21 Feb

Challenges of Life Insurance Marketing

I learnt how to type first on a Remingten typewriter typing away life insurance policy proposals and articles Aba wrote for the Insurance Journal. From issue dealing with trust to issues dealing with Fiqah and Islamic thought on life insurance, my early education on this subject was primarily on account of the work I did for my father. A few years later the Remington was replaced by a daisy wheel electric type writer and the life insurance proposals were replaced by union negotiations but my education through Aba’s articles and his work continued.

Two decades later I am now a qualified actuary who has worked in the appointed actuary role with three life insurance companies, two conventional, one Takaful and I have personally faced some of the challenges associated with that role that my father foresaw as early as in 1988. If it wasn’t for the work I did on a light blue typewriter as a fourteen year old, I possibly would never have picked up an interest in this field and travelled the eleven year path to become an actuary. As long as you are associated with the insurance industry either as a sales oriented professional, as a manager or as a regulator, the book has something to offer to you.

When Reboot finally came out in print, Aba started putting together all the work he had done over the last 45 years in the field of life insurance on his laptop and between Sama, Nadeem, Sana, Adnan, Fawzia and myself we had a cover, a profile photo and a blog up and running for the book. The book is expected to come out in print before the summer inshahallah and the blog has a complete sample chapter posted on it.


By Rizwan Ahmed Farid

21 Feb

Insurance in Islamic thought: Takaful, Family Takaful, Re-Takatful – Part ii

By Rizwan Ahmed Farid

(An extract from a series of articles on Insurance in Islamic thought by Rizwan Ahmed Farid, from his upcoming book on Challenges of Life Insurance Marketing)


El-Gamal, Mahmoud A., of Rice University writes:


“Interestingly, while the Islamic insurance industry has adopted a name suggestive of a mutual cooperative system, takaful companies have generally been structured as for profit shareholder-owned companies, or subdivisions thereof. In other words, the corporate form of those takaful companies is identical to that of the commercial insurance companies whose contracts the Ulama forbade. Takaful companies invoke non commutativity by stipulating that the shareholders pay policyholder claims as a form of voluntary contribution (tabarru`), where the operator is usually set up in the form of silent partnership (mudaraba), with the exception of few recent attempts at using agency (wakala) – while still falling short of mutual forms. In both structures, there are unresolved fiqhi issues about bindingness of promises in such voluntary tabarru`. It would appear, thus, that in the Islamic insurance (risk intermediation) industry as well as in the Islamic banking (credit intermediation) industry, mutuality can align rhetoric with reality and resolve simultaneously a number of corporate governance, religious, and financial problems.”


The element of ribā – the receiving of interest – as well as the forbidden ventures, such as gambling, dealing in alcohol, and night club activities, ambiguity or deception, etc. leaves many financial products, including conventional insurance, in opposition to Shari’ah. Thus one billion eight hundred and twenty-three million in 2009, which number is increasing at the rate of 1.84% annually, have but few options when shopping for products that conform to their faith.


After years of efforts and representation, the provision of Policy Holders Directors in the Insurance Act, 1938, was increased from one fourth to one third through the Insurance Amendment Ordinance in 1970. Rule. 48(1) of the Insurance Act, 1938, which was repealed on 19th August 2000 through the promulgation of the Insurance Ordinance, 2000, stated that:

“Where the insurer is a company incorporated under the Companies Act, 1913, and carries on the business of life insurance, not less than one third of the directors of the company shall not withstanding anything to the contrary in the Articles of Association of the company be elected in the prescribed manner by the holders of policies of life insurance issued by the company.”

However, as I have written earlier that local and foreign powerful lobbies and vested interest groups who were behind the scene, influenced the consultants to delete and totally drop the provision of Mutual insurance companies and the important provision of the Policyholder Directors on the Board of the company, to watch the interests of the life insurance policyholders from the new legislation, Insurance Ordinance, 2000.

