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Arguments for and against the contract of insurance Status of modern contract of insurance Issues related to insurance
a) b)
iv.
The modern contract on insurance is objected by the Ulama or the learned in Islam base on the following ground:i. ii. iii.
iv.
It is a wagering contract It is mere gambling It is of an uncertain nature Life insurance is a device whereby an attempt to supersede the Will of God
v.
The amount of life insurances premium is indeterminate, the insured does not know how many instalments he will have to pay The insurance companies invest the amount paid by the insured in interest bearing securities and in the case of life insurance, the insured, on his death, is entitled to get much more than what he has paid which amounts to riba The whole insurance business is based upon riba which is unlawful
vi.
vii.
It is based upon mutuality and cooperation Gambling is a play with luck-detrimental to society Insurance guards human being life and property from dangers and gives benefit to trade and industry
Prophet (PBUH) saying:Contract of sale are forbidden where the seller is unable to deliver a thing contracted. For instance, the sale of a bird in the air or a fish in the water. Inevitable uncertainty - It may concluded that the saying of Prophet (PBUH) pertain to the cases where uncertainty exists in its extreme form such as gambling
In this light, insurance is far from uncertainty, as it is accompanied by a definite compensation Contract of insurance is one the indemnity or bail according to Islamic law and the jurist have admitted the validity of such contract uncertainty cannot be objectionable in insurance
In the issue of security in insurance is not of a tangible nature to form the sort of subject matter of a contract required by Islamic law.
To this contention answer is found in a contract of hiring someone to keep guard which is valid under Islamic law (security is the subject matter)
Quran
(5:2) But help ye one another unto righteousness and pious duty. Help not one another sin and transgression
a calamity measures taken to lessen the seriousness of its consequences by mutual help and assistance.
Death
Hanafi jurist make a distinction between the indefiniteness which leads to complications and renders the contract unforceable & indefiniteness which does not effect the enforcement. i.e a composition against all obligations valid for it does not create any misunderstanding; while it is invalid if against some obligations only.
The premiums/installments amount is known and so is the total when all have been paid do not affect the validity of the contract
For life insurance, it is count for little as it is open to the insured not to accept more than what he has paid. While, there are no objection to other dealings of insurance companies and their investment on interest
Point to the contract of clientage (Aqd al-Muwalat) insure not only against death or injury, but also liability to third parties whose descent is unknown. Bay bil-Wafa- introduced as the circumstances demanded it. Insurance may also be adopted under the rule of necessity.
Ibn Abidin
Muslim is not allowed to take from the protected person what he is not liable to pay under Islamic law.
Nadwat al-Ulama
Insurance in all its forms is not free from unlawful riba & gambling. But also taking into consideration protection of life & property - emergency
Mahdi Hasan
The rule of necessity no laws whereinsurance may be permissible where lawlessness prevails.
Mahmud Ali
Insurance is not without gambling and riba. Even though riba permissible in Dar al-Harb.
Ubaydulla Rahmani
The amount earned under insurance is riba. Permissible when no safety of life and property. Issue of compensation & riba fi Dar alHarb.
Muhammad Zafiruddin
Amount in the name of bonus is riba. Premium being a loan and the profits upon it is not permissible. Excess without counter value is riba.
Muhammad Shafii
The bonus given is riba. The compensation renders a wager. But deposit with intention of saving is permissible if the interest is not accepted. Suggest (1) Mudharabah investment (2) portion to reserve fundwaqf (3) concept of shareholders (4) forfeiture
Wali Hasan
Insurance is based on riba & gambling - unlawful
Basic notions of the Shariah relating to transactions are ethical in character Unjustified enrichment and risk (gharar) are forbidden Vague expressions and delays in delivery are rejected Shariah insists that there must be no doubt concerning the obligations undertaken by the parties to a contract The object/subject matter of the contract must be known
Among other causes which go to vitiate a contract are unjustified enrichment and risk Obviously, the contract of insurance could not be valid in the eye of Shariah unless it were free from these. However, the modernists contend that insurance is contract of indemnity providing for the genuine loss of the insured with no unlawful enrichment to either of the parties Then, we have to examine whether it does correspond with the contract of indemnity called kafala (bailment or suretyship)
Kafalah
Kafalat al-Nafs (Kafala for the person) Kafalat al-Mal (Kafala for the property)
The word al-kafala is derived from al-kifl which means junction or addition In the language of law, it signifies the junction of one person to another in relation to a claim As a result, the creditor can call upon either the original debtor or the surety to perform the obligation, and a demand from one would not affect his right of demand from the other if the obligations remains unfulfilled
So that if the agreement released the original debtor from his obligation, it would not be a suretyship, but of Hawala or transfer of obligation
Two points are immediately evident:i.
ii.
