Assignment- 1 (Jan 2016)

Ali Munavvaru (1400291)

INCEIF
The Global University of Islamic Finance

Masters Islamic Finance Professional (MIFP)

Islamic Insurance (TK5013)
SEMESTER: January 2016

Assignment 1

Due Date: 07 February 2016

Lecturer: Mr. Ezamshah Ismail

Student Name: Ali Munavvaru

Student ID: 1400291

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Assignment- 1 (Jan 2016)

Ali Munavvaru (1400291)

Discuss the significance of risk management and Takaful from the Islamic World view.
Risk can be defined in many ways. It has a relative definition and can be meant based on the
situation. According to Webster Dictionary, Risk is the possibility that something bad or
unpleasant (such as an injury or a loss) will happen. However, risk can be positive or negative
and for the purpose of this writing, risk is defined as any situation that involves a possible
occurrence of an uncertain outcome.
Risk is an integral part of our life and we cannot separate it from our daily activities. For
example; if we do business, the profit we generate is not permissible unless we take an equal
counter risk in generating the said income. This concept is supported by the legal maxim that
says ( al-ghorm bil-ghonm) which means no reward without risk as in the
Islamic Jurisprudence. It is also mentioned in the Quran in Surah Al Baqara (2:104)
And we will surely test you with something of fear and hunger and a loss
of wealth and lives and fruits, but give good tidings to the patient
These verses clearly says that its in our fate to be testified with such trials like Fear, hunger,
loss of wealth, loss of life and devastation of crops are examples of adversities that test our
courage and spirit. Only thing we need to do is we have entrust our affairs with Allah and we
can be sure of Hell look after them in the best way possible for us. This is supported by the
Quranic verse in Surah Raud (13:11)1 which talks about our protection we have from the angels
before and behind us. They guard us by command of Allah. Because he is Allah, Al-Wakeel.
Trust for Allah is further encouraged in Surah al Maida (5:23) in the incident when Musa
alayhi sallam was standing with his people at the gate of Palestine and two courageous
believers stood up and announced:

Each person has been assigned guardian angels before him and behind him, who watch him by the command of Allah. The
fact is that Allah never changes the condition of a people until they intend to change it themselves. If Allah wants to afflict a
people with misfortune, none can ward it off, nor they can find any protector besides Him
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Enter upon them through the gate, for when you enter it, you will be the
dominant. And rely upon Allah (have Tawakkul), if you are believers.
However, the above verse does not imply that we can only make wakeel to Allah and be lazy.
Rather we have to take necessary precautions to minimize the risks. Remember when the
Prophet salallaahu alayhi wa sallam asked the Bedouin,
Why dont you tie down your camel? The Bedouin answered, I put my
trust in Allah. The Prophet then said, Tie your camel first, then put your
trust in Allah [At-Tirmidhi].
Since risk is an inherent part of our life that we have to live with it and protection of Life (Nafs)
Protection of Property (Mal) is part of the Maqasid al-Shariah. Therefore, a good risk
management is a shariah prerequisite according to Islam and negligence of measures in
managing risks are contrary to the Islamic shariah law. Moreover, insurance itself is
encouraged in Islam but the majority of the scholars concludes that conventional insurance
practiced now a days are not Shariah compliant.
Conventional method of risk management is carried out and categorized in various forms
preferably pure and speculative risk. Conventional insurance is the tool that is commonly used
to cover the pure risks only. Speculative risks and other risks are managed using different
techniques and mechanisms. The main reason that scholars consider conventional insurance as
Shariah non-compliant due to the following reasons.
1. Conventional insurance involves the elements of excessive uncertainty (gharar) in the
insurance contract;
2. Gambling (maysir) as the consequences of the presence of excessive uncertainty that
rely on future outcomes
3. Interest (riba) in the investment activities of the conventional insurance companies;

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4. Conventional insurance companies are motivated by the desire for profit for the
shareholders;
5. Conventional system of insurance can be subject to exploitation. For example, it is
possible to charge high premium (especially in monopolistic situations) with the full
benefit of such over-pricing going to the company.
Conventional Insurance usually cover only pure risks and they handle it through avoidance,
retained, transfer, shared or reduced methods. Thus most of the methods involves fasid
transections and it contradicts with Shariah law.
However, risk sharing approach is an acceptable one if the contracts are handled according to
the Shariah guidelines. Risk sharing refers to an arrangement to share profits and losses
amongst the members of a particular group. One such form of risk sharing practice in Islam is
the concept of takaful. This concept is originated from the Arabic word Kafalah, which means
"guaranteeing each other" or "joint guarantee (mutual assistance). Takaful is commonly
referred to as Islamic insurance which is based on brotherhood, solidarity and mutual
assistance, which provides mutual financial aid and assistance to the participants when needed,
where the participants mutually agree to contribute for that purpose.2
Takaful concept is in line with the principles of compensation and shared responsibilities
among the community. The concept is valid and permissible in Shariah as the Quran says
Help one another in righteousness and piety, but do not help in sin and
rancor; and fear Allah, for Allah is strict in punishment
(Surah al Maidah, verse 2)
Therefore, takaful is an essential element in the practice of Islamic finance. If we consider
conventional insurance, we take insurance policies to protect our properties and to minimize