It is high time that the government and the parliamentarians make an immediate amendment in the Insurance Ordinance 2000, and insert a specific provision for ‘mutual insurance company’ operations as well as representation of not less than two-third Policyholders’ Directors on the Board of a commercial Family Takaful Operator to watch and safeguard the interests of the policyholders.

Takaful Models are based on mutual cooperation, responsibility, assurance, protection and assistance among groups of participants. Its principles are similar to those that underpin mainstream mutual insurance contracts. Besides, a Takaful product needs to strictly follow the norms of Shari’ah compatible principles. The Board of Islamic Shari’ah Scholars’ role has been specifically assigned to vet business decisions.

Each Takaful operator under Ruletion 34 (1) of the Takaful Rules 2005 is required to appoint a Shari’ah Board (SB) of not less than three members which shall be responsible for the approval of products, documentation as well as approval of all operational practices and investment of funds. The Takaful operator shall appoint only high caliber scholars who are specialized jurists in fiqh almu’amalat (Islamic commercial jurisprudence) to such Boards. In addition, they shall have knowledge of modern financial dealings and transactions.


So far, two Family Takaful Operators (life insurance companies) Pak-Qatar Family Takaful Limited, and Dawood Family Takaful Limited, launched their Family Takaful products, respectively in 2007 and 2009. Pak-Kuwait Takaful Company Limited, Pak Qatar General Takaful, and Takaful Pakistan Limited are also registered for causality insurance business.

Under the conventional structure of insurance the insured shifts the risk to the insurer, but under takaful mode by incorporating risk bearing condition the insured is also the insurer. The golden principle of ‘bear ye one another’s burdens’ applies as on the occurrence of a loss the members share the risk themselves. The participants’ (voluntary) contributions towards the pool to mitigate losses expunge the element of gharar from the contract. Conditions of risk-bearing, indemnity in kind and shari’ah compliance investments change the character of insurance in vogue and free it from the odium of contractual riba, qimar and, to some extent, gharar.


Conventional insurance falls down because it involves the taking of a financial risk that the policyholder will make a loss if a claim does not occur. This uncertainty of happening of the insured event, which many Shari’ah scholars pronounce constitutes a qimar i.e. gambling. Unlike conventional insurance, where risk is transferred from the policyholder to the insurance company, takaful mode requires all participants to share risk among them. They pay contributions for the quantum of risk as that with conventional insurance practice, and are calculated on the basis of the published morbidity and mortality tables. These tables are being developed regularly and validated for the last two hundred and thirty years to ascertain the probable number of years any man or woman of a given age and of ordinary health will live. A mortality table expresses on the basis of the group studied the probability that, of a number of persons of equal expectations of life who are living at the beginning of any year, a certain number of deaths will occur within that year.


These contributions are then pooled in ‘Participants Takaful Fund’ which is invested strictly in Shari’ah approved ventures, under Ruletion 19 of the Takaful Rules 2005. The Investment of participants’ contributions within the Participants Takaful Fund (PTF) as well as in the Participants Investment Fund (PIF) shall be managed under a Wakala contract, a Mudarabah contract or a combination contract as determined to be sound and workable by the Shari’ah Board of the Takaful operator. The Takaful operator shall set the fee structure and the profit sharing ratio on the investment management based on the advice of the Shari’ah Board and the Appointed Actuary, if any.

21 Feb

Insurance in Islamic Thought: Takaful, Family Takaful, Re-Takaful

By Rizwan Ahmed Farid

The conventional insurance system in vogue was declared against Shari’ah over a century ago. The search was on for an Insurance Operation Model in consonance with Islamic Shari’ah principles. Muslehuddin made a careful and in depth objective study of the emerging Islamic reservations and issues faced by the Ummah for the need and operation of the insurance industry compatible with Shari’ah. He traced the history, assessed the insurance contacts in vogue, carried exhaustive commendable research in the context of “Insurance & Shari’ah” to qualify, in 1966, for the Doctorate of Law, from University of London. His outstanding work and knowledge capital on the subject, “Insurance and Islamic Law,” was first published in 1969.