Kafala in Islamic Law is the creation of an additional liability with regard to a claim there is nowhere to be found in the contract of insurance In kafala there are three parties in a contract of insurance there are two parties
Ignoring these points of divergence, the modernist argued that uncertainty of subject matter is no bar to the incorporation of insurance into Islam because kafala is lawful contract
Although upheld by Abu Hanifa, it is opposed by Shafii and others who maintain that the obligation to be fulfilled in kafala can no more be uncertainties than the price in a contract of sale
The modernist argued that the number of instalments in life insurance is not truly indefinite since it becomes known when they are paid However, uncertainty in Islamic law refers to the time of the contract whereas payment of instalments relates to the future
Subject matter
Insurance contract is a bilateral transaction The subject-matter is, therefore, risk coverage (compensation) sold in consideration of the premium The contention of the modernists that security is the subject-matter is far from the truth No intangible or indeterminate object can possibly from the subject matter of a contract of sale under Islamic law The principle of Islamic law is that there should be no delay in delivery and reciprocal possessions of the articles exchanges should take place at the time of contract For this and other reasons the contract of insurance cannot be compared to that of kafala
Verdict
Its uncertain and indeterminate subject matter Its suspension on an uncertain event renders it a wager
Insurance is clearly a transfer of the risk of cashvalue loss from one party to the other In mutual insurance, the insured himself is the insurer, risk is not transferred but rather shared by all Thus, the golden principle of bear ye one anothers burdens comes into play, and indeed cooperation and community of interests find their expression
1. Nature Gambling The gambler seeks out the risk which was not there earlier or which, even if it did exist, did not personally concern him - it can be avoided if he wanted to do so Insurance The occurrence of perils against which and the effect of which the insured seeks protection does not depend on whether he is insured or not all such perils entail financial losses For example is death, which is a permanent peril that causes financial loss to dependants of the deceased Owners of a car have the risk that the car will be destroyed or damaged, the risk being inevitable condition of their use Unlike the gambler, the owner of the car does not willfully imperil himself by seeking out accident involving financial loss
For instance, buying lottery tickets, betting and staking on horse races, football matches, games of cards and etc
Gambler willingly seek the financial loss as they are motivated by the potential gain that independently exist in gambling
2. Motivation Gambling Hope of gain the financial motivation in gambling is provided by the gain in the event of winning The gambler seeks clear profit Insurance The desire to have protection against the loss that one is to suffer in the event of the occurrence of the apprehended peril The stipulated amount that the insured will get in such a case cannot be considered as profit it only provides relief from the burden of loss
For example, the gambler gets a prize of a million pounds from lottery ticket, with that of the shipowner who gets the same amount who get the same amount after shipwreck from insurance as agreed value of the ship
The economic status of the shipowner is still the same as it was before the shipwreck. He is not any wealthier now than he was before. By contrast, the lottery winner is absolutely wealthier now than he was before.
3. Impacts toward economic activity Gambling The gambler incurs financial loss if he losses the game absolute loss Insurance The insured, after paying the agreed premium, is guaranteed the payment of compensation for his financial loss in the event of the occurrence of the peril covered by insurance
It has the economic implications, whose usefulness remains unaffected by whether there is actual accident or not The mere guarantee of compensation for loss is of great value for all economic activities that involve pure risk
Insurance/ Premiums
Provide conducive business environment
Thus, the discussion should be sufficient to remove the misunderstanding that the two share common characteristics or that gambling is in any way inherent in insurance The truth is that the two have nothing in common Rather, in their social and economic roles, they are opposed to each other
Prohibition of games of chance is explicit in the Quran (Surah Al-maidah:90-91) Islam also forbidden all such business activities as contain any elements of gambling Shah Waliullah has included sale of an indefinite quantity of dates for a definite quantity of dates, payment of advance money and buying of dried dates against fresh ones As observed by Shah Waliullah, gambling is not useful for civilisation, nor can it be termed as co-operation of the kind possible in business transaction
iii.
New parties continues to take out insurance The amount of premium is fixed a little higher than the minimum required to pay claims from the whole group of persons insured The premium money collected regularly, whereas the frequency of payment of claims is not so regular
By purchasing interest-bearing instrument the insurer able to minimise loss and ensure constant growth of the capital RIBA This growth in capital is taken into consideration while calculating the rate of premium payable less cost of insurance Thus, if this capital can be gainfully used through some interest-free channels, the insurance system will obviously get rid of the element of interest In fact, keeping such large amount of capital unutilised is a waste of national resources
As an alternative, the insurer should search for an avenue that comparatively safe and profitable investment of the surplus capital in an interest-free economy For instance, the insurer may invest their capital in government partnership shares or in the shares of reputed private business entity and depositing in profit-sharing bank accounts Profit from the invested insurance money may exceed the estimated amount which formed the basis for the calculation of premium surplus profit can be used to establish a reserve fund to offset any future possible loss
Profit from the invested insurance money may exceed the estimated amount which formed the basis for the calculation of premium. Surplus profit can be used to establish a reserve fund to offset any future possible loss and keep the rate of premium in harmony with the actual rate of profit over a fairly long period of time
The argument that insurance implies interest as the insured is promised an amount far excess of what he will have deposited in installments before the occurrence of any accident is baseless as Shariah does not regard absolutely every increment as interest Money paid as premium is not in the nature of a loan, and the payment of a claim does not amount to returning the loan with an incremental amount that may be considered interest
Pure risk, i.e. danger of financial loss incurred in accidents caused by unforeseeable perils or by human lapses, is a social evil Hence, it must be prevented to the extent possible This objective is even more desirable from the moral and spiritual than form the strictly economic point of view The Shariah considers these measures desirable, indeed it insists that man strive to keep life and property secure (maqasid al-shariah) Where financial loss causes destitution to individuals or to families, the need to help the victims, to compensate them for the loss, is rather obvious
In fact, prevention of any damage to an individuals efficiency, and keeping the familys economic potential intact, are necessary means for the economic progress and prosperity of the whole community Provision of compensation for losses involved in pure risks under insurance cover is a modern techniques of risk-management in the light of the law of large numbers It help maintain economic efficiency, within social conditions conducive to the confident pursuit of risk-bearing economic activities Often, insurance greatly helps those reduced to penury by some accident
All these are valid interests according to the Shariah which may be safeguarded insurance along with some other means. Nonetheless, insurance under an Islamic system will be organised in co-ordination with the system of public welfare and social security. Taking preventive measures and arranging beforehand for compensation for likely losses involved in cases of pure risk, whether done individually or collectively. It is absolutely compatible with the belief in predestination and submission to the Will of God.