for imposing penalty. This is because of absence of Islamic Capital and finance market. (Point to be noted, I have said in my last posts that the formation of Islamic insurance company will lead towards formation of Islamic capital market) . This is common practice of finance and money market that the prevailing rate are use for different transactions, penalties or charges. Just like “KIBOR” has been provided to mean Karachi Interbank Offered Rate applicable on first day of each quarter of the financial year. Currently KIBOR is now to be used for the purpose of applying the rate of compensation on delayed refunds u/s 171 as well as the rate of additional tax u/s 205 of the Ordinance. The person on which penalty is imposed can pay it as donation or charity to any madrsa or charitable institute and produce receipt of this donation to the bank to waive penalty.

I will feel very pleasure in discussing pros and cons of the Gold Standard but I would like to respond on this topic on economics forum because it is purely related to economics.

Regards,
Awais Aftab