Short of using the current insurance terminology ‘Takaful‘, meaning “guaranteeing each other,” Muslehuddin used the expression “Pure mutual institutions” in the conclusion to his pioneering and exhaustive research as, “Mutual Insurance under Islamic Law,” he suggested as follows:

Pure mutual institutions accord with the spirit of Islamic law but they are criticised by some as unstable, having no reserves to stand upon. This not a serious defect as reserves may be built with the consent of the members, for the welfare of the community, in the form of a waqf (endowment). Thus, mutual associations may be formed on the principle of assessment, every member paying the agreed amount or an amount according to the value of the insured property as a first contribution, while liable to pay an additional sum (i.e., assessment), in proportion to the first contribution, in case the loss exceeds the sum-total (of the first contribution). If, according to the annual account, loss does not exceed the collected amount and there remains a surplus, a greater part of it will be returned to the member or credited to reduce his future premium, i.e. contribution (in case policy is renewed), carrying the remainder to the reserves. The reserve so built may be invested in commercial pursuits permissible in Islam…

“It may be recalled that life insurance provides for the payment of a stipulated amount of money upon the death of the insured, without regard to the value of his life, for it is impossible to place a monetary value on human life. The amount payable to the insured is, thus, a definite sum of money and it is the amount of contribution only which is to be determined. This can be done by mutual agreement. And, in this regard, the procedure adopted by mutual life insurance societies may serve as a guide.

“These are our suggestions which may be improved upon and modified in the light of the experience.

Introduction of Television in this region in early sixties gave a boost to the debate. The Ulamā were thronged with queries to find and define a Shari’ah compatible insurance system. Sudan and Malaysia established takaful companies in 1979 and 1980 respectively by making some adjustments in the Pure mutual insurance theme and titled the Islamic Insurance configuration as takaful/solidarity. Islamic Ideology Council of Pakistan issued its recommendations about Shari’ah compatible need of Insurance System in detail on 1st March 1984. The Grand Counsel of Islamic Scholars in Makkah, Saudi Arabia, Majma al-Fiqh, approved the takaful system as the alternative form of insurance compatible with Islamic Shari’ah, in 1985. Thus all validating the theme, pure mutual insurance, first propagated by Muhammad Muslehuddin in 1966.

The Takaful concept is in line with the principles of compensation and shared responsibilities among the community. Muslehuddin traces the origin of insurance as follows:

“The insurance finds its expression in the payment of blood money by the group so as to lighten the burden of the individual member. This assumed the form of a custom to which there is a particular reference in the Hedaya, (Marghīnanānī, Vol. 4, Kitab-al-Ma’āqil, pp. ,641-50) under the title of ‘ma’aqil‘.

“…To explain it in more detail we give a reference from Encyclopaedia of Islam: “ākila is the name of a man’s male relations who according to the percept of the religious law have to pay the penalty (the ‘ākl) for him, when unintentionally he has caused the death of a Moslem. This decree was based on a verdict of the Prophet. One day in quarrel between two women of the Hudhail tribe one of them, who was with child, was killed by the other with a stone, which hit her in the womb. When, soon after, the other woman also died, the Prophet decided, that her kin (ākila, or, according to a different reading, her, āsaba, i.e. i.e agnates), in accordance with an old custom, had to pay the penalty to the relatives of the woman who had been killed.”

“This reflects the original custom of the ancient Arabs whereby the whole tribe had to pay the weregild. It is this community pooling and the spirit of cooperation which has been aptly described as the essence of insurance. (Insurance, in EC (new edition), Vol. 7, p. 617.)

After a lapse of thirteen and a half years since the recommendation of the Council, the Federal Government of Pakistan ultimately issued “Takaful Rules 2005″ on 3rd September 2005, giving the country a viable Islamic compatible Takaful operational model.

