Development & Applications of

Islamic Insurance (Takaful)

Prof. Dr. Mohd. Ma'sum Billah1

Introduction
Conceptually, Takaful (Islamic insurance) is a financial transaction of a mutual cooperation between two parties towards providing a financial security for one of them
against an unexpected material risk. In a Takaful transaction, the party called the
participant (insured), who pays a particular amount of money known as contribution
(premium) to another, who is known as Takaful operator (insurer) with a mutual
agreement that, the operator is under a legal responsibility to provide the participant with
a financial security against unexpected loss or damage caused to the subject matter of the
policy should one occurs within the agreed period of the policy. However, in case of a
life Takaful policy where the loss does not occur against the subject matter within the
specified period, the participant (insured) is entitled to the entire amount of paidcontributions to the participants account (PA) together with the share of profits made out
of the cumulated paid-contributions from PA, based on the principles of al-Mudarabah2
financing technique. In this transaction, both the Takaful operator and the participant are
mutually helping each other for a financial protection.
1

International Islamic Corporate Advisor on Shariah, Banking, Finance, Takaful @ Insurance, Business,
Wealth, Asset & Property Management, Capital Market, Bond Market, Money Market, Investment & eCommerce. Professor of Islamic Finance, Insurance @ Takaful, Banking, & e-Commerce, Faculty of
Islamic Finance, University of Camden, USA. E-mail: masum2001@yahoo.com Website:
http//.www.applied-islamicfinane.com.

2Al-Mudarabah is one of the financial technique in the Islamic partnership dealings between two or more
parties whereby on party provides capital while the other offers service or skill in a particular business, both
sharing profits accordingly. Todays Islamic banks and Islamic insurance companies have been operating
based on the principle of Mudharabah, which is an alternative to the interest based-transaction. In other
word, Mudarabah is a complete interest free profits and loss sharing transaction.

Such a mutual co-operation between both parties is certainly in line with the Quranic
doctrine of mutual co-operation as Allah (swt) commanded to the effect:

..and co-operate you one another in righteousness and piety.. 3

Under the Islamic teachings, the commandment to practice mutual co-operation is not an
absolute. There is in other words, a limitation to it, as Allah (swt) has further prohibited
mankind from co-operating among them in any manner, which involves sinful elements.
Allah (swt) again says to the effect:

.. and do not co-operate in sin and rancor.. 4

Based on the above verse of the holy Quran, it is submitted that, the practice of Takaful
contract and business will only become in harmony with the Islamic concept of mutual
co-operation should the transaction is operated based on the principles of al-Mudarabah,
which is permissible in the eyes of Allah (swt), and is carried out based on the noble and
sincere intention to ensure the participant with a financial security against unexpected
future material risk. Hence, in order for a Takaful transaction to become valid and
enforceable, it should be free from unlawful elements, like usury, fraud, and so on5.
This research however, seeks to provide a conceptual frameworks of Islamic insurance
and also the scenario of governing principles, which regulate Takaful and Re-takaful
products in the contemporary reality.

Development Scenario
Even though it was not expressly clear when insurance practices began in Islam, it may
be concluded based on the nature of insurance contracts today, that insurance transactions
by nature had been practised since before the time of the Holy Prophet Muhammad
(SAW) and had since been gradually developed until the beginning of the 19th century,
when a Hanafi lawyer Ibn Abidin (1784 -1836) became the first Islamic scholar who
came up with the meaning, concept and legal entity of insurance contract.6 As a result we
can see in the world of today a number of insurance companies are operating based on the
Divine principles.
Such a development of Islamic insurance could mainly be classified into the following six
stages:

Al-Quran, 5:3.
Ibid.
5
See generally, Billah, M. Masum, Life Insurance? An Islamic View, Arab Law Quarterly, 8:4, 1993 at
317ff.
6
Klingmuller, Ernest ,The Concept and Development of Insurance in Islamic Countries in Islamic
Culture, Vol. 43, January, 1969 at 30.
4

i)
Practices of the doctrine of al-Aqilah among the ancient Arab tribes as a tribal
custom: There are many encyclopaedias justifying the fact that the nature of insurance
practice had been originated from the ancient Arabs practices7, whereby it became a
custom among the tribes of Arab that if any member of a tribe was killed by a member of
different tribe, the heir of the victim would be paid with an amount of blood money as a
compensation by close relatives of the killer. Those close relatives of the killer were
addressed as Aqila in Arab terminology8, who were supposed to pay the blood money9,
on behalf of the killer. According to Dr. Muhammad Muhsin Khan, the word Aqila
means asaba which denotes paternal relatives of the killer10, therefore, the central idea
of the doctrine Aqila was practised among the ancient Arab trines as everybody in those
tribes used to be ready to make monetary contributions on behalf of the killer to
compensate the heir of the victim.11 Such monetary contributions known as blood
money. Readiness of the ancient Arabs at that time to pay compensation seemed to be a
kind of financial protection for the heir of the deceased against an unexpected death of
the victim.

