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.”