The Rules defines “Takaful operator” as a person who is permitted by the SECP to carry on the Takaful business. The Takaful Operator is a corporate body formed under Companies Ordinance, 1984, and which is eligible to transact insurance business in Pakistan under Section 5 of the Insurance Ordinance 2000. Further, it has also been granted, under Section 6 of the Insurance Ordinance 2000, a certificate of registration by the Security Exchange Commission of Pakistan (SECP) to carry on insurance business in Pakistan.

The role of the Takaful operator shall be the management of the ‘Participants Takaful Fund’ (PTF) and related risks. At the initial stages of the set-up of the PTF the Takaful operator and any of its shareholders may at their discretion make an initial donation or qard-e-hasna to the PTF. When the PTF including reserves are insufficient to meet their current payments less receipts, the deficit shall be funded by way of an interest-free loan (qard-e-hasna) from the Shareholders Fund (SHF). The Takaful operator shall undertake to give Qard-e-Hasna to the PTF to make good of the deficit. The Qard-e-Hasna may be recovered from future surpluses without any excess on the actual amount given to the PTF. The objectives of the PTF shall be to provide relief to participants against defined losses as per the PTF rules and the Participants Membership Document (PMD).

The Council of Islamic Ideology in its Report emphatically stated as follows:

“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.”

It is to be noted that the Takaful and Family Takaful structures prescribed by the Takaful Rules the shareholders and policy holders of the Takaful Operators ( companies) are different entities. The Insurance Ordinance, 2000, and the Takaful Rules, 2005, need to be changed.

The rhetoric of Islamic financial institutions often claims that the industry employs mutual modes wherein participants are in fact partners and/or shareholders of the corporate body. The approved models of the Takaful Operator, under the Takaful Rules 2005, the participants (policyholders) neither have the protection of being creditors of the Takaful Operator, nor do they have the protection of being equity holders with representation on the boards of directors of the Takaful Operator which by design is a commercial corporate body.

For the ready reference of readers I cite below extracts of the ruling of The Council of Leading Scholars of Saudi Arabia about two main types of insurance contracts: (1) conventional insurance in vogue which they deemed forbidden based on gharar; and (2) “cooperative insurance (al-ta’min al-ta`awuni) built on the principles of voluntary contribution (tabarru`) and mutual cooperation (ta`awun)”, which they approve permissible, since gharar does not affect non-commutative contracts:

“The decision of the Council of Leading Scholars of Saudi Arabia, no. 51, dated 4/4/1397 (1976) on the permissibility of cooperative insurance and its compliance with the principles of Islamic law:

“All praise is for Allah only; blessings and peace be upon the prophet after whom there will be no other prophet. The Tenth Session of the Council of Leading Scholars, held in the city of Riyadh, in the month of Rabi’ al-Awwal:

“The Council has taken into account the announcement made by a group of experts on cooperative insurance, which is said to be a viable alternative for Muslims wanting to avoid commercial insurance. It is also mentioned by the experts that cooperative insurance will be able to realize the objectives of Islamic law.

“After the proposal was studied and researched and the opinions of the scholars sought, the Council decided, with the exception of his Excellency, Shaykh ‘Abdullah bin Manee’, that Islamic cooperative insurance is a viable alternative to commercial insurance, as it will help to fulfill the needs of the Muslim society for the following reasons:

  1. The cooperative insurance firm is founded on the concept of a transaction of voluntary contribution, which is fundamentally intended for cooperation to ameliorate risk by sharing in bearing the responsibility in case of crisis. This is accomplished by means of contributions of money that are designated for compensation to those who suffer harm.
    1. The aim of the shareholders of a cooperative insurance firm is not trade or profit from other people’s money; their goal is solely to distribute risk among themselves and to cooperate in bearing harm.
    2. Cooperative insurance does not contain elements of either type of (riba); neither the type related to barter (riba al-fadl) nor the increased return on a loan (riba al-nama). Unlike commercial insurance, it is not a contract of interest. Also, the premium/donation received will not be used for riba-based transactions.
    3. Unlike commercial insurance, whereby profit maximization is key, in cooperative insurance, the main purpose is to help each other in the spirit of solidarity; so the premium paid is considered a donation. Thus, it does not matter if the participants/donors are not sure what benefit they will get in return for their contributions, for they are giving in the spirit of donation; they are not trying to saddle someone else with responsibility for risk or harm, as is the case with commercial insurance.
    4. The cooperative insurance firm will be managed by the representatives of the donors. The representatives will act as the management team and will invest the premiums, with the goal of realizing the purpose of the corporation. In this matter, the management team can work on a voluntary basis or receive salaries, just like any other company.

“With the exception of his Excellency, Shaykh ‘Abdullah bin Manee’, the Council considers the optimum arrangement for cooperative insurance to be in the form of a mixed [i.e., private/public] cooperative insurance company, for the following reasons:

  1. It is in line with Islamic economic thought, which leaves it up to individuals to undertake and manage various economic projects. The role of the government is only to compliment the efforts of individuals, intervening only when they are unable to fill a societal need, provide them with the necessary assistance, and establish guidelines to ensure the best practices and the success of the projects undertaken.
  2. [A private company] is in line with the concept of cooperative insurance in that the participants are not dependent on any outside entity. They set it up, operate it and bear the responsibility for its performance.
  3. It provides the opportunity for the population to get hands-on experience with the process of cooperative insurance, to undertake individual initiative and to reap the benefits of personal motivation. No doubt, the participation of members in the administration of the process will make them more vigilant and alert in avoiding risks since it is they who will collectively pay the compensation for their occurrence. This arrangement is, thus, likely to realize their best interests as it provides the motivation that optimizes the chances for the success of the cooperative insurance enterprise. That is because the avoidance of risk occurrence results in lower premiums for them in the future, just as their occurrence is likely to lead to higher future premiums.
  4. Structuring the enterprise as a mixed public/private corporation precludes insurance from being regarded as a grant from the government to those who benefit from it. Rather, the government shares with them to protect and support them since they are the principal beneficiaries. This leads to a more positive mindset, in that it makes the participants aware that, although the government is willing to play a supporting role, it doesn’t absolve them of their [primary] responsibility.
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.

21 Feb

Insurance in Islamic thought: The issue of extortion or Akal-e-Haram

By Rizwan Ahmed Farid

The report states that the presence of ‘gharar’, ‘qimar’, and ‘ribā’, make the insurance contract a transaction totally void under the tenets of Sharia’h, because the money extorted by each party, in such a contract, constitutes an illegal income.


The Ulmā refer to the verses 2:188 Al-Baqara and 4:29 An-Nisaah of the Holy Qur-ān:




The Shari’ah Scholars have recommended that since the conventional insurance business in vogue is not based on the idea of mutual cooperation but serves as a device for extortion of money from the people to utilize it in interest bearing ventures, therefore, it is forbidden. The business aims at multiplication of capital in the hands of insurance companies and, therefore, is liable to be considered as illegal in Shari’ah!

The basis of co-operation between capital and enterprise which Islam cherishes is equitable sharing of the risk and gains between them. The Ulamā of the Islamic Ideology Council have deduced that:

“The above verse (A-Nissa – 4:29), can be interpreted that taking away of each other’s wealth, property or capital by unlawful means such as interest, gambling or fraud is prohibited while deriving benefit from each other’s wealth, property or capital under an equitable business deal struck by mutual consent is permitted.”

“The essential element of “trading” is that the return on capital employed depends upon actual operating results of the business undertaken.”

The Council’s report, Beema-wa-Qawaneen-e-Beema, page 12, recommended the following opinion about the lawful, Shari’ah compatible, form of insurance.