:(The development of insurance practices

during the time of the Holy Prophet (SAW) could be discovered from two situations:

ii)

Practices of the Holy Prophet (SAW

(a)
The acceptance of the ancient Arabs practices of Aqila. The Prophet
(SAW) himself had accepted the concept of Aqila as practised by the ancient Arab
tribes. This could well be justified from the numerous verdicts or Sunnah of the
Prophet (SAW).12
In one of the disputes, the Holy Prophet (SAW) decided as follows:

Narrated by Abu Hurairah (R ), he said that once two women from Huzail clashed
when one of them hit the other with a stone which killed her and the baby in the victims
womb. The heirs of the victim brought an action to the court of the Holy Prophet (SAW)
who gave a verdict that the compensation for the foetus to be a male or female slave slave
while the compensation for the killed woman is a blood money (dyat) to be paid by the
Aqila (the relatives of the fathers side) of the killer.13
b(
The relevant legislations passed in the first constitution of Medina was in
622 B.C. Dr. Celal Venicery discovers that the first constitution in the Muslim world
7

See Aqila in Gibb H.A.R., et.al., The Encyclopaedia of Islam, E.J. Bril, Leiden, 1979.
See Aqilah in Hughes, Thomas Patric, Dictionary of Islam, Cosmo Publications, New Delhi India, 1982.
9
See Murghimani, Ali Ibn Abi Sakar ,al-Hedaya (Trans. Eng.) Charles Hamilton, The Hedaya, Vol. 4,
Book 51, Premier Book House, Lahore, Pakistan, 1982, at 670.
10
See Sahih Al-Bukhari, (Trans. Eng.) Khan, Dr. Muhammad Mushin, The translation of the meanings of
Sahih al-Bukhari, Kazi Publications, Lahore, Pakistan 1979, at 34.
11
See generally Aqila in Gibb, H.A.R., et. Al., Shorther Encyclopaedia of Islam, E.J. Brill Leiden, 1953.
12
See Athqalam, Ahmad Ibn Hajar ,Fath ul-Bari, Vol. 12, Alan Nashrul Kutub Al-Islamiah, Lahore,
Pakistan 1981, at 246.
13
Sahih Al-Bukhari,, op.cit ,.Vol. 9, No. 45 at 34.
8

which was prepared by the Holy Prophet Muhammad (SAW) shortly after the migration
to Medina in 622 B.C., which was meant for the people of Medina (i.e. the Muhajireen,
the Ansar, the Jews and the Christians) had included and introduced in it a kind of social
insurance which appeared into three modules:14 viz
Through the practice of Dyat: dyat or blood money was supposed
to be paid mutually by the Aqila (i.e. the close relatives of the killer) to the heir of the
deceased (victim) in order to rescue the killer from legal burden.15 The Holy Prophet
(SAW) ruled it out at article 3 of the above said constitution of Medina that:

The

immigrants among quraish shall be responsible for their word and shall pay
their blood money in mutual collaboration.16
Similarly ,Banu Awf, Banu Harith and other groups living in Medina at that time were
also obliged to pay blood money in mutual collaboration relying on the doctrine of
Aqila as ruled out in the constitution.17
Through the payment of Fidya (ransom): The Holy Prophet
(SAW) had also enacted a provision in the first constitution concerning rescuing the life
of the prisoners, which stated that should there be any person being made a prisoner of
war by an enemy, the Aqila of the prisoner shall contribute to a ransom to be paid to the
enemy in order to enable the captive to be freed.18 Such contribution could well be
considered as another form of social insurance. The Holy Prophet (SAW) mentioned to
the effect:

The immigrants among the Quraish shall be responsible for releasing the prisoners
by way of paying their ransom, so that the mutual collaboration among the believers be
in accordance with the principles of goodness and justice.19
Likewise, above ruling was also applicable to other groups like Banu Harith, Banu
Najjar, Banu Jusham and others living in the Medinan society at that time.20
By way of other forms of social insurance included in the first
constitution: which mentioned that the society shall be responsible to establish a joint
14

