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 thought: The issue of Qimar, Maisir or Gambling

By Rizwan Ahmed Farid

The Islamic Ideology Council has quoted the definition of Qimar from the book, “Al-Iqtasad ul Islam“, as that, ‘Qimar
is a contract under which the parties agree with each other that one of the parties would pay to other a certain sum upon the happening of a certain event.’ The Fuqaha cite the Qur-ānic verses 5:90-91 of Al-Maida

The Fuq’ah Scholars relying upon the above verses of the Holy Qur-ān rule that, “Any contract containing the element of ‘maisir’ would be void ab-initio.” Further, in a contract of insurance the insurer promises payment till a certain event takes place, as such, the contract contains the element of ‘maisir’
rendering it void in Shari’ah.

The Council of Islamic Ideology defines:

“Briefly, qimar/maisir means every form of gain of money the acquisition of which depends purely on luck and chance and as opposed to others equally eligible, one man may acquire income as a result of lottery, draw or as a result purely of any other chance. Gambling, wagering and all of the games of chance are included in ‘qimar‘.


Since maisir’s main effect is to get something too easily without hard labour where one wins or loses by chance alone. The adverse consequences of maisir/qimar on an individual, families and upon the nations are highlighted succinctly in the Qur’an as: Satan’s plan is (but) To excite enmity and hatred Between you, with intoxicants And Gambling, and hinder you From the remembrance Of Allah, and from prayers: Will ye not then abstain? (5:91)


Bickelhaupt, David L., writes:

“Gambling operations may involve many of the attributes of insurance, such as large numbers, spread and homogeneity of risk, and predictability. Probably this is the reason so many uninformed persons think of insurance as gambling and sometimes even feel that they have “lost the bet” if they fail to have loss equal to the cost of insurance. The distinction is not in the method of operation, which may appear similar, but in the fact that insurance concerns itself with an existing risk. Speculation and insurance are both based upon socially and economically useful risks, too, while gambling is generally regarded as a less desirable method of speculation.”


The presence of the common element of “chance “in both maisir and insurance has led many learned fuqaha scholars to perceive that insurance in vogue tantamount to maisir/qimar or gambling and as such prohibited in Shari’ah. Resemblance between insurance and gambling in both does not cast them identical in purpose, phenomenon and consequences. To comprehend the point of perception the Qur’an clearly emphasizes that, “… because they say:”Trade is like usury,” but Allah hath permitted trade and forbidden usury.” (Al-bakarh 2:275)..


To expunge the element of gambling or wager from insurance operations the Life assurance Act 1774, commonly called the Gambling Act, which is still in force, states in its preamble:

“Whereas it hath been found by experience, that the making insurance on lives, or other events wherein the assured shall have no Interest, hath introduced a mischievous kind of gambling. For remedy whereof, be it enacted … That from and after passing of the Act, no insurance shall be made by any person or persons, bodies politic or corporate, on the lives of any person or persons, or any other event or events whatever, wherein the person or persons for whose use, benefit or on whose account such policy or policies shall be made, shall have no interest , or by way of gaming and wagering; and that every insurance made contrary to the true intent and meaning thereof shall be null and void to all intents and purposes whatsoever”.


The Act laid down three rules as follows:

  1. That no life insurance should be made unless the person effecting the assurance has an interst in the life assured; and, that any life insurance made without such interest shall be null and void.
  2. That there shall be inserted in the policy the name of the person or persons interested in it.
  3. That no greater sum shall be recovered than the amount or value of the interest of the assured.


The nature and extent of insurable interst has been ascertained principally from case law. An insurable interest is a right or relationship in regard to the subject matter of insurance contract of such a nature that the occurrence of the event would cause pecuniary loss to the insured from damage, loss, or destruction of the subject matter of the contact which may be a property, a life, or another interest. Without insurable interest, a contract of insurance is a wager or gambling contract and shall be null and void.


In Lucena v Craufurd, Lawrence J defined insurable interest as:

“The having some relation to, or concern in, the subject of the insurance, which relation or concern, by the happening of the perils insured against may be so affected as to produce a damage, detriment or prejudice, to the person insuring and where a man is so circumstanced with respect to the matters exposed to certain risks or danger, he may be said to be ‘interested in’ the safety of the thing with respect to it so to have benefit from its existence – prejudice from its destruction.” (1806) 2 B&P 269, 301 (NR).


Some of the marked differences between insurance and gambling are as follows:

  1. Risk element is of the essence of insurance contract; the insured seeks insurance cover in view of the inherent risk of loss, and does not create the risk of loss by contract itself, as is the case with wager or gambling.
  2. Insurance contract aims at neutralizing and offsetting already existing risk or chances and their consequences, whereas gambling purposely create new ones.
  3. In gambling one of the parties prays that a certain event may happen, while the other party wishes that the event may not happen. This is not the case in the contract of insurance. Both the parties to the contract whish that the insured event may not happen at all.
  4. The parties in gambling pose a threat of loss on each other. Whereas aim of insurance contract is to save the insured from the inherent loss.
  5. The parties in a contract of insurance agree to certain mutual obligations which they have to discharge. The element of carrying out of mutual obligations is not necessary in wagering.
  6. The money pooled by way of contribution in the insurance operations is mostly employed for productive purposes, whereas in gambling the money generated through premiums is likely to be diverted on unethical or nonproductive ventures.
  7. Gambling may lead to windfalls whereas under a contract of insurance generally the insured is monetarily indemnified to the extent of the loss suffered.
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.”