” There is no repugnance in Shari’ah if insurance is undertaken with the sentiments of and is founded on cooperation, reciprocal responsibility, mutual surety and volition. If, therefore, an insurance company is established in such a manner that each one of its members is insured and these insured persons enter into a mutual agreement of cooperation and reciprocal responsibility, then such agreement will be lawful in Shari’ah …”


The Council of Islamic Ideology examined the system and laws of insurance and, proposed in its Report, Beema-wa-Qawaneen-e-Beema, in 1984, to the Government that:


“In order to prepare an Islamic alternative, that is, System of Collective Responsibility and Cooperation in place of the existing insurance system, a working group may be constituted in which Ulamā of the Council and the insurance experts may be included. They may expunge un-Islamic elements from the insurance system as per Report of the Council and bring out the alternate Islamic system.”


The reader should keep his mind crystal clear that Shari’ah Scholars of all schools of thought do not condemn the theme, need, importance and viability of insurance system. They question and express their reservations to the conventional model of insurance currently in vogue.

Instead of writing on the need and importance of insurance I would prefer to quote below the Council’s views on the subject:

“In the early stage of the new economic system of the world, Insurance business related to a large extent to the coverage of sea-ships and their cargo. But along-with the growth of industry and trade and banking business in the Western countries the field of insurance also continued expanding in extent. Now it has come to this that sea-ships, aeroplanes, cars, factories, commercial and private buildings and besides human life, human limbs, voice, etc. are also being insured. Due to this, it has assured a regular and vast business proportion. On the strength of their capital big capitalists sell expensive policies to simple minded persons, involving real or imaginary possibilities or apprehensions. Like this, they make hundreds of million dollars annually. This capital is further invested in business and profit is reaped in astronomical figures. In other words, money-business is being indulged in , in many shapes and forms. On the one hand this giving rise to inflation, Ruleondly prices of commodities and services are under extraordinary pressure. Not only this but many economic evils like concentration of wealth, recessions, etc. are also coming into existence which in their own way are a big source of corruption. As, however, the individuals and nations devoid of the wealth of faith and belief have no remedy for these evils, they are treading on these paths only.


“As far as developing countries and economically weak nations like Pakistan are concerned, in this matter they are absolutely helpless and are perforce the target of exploitation of the developed nations.”

21 Feb

Insurance in Islamic thought : The issue of riba or interest

By Rizwan Ahmed Farid

The Council of Islamic Ideology’s report quotes, verse 279 of Al-Baqara:



For, upon a claim on an insurance policy the insured receives more than what he has paid (the premium) to the insurer, the excess amount constitutes ‘Ribā’. Usury is condemned and prohibited in the strongest possible terms. I cite below four verses,2:75-76, 3:130, 4:161 of the Holy Quran and the meaning with commentary, about ribā:

Below is the commentary on the verse 2:275 of Al-Bakara:


“Usury is condemned and prohibited in the strongest possible terms. There can be no question about the prohibition. When we come to the definition of usury there is room for difference of opinion. Hadhrat ‘Umer, according to Ibn Kathir, felt some difficulty in the matter, as the Prophet (PBUH) left this world before the details of the question were settled. This was one of the three questions on which he wished he had had more light from the Prophet. Our ‘Ulmā’, ancient and modern, have worked out a great body of literature on Usury, based mainly on economic conditions as they existed at the rise of Islam”.


“An apt smile: whereas legitimate trade or industry increases the properity and stability of men and nations, a dependence on Usury would merely encourage a race of idlers, cruel blood-suckers, and worthless fellows who do not know their own good and therefore akin to madmen.