Vardit, Rispler ,Insurance in the World of Islam, Origins and Current Practice, UMI, USA, 1985 at 28.
Rahim M.A ,.Islamic Arthanaitik Nirapatta wa Binma (Bangla) Islamic Foundation, Bangladesh, Dhaka,
1983, at 106.
16
The articles of the constitution from 3 to 12 emphasis on the payment of blood money relying on the
doctrines of aqila.
17
See Hamidullah ,op. cit .at articles 4-12a, at 42ff.
18
Hamidullah, Dr. N ,.Introduction to Islam, Sh. Muhammad Ashraf, Lahore, 1983, at para. 362 at 146.
19
See Supra No. 4, Art. 3 at 55.
20
See Ibid, at articles 4 - 12a at 42ff.
15

venture with a mutual understanding towards providing necessary aids for the needy, ill
and poor.21 These were the three modules in which elements of social insurance were
introduced and practised in the light of the relevant provisions in the first constitution of
Medina.
iii)
Practices of the Companions: Further development of the practice of insurancebased transactions could be discovered from the period of the second Caliph, Sayedina
Umar (R ). During the period, the doctrine of Aqila had even been encouraged by the
government to be practised by the people. Sayedina Umar (R) had commanded that a
Diwan of Mujahideen be established in various districts and those whose names were
recorded and contained in the Diwan owed each other a mutual co-operation to
contribute sincerely the blood money for manslaughter committed by one from their own
tribe.22 Hence, it is presumed here that the application of the doctrine of Aqila had
further been developed during the period of the second Caliph of Islam. Sayedina Umar
(R ) which, hence, reflects the elements of insurance practice during the period.
iv)
Development in the 14th - 17th Century: During the period of fourteenth to
seventeenth century a Sufi Order of the Kazeeruniyya was very active especially in port
cities in Malabar and in China. This order served as a kind of marine travel insurance
company. It had been associated with the tomb of Abu Ishaq Ibrahim Ibn Shahariyahb
(963 - 1035 C.E.) whose blessings were considered as a protection against peril during
the sea voyage.23
v)
Development in the 19th Century: During the period of the nineteenth century Ibn
Abidin (1784-1836), a Hanafi lawyer was the first person to discuss about the idea of
insurance and its legal entity. He was also the first person to discover insurance in the
context of a legal constitution, being no longer a customary practice.24
Ibn Abidins opinion on insurance practice being a legal institution served as an eyeopener to many Muslims who did not accept the legality of insurance practice and it had
prompted other Muslims to accept the idea of involvement in insurance business. Kling
Muller claims that Muslims began to practise insurance business not only by buying it
from foreign companies, but also be establishing insurance companies and becoming
insurers themselves.25
vi)
Development in the 20th Century: In the period of twentieth century, a well-known
Islamic jurist, Muhammad Abduh issued two fatwas mentioned that an insurance
transaction is like the transaction of al-Mudhaabah financing technique, while the other
was that a transaction which is similar to endowment or life insurance are legal.26
21

Islam da Devlet Butcest, pp. 382-83 as cited by Vardit ,op.cit ,.at f.n. 84 at 28.
See Akila in Gibb, et. Al., op. cit., at 29f.
23
Vardit ,op. cit ,.at 29f.
24
See, Klingmuller ,E ,.The Concept and Development of Insurance in Islamic Countries in Islamic
Culture, Vol. XLIII, 1969, at 30.
25
Ibid.
26
See ,Vardit, op. cit ,.at 32.
22

The gradual growth and development of Shariah-based insurance practices in the

twentieth century in both Muslim and non-Muslim countries are quite satisfactory despite
the fact that there are still some areas to be developed in this field in meeting the needs
the necessities of the society of today. It is also sad to say that there are also many
scholars of today who oppose the practice of insurance, especially life insurance, without
suggesting an alternative for the Muslim Ummah. It is undeniable that there are some
elements involved in todays conventional insurance practices which are not recognised
by the Shariah, this does not mean that insurance practice is entirely unlawful and
illegal. It is however, suggested here that even though certain aspects of the conventional
insurance could not be practised by Muslims due to its involvement of some unlawful
elements in the eyes of the Shariah, it is now the responsibility of the present Islamic
scholars to be innovative and come up with an alternative model of Islamic insurance
which eliminates all the elements prohibited by Islamic law, in order to ensure the
Muslim Ummah to be rescued from any form of unexpected risk and peril.
The following chart is given as an example of Islamic insurance companies operated in
the contemporary world.
INSURANCE COMPANY(S(
The Islamic Insurance Company

COUNTRY

YEAR

Sudan

The Islamic-Arab Insurance Co.

