21 Feb

Insurance in Islamic thought: What is Sharia’h?

By Rizwan Ahmed Farid

What is Sharia’h?


Before I elucidate further the Islamic perspective of insurance, the reader needs to appraise the meaning of Shari’ah: simply, Shari’ah means the Islamic way of life as derived from the Qur-ān and the traditions (Sunnah) of Prophet Muhammad. For Muslims the word of Allah is His law and His law is the command of Allah. It refers to both the Islamic system of law and the totality of the Islamic way of life.

The traditions of the Prophet Muhammad (pbuh) being divinely inspired are not only interpretive of Qur-ānic verses but also complementary to them. I quote two ayath 4:59 , and 4:80 of An-Nissah from the Holy Qur-ān:




Thus the Qur-ān and Sunnah are the fundamental roots of Shari’ah. The two other important sources of Shari’ah law are Ijma and Qiyas.

Judicial issues that cannot be resolved by qiyas are resolved through Ijima (consensus) among fuq’ah scholars. The validity of Ijma is based upon Prophet Muhammad’s saying “My people will never agree upon an error.”

Qiyas, i.e. reasoning by analogy, defines laws from known injunction to new injunction. For the validity of Qiyas, M. Hidayatullah, the former Chief Justice and Vice President of India, quotes Faizee and Amir Ali, when the Prophet sent Mouadh Bin Jabal as Chief Justice (and the Governor) of Yemen:

“The Prophet questioned him (Mouadh) to know how he would conduct himself and this is what was said:


Prophet: On what shalt thou base thy decision?

Mouadh: On the Koran.

Prophet: If the Koran does not give guidance to the purpose?

Mouadh: Then upon the usage of the Prophet.

Prophet: But if that also fails?

Mouadh: Then I shall follow my own reason.


The Prophet (pbuh) fully approved of the replies of Mouadh and praised God that His servant was on the right path.”


The Columbia Electronic Encyclopedia has the following entry for Sharia’h:

“Sharia, the religious law of Islam. As Islam makes no distinction between religion and life, Islamic law covers not only ritual but every aspect of life. The actual codification of canonic law is the result of the concurrent evolution of jurisprudence proper and the so-called science of the roots of jurisprudence (usul al-fiqh). A general agreement was reached, in the course of the formalization of Islam, as to the authority of four such roots: the Qur’an in its legislative segments; the example of the Prophet as related in the hadith; the consensus of the Muslims (ijma), premised on a saying by Muhammad stipulating “My nation cannot agree on an error”; and reasoning by analogy (qiyas). Another important principle is ijtihad, the extension of sharia to situations neither covered by precedent nor explicable by analogy to other laws. These roots provide the means for the establishment of prescriptive codes of action and for the evaluation of individual and social behavior. The basic scheme for all actions is a fivefold division into obligatory, meritorious, permissible, reprehensible, and forbidden….

In accordance with the recommendation of the 11th Report, “the Council’s Working Group for Insurance,” was constituted in 1986. The Working Group comprised of the Ulmā members of the Council, Chairmen of the four Government Insurance Corporations, and the then Controller of Insurance, (late) Abdur Rahman Mohammad Khalfay, a Fellow of the Institute of Actuary.

After extensive research and review the working group of the Council held twelve sessions. Beside the takaful modes of Malaysia, Jeddah, Manama, Sudan, and Bahrain, the mutual insurance companies working in various countries, particularly USA, Japan and Canada were examined in detail. The members of the working group found that all the examined takaful models are incompatible with the injunctions of Islamic Shari’ah.

The concept of cooperative risk sharing is the oldest form of insurance. The Grand Council of Islamic Scholars, Majma-al-Fiqh, Mecca, Saudi Arabia, approved Takaful model as a Shariah-acceptable alternative to traditional insurance system in 1985.

“The working group was of the view that any insurance arrangement, which was not of the mutual type, will not be acceptable in Islam. There was also a general agreement that since the constitution of the various Islamic Insurance Companies was not based on mutual sharing of the risks and the shareholders and policy holders of the companies under review are different entities, none of these could be adopted to serve as a model for the working group.”

The Council of Islamic Ideology reviewed the operations of the existing takafuls in order to find a Shari’ah compatible model for Pakistan. Finally, after seven years of hard labour, the Council members unanimously approved its recommendations in its report on Islami Nizam-e-Beema, on 29th April, 1992; and the Council instead of adapting any of the examined takaful proposed its own structure, “the Blue Print of the Islamic Assurance System,” which formed a part of the recommendations. The recommendation of the Council was printed and presented to the government on 2nd Zul Hijja, 1412 A.H. i.e. 4th June, 1992.

The worthy effort of the Council to establish an Islamic country’s system of Insurance on true Islamic mode will prove to be a milestone as a fundamental document. The system of Insurance which may be set up in future on its proposed basis will be free of the elements of gharar, qimar and ribā on account of which the conventional system of insurance in vogue failed to win the confidence of the Muslim Um’mah of over one and a half billion (now, in 2009, one billion eight hundred and thirty million) who have had few options when shopping for products that conform to their faith.

The Council of Islamic Ideology in its report recommended that:

“The Government may promulgate a regular detailed and codified law as the first stage towards establishment of the new institutions of Takaful. This law should have, like the companies and modarabah ordinances, from the basic and essential orders down to all necessary and sectional details as well as detailed procedures of different matters, business, investments, outlines/sketches and proformas etc; full and complete.”