“Owing to the fact that the interest occupies a central position in modern economic life, and especially since interst is the very life blood of the existing financial institution, a number of Muslims have been inclined to interpret in a manner which is radically different from the understanding of Muslim Scholars throughout the last fourteen centuries and is also sharply in conflict with the categorical statements of the Prophet (peace be on him). According to the Islamic teachings any excess on the capital is ribā (interest). Islam accepts no distinction, in so far as prohibition is concerned, between reasonable and exorbitant rate of interest, and thus what come to be regarded as the difference between usury and interst; nor between returns on bonus for consumption and those for production purposes and so on.”

21 Feb

Insurance in Islamic Perspective: Takaful – The issue with Gharar

By Rizwan Ahmed Farid

Council of Islamic Ideology, Government of Pakistan, is constituted under Article 230 of the Constitution of the Islamic Republic of Pakistan. One of the important assignments of the Council of Islamic Ideology is to scrutinize the laws in-force in the light of Qur-ān and Sunnah and recommend to the Government such steps by means of which these laws can be made to accord with the Islamic injunctions and teachings.

The Council in its 11th Report, “Beema wa Qawaneen-e-Beema..,” dealing with Shari’ah Law and Insurance, delivered a majority decision on March 1, 1984, that “The contract of insurance, in all its form, is illegal, corrupt, false, forbidden, and cannot be decreed.

The Council has taken the view that the insurance is a transaction which was not dealt with at the time when the Islamic fiqh was being developed. The 11th Report further stated that both religious and judicial scholars have a difference of opinion with regard to the form of the contract, in vogue, for conventional insurance.

The Council of Islamic Ideology’s Report on Islamic Insurance System cited the express opinion of the Majlis-i-Fiqhi Islami about the system of insurance in vogue as follows.

  1. gharar-e-fahish’ (risk)

    “Praise be to Allah and prayers and peace for Allah’s messenger, his progeny, companions and for all those who are guided by Him. Now then:-


    “In its first session which was held at Makkah Mukarrmah on Sha’ban10, 1398 A.H. in the Majlis-i-Fiqhi Islami (the Assembly of Islamic Jurisprudence) deliberated on insurance and its different kinds. The vast amount of writings by the Ulmā on this subject was also kept on view. Also kept in view was resolution No. 55 of Saudi Arabia’s Majlis-e-Hayat-i-Kibar-ul-Ulamā (The Constituent Assembly of Most Eminent Religious Scholars) passed in its tenth session at Riad held on 4.4.1397 A.H. declaring all kinds of commercial insurance as unlawful in Islam.


    With the exception of Honourable Sheikh Mustafa-uz-Zarqa, the rest of the member of the Majlis-i-Fiqhi agreed to conclude that all kinds and types of commercial insurance, whether related to life or commercial goods and wares or other articles are unlawful in Islam for the following reasons:


    “As has been mentioned earlier, in the above referred report, the council expressed the opinion that the main laws relating to insurance and the prepondering bulk of insurance business is in conflict with the injunctions of Islam, because:


    1. There is ‘gharar’ in these contracts.
    2. The element of gambling is present in its extreme form.
    3. There is an element of interest in these contracts and
    4. Such arrangements come within the definition of ‘akal-mal-batil,’ e.g. unlawful acquisition.


    “The report mentioned the view points of six different school of thought; Hanafites, Malikis, Shafites, Humbalies, Zaides, (i.e. the Shiites) and Zahiris on what is ‘gharar’. (The word ‘gharar’ is a derivative from the the word ‘gharar’, which means to lure; allure; entice; tempt; beguile; deceive; delude.’) According to these view points a contract suffers from ‘gharar’ if it is about:


    1. An occurrence about which the parties do not know whether it would happen or not;
    2. A thing which is not within the knowledge of the parties;
    3. A thing whose existence or acquisition is in doubt;
    4. A thing about which it is not known whether it exists or does not exist;
    5. A thing whose acquisition is doubtful;
    6. A thing whose quantum is unknown.”