Saudi Arabia

The Islamic-Arab Insurance Co.

Darul-Mal Al-Islami

U.A.E.
Geneva

Syarikat Takaful Al-Islamiyah

Bahrain

Islamic Takaful and Re-Takaful Co.

Islamic Takaful Company

Bahamas

Al-Barakah Insurance Co.

Islamic Insurance and Re-Insurance Company

Sudan

1979
1979
1980
1981
1983
1983
1983
1984
1985
1992

Luxembourg
Bahrain

27
Brunei
Syarikat Takaful Malaysia Sdn. Bhd .
This company is currently managing nine-other branches
28
throughout the country .
Syarikat Takaful Brunei Darus-Salam29
Brunei

The PT Syarikat Takaful Indonesia

The Syarikat Takaful Singapore

30

Indonesia

31

Singapore

27

1992
1994
1995

The information extracted from Rahman, Dr. M. Ataur Akti Desher Orthomaitik Unnayona Islami
Bimer Vornica: Bangladesh Prekkith Thoughts on Economics, Vol. 4, No. 3-4, 1994 at 91.
28
See in The Malaysian Insurance Directory 1994/95, op. cit ,.at 194.
29
See in Profitle of Asuransi Takaful Umum Indonesia, (An information Brochure, n.d.) at 2.
30
See in Ibid., at 1.
31
See in Juhari, Johrawati ,Islamic Insurance Takaful Launched in Singapore ,in the Muslim Reader,
Vol. 13, No. 3, Oct. - Nov. 1995.

Islamic Insurance Company32

MNI Takaful Sdn. Bhd

33

Qatar
Malaysia

ASEAN Takaful Group (ATG(

ASEAN Re-Takaful International (Labuan) LTD (ARIL)

Malaysia
Malaysia

1995
1993
1996
1997

Besides all the Islamic insurance companies listed above, the Organization of Islamic
Conference (OIC) is at present taking the initiative to establish an international Re34
Insurance Corporation .
At present, serious studies and researchers in the sight of the Shariah are being
conducted on insurance in many parts of the world in order to make insurance to be
understood by all, in both theories and practices, so that the contemporary Muslim
Ummah could be benefited from.
Nature of Insurance Practices in the Islamic Economy
Islamic insurance or course, differs from that of conventional. This is because an Islamic
insurance policy must operate based on the concept of al-Mudharabah, a profit sharing
scheme and must be free from the elements which are illegal in the eyes of Shariah. The
scholars who are not in favour of legalising insurance must have based their opinions and
judgments on the conventional insurance practices which for sure involve a few unlawful
elements in the eyes of the Shariah.
Thus, here is given a proposed model for Islamic insurance policy which is different from
that of the conventional one.
i)
An insurance contract binds the insurer only on unilateral basis that the insurer is
under an obligation to provide a compensation against the loss to the subject matter of the
policy, while the insured not be forced if he does not want to continue the payment of
premiums. But it is necessary to the insured to continue the payment of premiums in
order for claiming benefit over the policy. If the insured discontinues the payments of
premiums, the paid-premium should not be forfeited.
ii)
An Islamic model of insurance policy is based on the fundamental principle of
mutual co-operation and solidarity, as ordained by Allah) SWT) Allah (SWT)
mentioned to this effect:

Sustain a mutual co-operation among yourselves in the righteousness and piety35 .

32

See in The Islamic Banker, July, 1995, at 5.