In Islam, takaful is a form of risk sharing where the participants help those who are in need or in hardship due to perils or
hazards. (BNM Takaful Act 1984).

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the losses and damages to the beneficiary at the event of loss. Takaful can play the same role
in line with the Sharia law as the concept of takaful has a direct relationship with the concept
of risk sharing. Both concepts, takaful and risk sharing are acceptable in Islam. Thus from the
above verses, it is encouraged to promote mutual assistance in righteous deeds but rejects the
concept of mutual assistance in sin and rancor.
In Insurance, compensation is paid to the insured or to the beneficiary at the time of loss.
However, risk sharing in Islam is also encouraged in the institution of diyah, which has been
commanded in the Quran3 and the Sunnah4. Similarly in risk sharing, a compensation is paid
to the injured or to the beneficiary. The legitimacy of this concept is in the Quran which says
in (Surah al-Nisa, 92),
Never should a believer kill a believer except by mistake; and whoever
kills a believer by mistake it is ordained that he should free a believing slave
and pay blood-money to the deceaseds family.
Application of risk management in Islamic perspective of takaful is different from the
conventional insurance contract. In takaful, the underlying contract between a participant and
other participants is a contract of donation (tabarru) and mutual assistance (taawun). The role
takaful company is to manage the tabarru fund. The risk that is usually borne by the individual
participant is shared and transferred to the group of participants in the tabarru fund which
minimizes the risk. The majority of Muslim scholars consider that takaful must be based on a
contract of donation (tabarru) and mutual assistance (taawun) in order to allow the element
of gharar (uncertainty) in insurance to be tolerated.

Never should a believer kill a believer except by mistake; and whoever kills a believer by mistake it is ordained that he should
free a believing slave and pay blood-money to the deceaseds family, unless they remit it freely. If the deceased belonged to a
people at war with you, and he/she was a believer, the freeing of a believing slave (is enough). If he/she belonged to a people
with whom you have a treaty of mutual alliance, blood-money should be paid to his/her family, and a believing slave be freed.
For those who find this beyond their means, a fast (is prescribed) for two consecutive months as a means of repentance to
Allah. Allah has all knowledge and all wisdom (Surah al-Nisa, 92).
Narrated Abu Musa: The Prophet (peace be upon him) said, When the people of Ashari tribe ran short of food during
expeditions, or the food of their families in the town ran short, they would collect all their remaining food in one sheet and
then distribute it among themselves equally by measuring it with a bowl. These people are from me, and I am from them.
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In takaful the participants agree to guarantee each other and make contributions to a mutual
fund to bear one anothers specified risk and loss such as injury and other perils which may
occur to any participant. On behalf of the participants, the Takaful fund is managed and
administered by a Takaful Operator who takes pre-agreed charges to cover costs. The takaful
operator maintains two separate funds; a participants fund for making claims payable to the
policyholders, to cover the retakaful costs and administrative expenses, shareholders' fund or
Investment fund uses its fund to invest in Shariah compliant financial products for a profit-andloss-sharing basis.
Any claims made by participants are paid out of the Takaful fund and any remaining surpluses,
after making provisions for likely cost of future claims and other reserves, belong to the
participants in the fund, and not the Takaful Operator, and may be distributed to the participants
in the form of cash dividends or distributions, alternatively in reduction in future contributions.
Takaful is a concept of risk sharing in a Shariah compliant manner. It eliminates excessive
uncertainty, mysir and riba in the pooling of funds and the return from its investments. Takaful
also promotes mutual assistance (taawun) and universal brotherhood which is based on a
contract of donation (tabarru) rather than pooling of risk as in conventional insurance. Since
we cannot entrust our affairs only to Allah and let things happen, the financial institutions
should provide proper risk management opportunities for Muslim traders and the individuals
as it is a shariah prerequisite according to Shariah law. This makes the risk management and
takaful really significant in our everyday affairs.

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