The Council of Islamic Ideology analyzed various forms of insurance contracts, and has ruled that gharar is present in the contract of insurance, because:

  1. The parties are uncertain (apart from a life assurance policy) whether the loss contemplated under a contract of insurance would ever be payable by the insurer.
  2. At the time of the inception of the insurance contract, the parties are unaware of the exact amount of compensation payable by the insurer, and the time of such payment.


Gharar literally, also implies: uncertainty, hazard, chance or risk, such as, sale of a thing which is not present at hand; or sale of a thing whose consequences or outcome is not known; or a sale involving risk or hazard in which one does not know whether it will come to be or not, such as fish in water or a bird in air. (Glossary of Islamic financial terms. Online)


The Prophet (pbuh) decreed prohibition on transactions of “sale”
involving an element of gharar‘. The Council of Islamic Ideology deduced that any transaction containing Ghararwill be deemed to have been prohibited.
differ regarding presence of ‘gharar‘, ‘ribā’, and ‘qimar,’ in insurance contracts. Qimar and ribā are condemned in the Qur-ān while condemnation of gharar (uncertainty) is supported by the following Ahadith.

“The sale of fish which is not yet caught is not in the state of property. Likewise, the sale of fish which the vendor may have caught and afterwards thrown into a large pond, from which it cannot be taken without difficulty, is null and void because there the ‘delivery’ is doubtful.” (Hedaya page 268)


“The sale of a bird in the air, or of one, which after having been caught, is again set free, is null, because in the one case it is not ‘property’ and in the other the ‘delivery’ is doubtful. (Bukhari Vol.III, page 199, and Abu Daud Vol. II page 634)


The above and other ahadith cited by the Council of Islamic Ideology in its report are with specific reference to the transactions of sale of tangibles only where ‘delivery’ and ‘goods sold’ by the vendor to the vendee is doubtful. The elements of explicit doubt regarding the performance of such contracts make these transactions as containing gharar. And, thus, would result into controversies, casting fraudulent intentions on the part of the vendor.

Risk management in the insurance business deals with pure risk which is transferred from an individual to the insurer who charges a service fee for agreeing to accept the risk. Pure risk exists when there are no potential gains, only possibility of financial loss. For example, personal injuries, sickness, hospitalization , partial or permanent disabilities; road or industrial accidents, fires, and thefts; forgeries, personal, professional or product liabilities; sea perils and high-jacking; tsunamis, earthquakes, windstorms, floods, water damages; kidnapping for ransom, terrorism, riots, war and warlike operations; etc., are forms and events involving pure risks.


Insurers do not address speculative risks that involve chance of loss or gain, whereas in pure risks there is only the probability of loss or no loss. The insurer accept only the risks which besides the capability, inclusive of reinsurance treaties, of the insurer to absorb the quantum of the probable loss. The risk must normally be accidental in nature, from the the insured’s perspective free from moral hazards, predictable, measurable, spread over a large number of similar eventualities, and acceptable to the insurer.


In fiqh literature the term gharar is associated with risk and uncertainties in contractual agreements. Bay’al-gharar prohibited by the Prophet (pbuh) includes selling fishes in the pond and birds in the sky. In shari’ah contract becomes null and void where presence of gharar in contractual obligations is found.

Allah hath permitted trade and forbidden riba. (Al-Baqarah: 275). In trading ‘Al-bay’ is a contract of sale, and no sale transactions in Islam or any other religion is free from risk of market, physical or natural calamities. Taking these risk is the legitimate way of doing business which is called ghorm i.e. price and market risks, etc. A person cannot expect to make profit without assuming probability of loss or risk in his ventures.

Gharar is indeed different from ghorm, although the English translation of both has applied the same term interchangeably: risk and uncertainty. Rosly, Saiful Azhar, writes:

Gharar or ambiguities about the buyer or the seller, the object of the sale and its price must be avoided. In fact, using the term “ambiguities” is more accurate than risk and uncertainties when one is dealing gharar in contractual agreement.”