See in The Malaysian Insurance Directory 1994/95, op. cit ,.at194 Af.
34
Ali, K.M. Murtuza ,Insurance in Islam: Some Aspects of Islamic Insurance, Islamic Economics
Research Bureau, Dhaka, 1991 at 45.
33

iii)
A Shariah based insurance policy does not involve unlawful element of usury
(Riba), but it is based on the profit-sharing financing technique of al-Mudharabah,
whereby the insured pays the premiums to the insurer (insurance company) who will run
a business by the cumulated money, the profits arising from such transaction will be
shared by both the insurer and the insured accordingly.36
iv)
In the case of life insurance policy, some claim that such practice is prohibited in
Islam, relying on the fact that the insurer and the insured, in this case, are trying to
determine ones life or death, as claimed by the Muslim brotherhood in 1941.37
However, such criticism was proven to be groundless.
v)
In an Islamic model of life insurance policy, however, the nominee(s) is not an
absolute beneficiary(s), but a mere trustee who is under an obligation to receive the
benefits over the policy and distributes them among the legal heirs of the deceased in
accordance with the principles of Mirath (inheritance) and Wasiyah (bequest).38
vi)
In an insurance transaction an agent is working for the company. Hence, it is
suggested here that agent should also have a certain share in profits in the business
carried out by the company as salary. The agent therefore, should not be paid out of the
insured premiums.
vii)
In a life policy, if the assured passes away at any time before the maturity of the
period, the beneficiary(s) is expected to claim from the policy the total paid-premiums,
the share of the profit, and dividends made over the paid premiums which are all based on
Al-Mudharabah financing technique plus an additional sum of donation from the
company taken out of its charitable fund upon considering the financial status of the
beneficiary(s).39 But if the insured sustains his life upon the maturity of the period of the
policy, the insured is entitled to claim from the insurer the total paid-premiums also the
share of the profits, dividends accordingly.
viii) In the case of general insurance, it is to be mutually understood by both the
insurer and the insured that the insureds payment of premium will be given out as a
donation based on the principle of Tabarru40 (donation or contribution) whereby the
insured can not legally claim back the premium if there is no loss on the agreed subject
matter. However, if a loss or damage occurs to the subject matter within the policy

35

Al-Quran, at 5:2.
See generally in Rashid, S.K ,.Islamization of Insurance - A Religio - Legal Experiment in Malaysia in
Religion and Law Review, Vol. 2, No. 1, 1993 at 26f.
37
See in Klingmuller ,op.cit ,.at 35.
38
See the details in Billah, M. Masum ,Life Insurance? An Islamic View, in Arab Law Quarterly, Vol.
8., part 4, 1993 at 319.
39
See the details in Billah ,op. cit ,.at 324.
40
See in Rashid ,op. cit ,.at 27.
36

period, the insurer is unilaterally bound to pay the agreed compensation to the insured for
that particular loss or damage of the subject matter.
ix)
The person who claims the benefits over a policy must have an insurable interest
on the subject matter.
x)
The parties involve in an insurance policy must have legal capacity to enter in to
contract.

Scope of Islamic Insurance Contract

Generally, the scope of an Islamic insurance policy is very wide and flexible. Such wider
scope and flexibility are just for the purpose of Inter Alia to ensure a smooth life in the
society which is of course in line with the following sanction:

.. Our Lord, give us happiness in this world and happiness in the hereafter..41
In spite of the wider scope and flexibility of the Islamic insurance policy, there are certain
limitations set by the Shariah in order to purify the transactions. For instance, Allah
(SWT) prohibited any kind of cumulation of profits and wealth by way of unjust
enrichment. He commanded to the effect:

.. do not eat up your property among yourselves in vanities, but there be amongst
traffic and business by mutual goodwill..42In short, the limitation imposed by the
Shariah to an insurance policy are as follows:
i)
A contract of insurance should not involve a single element of Riba in its
investment activities or any other activities43 organised by the insurance company. This
is because besides it is being totally forbidden in Islam, it Inter Alia, creates the sense of
selfishness, miserliness, greed, and malevolence, at the individual level and hence Haji
Azlan Khalil accepts the view of Khan M.V. that the institution of Riba could lead to
miserable, unstable society.44 Allah (SWT) warns the believers against involving Riba
in their transactions. He (SWT) says to the effect:

41

Al-Quran, at 2:201.
Ibid., at 4:29.
43
See Takaful Cover, Syarikat Takaful Malaysia Sdn Bhd., Kuala Lumpur (n.d.)
44
Shamsuddin, Haji Azlan Khalili Hj ,.Banking and Public Finance in Islam, Dewan Pustaka Fajar, Kuala
Lumpur, 1988 at 13.
42

 O ye who believe!

