Takaful & Re-Takaful: The Shari’ah Perspectives

I. Introduction

Insurance under Islamic law can be defined as a mutual financial transaction between two parties in which one provides material security for the other against a defined risk. In an insurance policy, the operator provides compensation against unexpected loss or damage, if any, but in case where the risk does not happen to the subject matter of the policy within the agreed period, the insured participant, upon the maturity of the policy, should be entitled to the whole amount (in life policy) of the paid contribution, together with a share of profits made over and above the paid contributions.

Until today, groups of Islamic scholars are in conflicts in viewing Islamic insurance. There might be because of the nature of its operations, principles used or the term ‘insurance’ itself which is originated from the west. However, many scholars who are in favor of the product today proved that insurance can be Islamized if it is implemented using the underlying principles which is relevant in Islamic mu’amalat.

When we talk about insurance, there is a Malay phrase which says, “malang tak berbau”, which means the loss cannot be predicted. Due to that, most people who are risk averse try as far as possible to protect themselves against unfavorable risk. Then, it is when takaful (Islamic insurance) come into an existence.

Every human being always hopes for the best in this world and the hereafter. Due to that reason, takaful provides a wide and flexible policy to protect Muslims from any harm. Life insurance for example, provides material protection for unfortunate off springs in case of the death of policyholders (for example, father). However, any takaful operation is bound to certain rules in order to ensure that its operations are in line with the Islamic teachings and principles. For example, Allah prohibits any kind of unjust accumulation of wealth and profit.

“O you who believe! Eat not up your property among yourselves unjustly except it be a trade amongst you, by mutual consent. And do not kill yourselves (nor kill one another). Surely, Allâh is Most Merciful to you. (Al-Qur’an, 4:29)”

Insurance policy is operated based on the principles of al-Mudarabah, whereby the insurer is a capital provider and insurance company is the entrepreneur. They will be sharing agreed portion of profits and simultaneously could avoid the element of interest (Riba) which is strictly prohibited in Islam. As Allah says:

“Those who eat Ribâ[] (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitân (Satan) leading him to insanity. That is because they say: "Trading is only like Ribâ (usury)," whereas Allâh has permitted trading and forbidden Ribâ (usury). So whosoever receives an admonition from his Lord and stops eating Ribâ (usury) shall not be punished for the past; his case is for Allâh (to judge); but whoever returns [to Ribâ (usury)], such are the dwellers of the Fire - they will abide therein. (Al-Qur’an, 2:275)”

Takaful is a policy which not only a medium to invest and protect one’s wealth but the main purpose of it is to promote the contractual parties with mutually co-operation to each others and not to take advantage or make profit against the expense who are in need or in difficulties. As Allah says:

“…and help you one another in righteousness and piety”. (Al-Qur’an, al-Maidah :2)

Allah says in other verse:

“…Narrated by Abu Huraira (r.a) from the Holy Prophet (S.A.W.) saying that: whosoever removes a worldly hardship from a believerAllah (s.w.t.) will remove from him one of the hardships of the hereafter. Whosoever alleviatesthe needy person, Allah (s.w.t.) will alleviate from him in this world and the next…”. (Sahih Muslim (Arabic), Kitab al-Birr, 59).

Thus, we can say that the Takaful policy is designed not only to provide material protection to the policyholders. But, it is also a shape of investment which can generate benefits to both contracting parties. The contractual relation between the contracting parties leads to strengthened brotherhood between Muslims and also non-Muslims within the society.


II. Unique Characteristics of Takaful

Takaful (Islamic Insurance) is not similar to the conventional one. This is because Islamic insurance posses a few characteristics to ensure that it is operated in line with the teaching of Islam. Those characteristic can be categorized as below:

“…Narrated by Omar bin al-Khattab (r) the Holy Prophet (s.a.w.) said: The reward of deeds depends upon the intentions and every person will get the reward according to what he has intended.” (Bukhari and Muslim, (agreed), Kitab al-wahi, (trans. English.) Khan, M.Mohsin, op. cit. vol.1, No.1, p.1)

By referring to the above hadith, every Islamic insurance contract should be based on the sincerity to lighten the burdened of our Muslims brothers and sisters when they are in difficulties not to take advantage from those who are in need.

Insurance policy is only a mechanism to protect a person from any future unexpected loss and damages. However, Muslims should put the trust and faith only to Allah since He is the only one who can knows the future and He is the absolute power of protection over the entire universe. Allah says in the Qur’an:

“To Him belongs the dominion of the heaven and the earth: to give life and death: And He has power over all things.”(Al-Qur’an, Surah al-Hadid;2)


III. Absolute Shari’ah Principles

Islam is a way of life. Every Muslims is left with two main resources to guide them in this world. Therefore, it is necessary for any mu’amalat to be in conformity with the divine sources of Holy Qur’an and Sunnah. Any practices which against the teachings of both Divines regulations will become invalid. Allah says:

“If any one desires any religion other than Islam never will it recognized by Allah (s.w.t.)…” (al-Quran, Surah 3:85)


IV. Moral Attributes

Takaful contract should be bounded by the moral and spiritual elements. Any contract must be concluded with utmost good faith, honesty, disclosure and truthfulness (Billah, M. Ma’sum, Islamic and Modern Insurance: Principles and Practice. Ilmiah Publishers, Malaysia, 2003 at p. 39).

“O you who believe! Eat not up your property among yourselves unjustly except it be a trade amongst you, by mutual consent. And do not kill yourselves (nor kill one another). Surely, Allâh is Most Merciful to you.” (Al-Qur’an, 4:29).


V. Elements of Contracts

It is suggested that any takaful contract should be concluded with the availability of the following elements: (Billah, M. Ma’sum, Manual of Principles and Practices of takaful and Re-Takaful, International Islamic University Malaysia (2002/2003) at p. 48)

1. The parties of the contract must have legal capacity;

2. The availability of insurable interest;

3. Indemnity clause: The insurer is unilaterally bound to compensate the insured for the loss to the agreed-subject matter;

4. The payments of premium by the insured as a consideration to the contract;

5. The presence of mutual consent by both parties

6. An offer and acceptance to be expressed in a formal agreement between the insurer and the insured, in which the terms and conditions being compliance with the Shari’ah principles;

7. Specification of period for the agreed policies which is to be contained in the agreement.

Al-Mudarabah Principles:

One of the critics on impermissibility of conventional insurance is due to the element of interest (Riba) exist in its contract As an alternative, Takaful is operated using the principles of al-Mudarabah financing techniques to ensure just and permissible transactions in the contract. The principle allows both contracting parties to share profits and dividends justly made over the paid premiums.


References:

1.) Billah, M. Ma’sum, Islamic and Modern Insurance: Principles and Practice. Ilmiah Publishers, Malaysia, 2003 at p. 23
2.) Billah, M. Ma’sum, Manual of Principles and Practices of takaful and Re-Takaful, International Islamic University Malaysia (2002/2003) at p. 47
3.) al-Qur’an, Surah al-Baqarah (2:201)
4.) Sahih al-Bukhari, Kitab al-Faraif, (trans. Eng.) by Khan, Dr Muhammad Muhsin, Kazi Publication, Lahore, 1979, Vol. 8, No.725, p.447f.
5.) Al-Qur’an, 4:29