It is interesting to note that the government did not act for thirteen (13) years on the recommendations of the Council. Insurance Reform Commission was constituted in mid 1987 under the Chairmanship of Justice (Rtd.) M. Mahboob Ahmad. Life insurance market reopened to private local insurers through the Finance Act, of 1990, and to foreign insurers in 1994. Privatization of the State Life Insurance Corporation of Pakistan was constantly the topic of the day. Takaful companies were being established around the world in several Islamic countries. The inordinate delay on the part of the government to implement Council of Islamic Ideology’s recommendations does not seem to have any justification.

My exclusive interview in regard to Private Insurance Companies and State Life was published by the Insurance Journal, Karachi, Pakistan, in July-Aug-Sep 92. In response to one of the question in this interview I suggested a blue print and the strategy of privatization of the State Life Insurance Corporation of Pakistan (SLIC) through mutualization, reproduced as follows:

“Insurance Journal: In your opinion how best can the government privatize SLIC?


“Rizwan Farid,


“The Paid-up Capital of State Life Insurance Corporation is only Rupees fifty-five (55) million, wholly owned by the Federal Government. The corporation has also a life fund of over Rupees twenty (20) billion which belongs to the policyholders. Every year the corporation invests substantial fund in government Ruleurities, real estate, stock and bonds and loans to the policyholders against their cash values.


“In my view the government should offer its total share holding of Rs. fifty-five (55) million at a reasonable price. These shares should be bought by the corporation through its life fund as is the practice of the corporation to buy any share of an approved company. By this transaction the corporation would automatically be converted into a mutual insurance company i.e. a company wholly owned by its policy holders.


“Thereafter the policy holders would elect their own Board of Directors consisting about 15 to 18 members who should first be the policy holders of the corporation and be nominated by election by the professional bodies such as Pakistan Insurance Association, Pakistan Medical Association, Pakistan Bar Council, Pakistan Chamber of Commerce and Industry, University Teachers Federation, Pakistan Engineering Council, Association body of the Chartered Accountants, Pakistan Newspapers owners Association, Federation of Working Journalist, one nominee each elected by Karachi, Lahor and Islamabad Stock Exchanges ,besides one director each elected by the Corporations officers, Area Managers, Staff and Field Workers Federations. To get the elected nominee the corporation would also have to use postal ballots


“These elected directors then would select and appoint professionally qualified and experienced persons for the positions of the Chief Executive Officer, and Executive Directors for each function division of the corporation such as, Marketing, Policy Holders Services, Actuarial, Investment, Audit and Accounts, Real Estate, Group & Pension, Personnel & General Service, etc.


“In the United State most of the mutuals started as stock companies and converted to mutual at a later date. Out of 2153 life and health insurance companies in the United Estates117 are mutual at the end of the year 1990.It would be interesting to note that the largest life and health insurance companies are mutual. Mutual insurance companies are very important in the U.S.A, although by number they are less than 6% but possesses almost two third of the total assets of life insurance industry and accounts for about one half of the total amount of life and health insurance business in force in the United States. Similarly out of thirty (30) companies sixteen (16) are mutual writing life and health insurance business in Japan during the year 1990.


“In 1984 out of 169 life and health insurance companies in Canada fifth (50) were mutual companies and many stock companies were seriously considering to convert from stock to mutual companies.


“In mutual insurance company the policy holders are owners of the company and theoretically they control the company. Each policy holder is eligible to vote in the elections of the board of directors on the basis of one vote for each policy holder regardless of the amount or number of policy that the policyholder owns. The operating profits are distributed to the policyholders. Since a mutual company has no stock to sell it cannot be bought by another company as a stock company can be. By means of mutualization the government can successfully avoid future takeovers by any interested and influential group of people.


“By converting State Life Insurance Corporation into a mutual the Government would also succeed in its objective of Islamization as all Islamic school of thought around the world have the consensus that mutual life insurance companies are permitted in Islam. In view of the above I would strongly suggest whenever the government should think to privatize SLIC, the best way would be to convert SLIC into a mutual company, and as a matter of fact it would be justice with the policyholders and good gesture on the part of the government.” (Published in the Insurance Journal, pp. 8-9. Karachi, Pakistan, July-Aug-Sep 92)



Insurance industry professionals were anxiously expecting some dynamic legislation on some system of insurance operations compatible with Shari’ah. Earnest and Young was engaged to draft new insurance legislation. The Insurance Act 1938 was thoroughly reviewed. Some powerful lobbies and vested interest groups who were behind the scene influenced the consultants to delete and totally drop the theme of cooperative or mutual insurance companies, and the election of not less than one third of the Policy Holders Directors on the Board elected by the life insurance policyholders of the company, in the new legislation that was introduced on August 19, 2000 as “Insurance Ordinance 2000”. Thus with a single and silent stroke in drafting the new legislation regarding insurance business in Pakistan the consultants deprived the life insurance policyholders of the say in the management of the affairs of the company; and also killed the doctrine of mutual insurance entities — popular name ‘Takaful‘ when operated in consonance with the established Shari’ah principles — which was strongly and unanimously recommended by the Islamic Ideology Council in its recommendations of 1992.

I earnestly request the government and the parliamentarians to make an immediate amendment in the Insurance Ordinance 2000, and to insert a specific provision for ‘mutual insurance company’ operations and appointment of Policyholders’ Directors on the Board of companies.