21 Feb

Insurance in Islamic thought: The Family Takaful Model

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)


The Family Takaful Model, prescribed by the Takaful Rules, 2005, can easily be grasped by studying the enclosed Flow Chart of the Operational Model for financial transactions.


Mortality and Morbidity Tables


Mortality tables are used by insurance companies to determine the amount of contributions for mortality and other risk elements to be charged for those in the respective age groups. Basically two types of mortality tables are important for a general readers’ understanding:

1. Those based on the experience of the general population.

2. Those based on the experience of the insured lives.

Muslehuddin raised questions in his writings,

“The measurement of risk becomes possible if large numbers of risks or the past occurrences are grouped together and their general average taken. In other words, the probability of many phenomena becomes predictable in groups of sufficient size. Hence large numbers and probability are said to be the basis of risk theory. But how far does it hold good? What is the limit of the large numbers and how extensive should be the size of groups to predict the regularity and probability of the phenomena?”

Mortality Tables data base contains more than one thousand mortality, longevity, sickness, morbidity, annuitants, male or female, and other types of tables constructed and published globally for the last two centuries by insurance and other organizations and countries, such as, the USA, UK, Canada, European Countries, Australia, New Zealand, Pakistan, India, China, Malaysia, Egypt, Indonesia, etc.

The Northhampton Table was constructed on an unsound method by Dr. Price in 1783 from the deaths in the Parish of all Saints, Northhampton, during the years 1735-1780. Joshoua Milne in 1815 constructed on sound lines The Carlesli Table based on the deaths for the years 1779-1787, and two censuses taken on 1780 and 1787, of the two parishes in the City of Carlisle. Realizing the tremendous importance and benefits of such tables not only for insurance but for country’s economic planning, mortality and other tables were regularly constructed and validated from time to time in U.K. and thereafter globally. Few random examples are tabulated as follows:


Period Investigated





Both Sexes, published in 1780



Both Sexes, published in 1815

English Life # 3


Male Lives

English Life # 4



English Life # 6



English Life # 9



English Life # 10



English Life # 11





Eastern Federal Union Insurance Co. Ltd.




India LIC


Male + Female

India LIC


Male + Female












Statutory Valuation Mortality Table







United States



England and Wales






New Zealand


European population



Takaful operational model:

The principal operational model for insurance risk management and the investment component, under Rule.8 (1) of the Takaful Rules 2005, shall be based on the Islamic concept of wakala and modarba, respectively. Accordingly, there are seven elements that must co-exist to establish a proper framework for a Takaful Operational Model:

  1. Takaful operator – The Rules defines “Takaful operator”
    as a person who is permitted by the Security Exchange Commission of Pakistan (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 SECP to carry on insurance business in Pakistan.

  2. The Shari’ah Board – Each Takaful operator shall appoint a Shariah Board (SB) of not less than three members, under Rule. 34(1) of the Takaful Rules 2005, which shall be responsible for the approval of products, documentation as well as approval of all operational practices and investment of funds
  3. Management of the Takaful Fund – Management is by the Takaful Operator who, depending on the adopted model, utilizes either of the two Shari’ah compliance contracts, namely wakala or mudaraba or a combination of both.
  4. Mutual Guarantee – The basic objective of Takaful is to pay a defined loss from a defined fund. The loss is borne by a fund, PTF, created by the contributions (premium) of policyholders. The liability is spread amongst the policyholders and all losses divided among them. In effect, the policyholders are both the insurer and the insured. Rule 9(1) states that 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-hasana to the PTF. The objective of the PTF shall be to provide relief to the participants against defined losses as per PTF rules and the Participants Membership Document. Under Rule. 9(3)(g) any donation made by the shareholders shall be the income of the PTF.
  5. Elimination of Uncertainty – Contributions to the PTF are for the purpose of pooling of the risks amongst participants to provide relief to them against defined losses as per PTF rules and PMD. As such, participants (policyholders) are the owners of the fund and entitled to its surplus (profits), if any.
  6. Investment Conditions: – Rule 8(4) of the Takaful Rules 2005 prescribes ….Investment of funds may be made in consonance with the Islamic concept of the mudaraba, wakala or a combination of mudaraba and wakala at the option of the Takaful operator (or its Appointed Actuary in case of Family Takaful) and the Shari’ah Board as clearly spelled out in the participants’ membership documents (PMD).

    Rule27(3)(c) of the Takaful Rules 2005 states that … investments in non-Shari’ah compliance preferred stocks, debentures and interest based redeemable capital securities are not allowed. Further , by Rule 27(3)(c)(i): It is not permissible to acquire the shares, debentures or certificates of the companies providing financial services like conventional banks or the companies involved in business prohibited by Shari’ah like alcohol production, gambling or night club activities, etc.

  7. Integration of Shari’ah principles — In particular, , avoidance of ribā, gambling, and al Gharar, and inclusion of the al Mudharabah (profit sharing arrangements) and/or Wakalah (Agency) principles for management practices.

Ownership of Funds and participation in the Management – The Federal Government’s prescribed structure, under the Takaful Rules 2005, is not at all based on cooperative or mutual modes as strongly recommended by the Council of Islamic Ideology and Saudi Arabia’s Majlis-e-Hayat-i-Kibar-ul-Ulamā (The Constituent Assembly of Most Eminent Religious Scholars). Further, there is no provision for the participants in the management or affairs of the Takaful operator (corporate body) by its policyholders. Instead of implied ownership, the Takaful Rules, 2005, should clearly spell out that the Participants Takaful Fund, Participants Investment Fund and all types of Reserves generated through these funds are wholly and solely owned by the participants.


Ayub, Muhammad, the State Bank of Pakistan’s former Senior Joint Director of Islamic Banking Department, has traced various Takaful operator structures in vogue in various countries as follows:


“Al-Takaful is the pact among a group of people, called participants, reciprocally guaranteeing each other; while Al-Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.


“Based on the nature of relationship between the company and the participants, there are various models like Wakalah (agency) Model, Mudarabah Model and the combination of agency and Mudarabah models. In the Sudanese Takaful Model that is preferable to majority of the contemporary Shariah experts, every policyholder is also the shareholder of the Takaful Company. There is a Board that runs the business on behalf of all the participants and there is no separate entity managing the business. The legal framework in other Islamic countries normally does not allow this arrangement and Takaful companies work as separate entities on the basis of Mudarabah (as in Malaysia) and on the basis of Wakalah (as in the Middle East region). In Mudarabah model that is practised mainly in the Asia Pacific region, the policyholders get profit on their part of funds only if Takaful Company earns profit. The sharing basis is determined in advance and is a function of the developmental stage and earnings of the Company. The Shariah committee approves the sharing ratio for each year in advance. Most of the expenses are charged to the shareholders.


“In Wakalah Model, the surplus of policyholders’ funds investments – net of the

management fee or expenses – goes to the policyholders. The shareholders charge

Wakalah fee from contributions that covers most of the expenses of business. The losses, if any, are first absorbed by reserves known as Participants Equity, then from interest free loans from shareholders of Takaful Company and then by a general increase in pricing by the Company. rate is fixed annually in advance in consultation with Shariah committee of the company. In order to give incentive for good governance, management fee is related to the level of performance.

Ernst & Young’s inaugural World Takaful Report 2008, launched at the Annual World Takaful Conference 2008, shows that 59 of the 133 Takaful operators worldwide are within the GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

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.