Do not involve with usury, double and multiple..45

ii)
An insurance business should be based on the principle of al-Mudharabah
financing technique as an alternative to the principle of the fixed-rate interest.46
iii)
The nominee(s) in a life insurance policy is not an absolute beneficiary(s) as
47
under the conventional system
.Such nominee(s) is only a mere trustee(s) whose
obligation is to receive the benefits over the policy and distribute them among the legal
heirs of the deceased (insured)48 in accordance with the principles of al-Mirath and alWasiyah.49 Such responsibility is shouldered by the nominee(s) and is just for the sake
of enabling the heirs of the assured to enjoy a fair distribution of the benefits of the
policy.
iv)
An insurance contract is only enforceable if it does not contravene with any of the
principles of Shariah. This has been clarified by the Malaysian Takaful Act 1984:

Takaful business means a business of takaful whose aims and operations do not involve
by any element which is not approved by the Shariah.50
v)
Every individual in the society has a freedom of buying an insurance policy. The
only exceptions to this general rule are set out as follows:
a)

Any person whose age is below eighteen years

.The Malaysian Takaful

Act to the effect:

A person under the age of eighteen years shall not have the capacity to enter into a
contract of Takaful51 .
b)
A person who is an insane and an ill (the one medically unfit) are also
incapable to enter into a contract of insurance.
vi)
An insurance contract does not aim at gaining something as it is a mutual
transaction aimed at fostering the sense of mutual co-operation among the parties to the
contract in order to establish brotherhood and solidarity among them. Thus, in an
insurance policy, there is a mutual co-operation between both parties whereby the insured
undertakes to pay the premiums throughout the period of the policy while the insurer
undertakes, in return, to provide the insured with the necessary material protection
45

Al-Quran, at 3:130.
See Shafi, Maulana Mufti Muhammad ,et. Al ,.Bimah Jendegi (trans. Urdu-Eng.), Meenai, Anwar
Ahmad, Life Insurance, Darul Isayat, Karachi, 1995, at 36.
47
See the judgment of Suffian J., in Reman bin Mihat (1965) 2 MLJ 1.
48
See the decision of the High Court of Karachi in Karim Vs. Hanifa (1970) PLD 683.
49
See in Billah ,op. cit ,.at 319.
50
Takaful Act, (Malaysia 1984 (at S.2.
51
Ibid, at S. 64.
46

10

against an unexpected risk, danger or loss. Allah (SWT), in the Holy Quran, has enjoined
such mutual co-operation to be established among the people. He (SWT) says to the
effect:

And co-operate one another in righteousness and piety..52

vii)
A contract of insurance is enforceable should it be entered upon a speculation of a
risk on a particular subject matter.
viii) If either party to the insurance contract has the intention of gaining instead of
establishing mutual co-operation, the transaction will become morally and spiritually
unlawful. Hence, it is also required from both parties to the contract to instill in their
hearts purity and sincerity in order to abide the principle of mutual co-operation as
enjoined by the Holy Quran at 5:2.
ix)
The fundamental aspects of insurance must be controlled and supervised by the
State Authority based on the Shariah rules and nothing should be left, unchecked. Such
a wise move is aimed at ensuring the legality and fairness of all the transactions
conducted by the insurance companies, since insurance businesses are considered as
Amanah or trusts, whereby the insurance companies undertake to protect the insured
from future unexpected losses, damages, risks or perils. Nejarullah Siddiqi hence
suggested to the effect:

All

insurance concerning perils to lives, limbs, and health should be dealt with

exclusively under the supervision of the state53 .

He further suggested:

Insurance against peril involving money and property should also be run by the state
.

54

Again he aspired in his proposal that all kind of insurance practices should be dealt under
the supervision of the state authority.

Foundation of Insurance in the Islamic Economy

52

Al-Quran, at 5:2.
Siddiqi, M.N ,.Insurance in an Islamic Economy, The Islamic Foundation, U.K., 1985 at 67.
54
Ibid.
53

11

An insurance practice under Islamic teachings posses certain fundamental characteristics

upon which an insurance contract is to be held valid. Those fundamental characteristics
could mainly be classified into four categories:

i)

Sincerity (Ikhlas(

Every transaction and dealing should always be done with sincerity and pure intention in
order to achieve the desired result from Allah (SWT). He (SWT) says:

And they have been commanded no more than this, to worship Allah (SWT), offering
him sincere devotion.55
This has further been enhanced by the tradition of the Prophet (SAW) as follows:

.. Narrated by Omar Ibn Khattab (R ) the Holy Prophet (SAW) said:

The validity of
the actions are depending on intention and therefore every man shall have but that which
he intended..56
Moreover, the parties to the insurance contact must have the sincerity of not to gain, but
to be bound by that transaction based on the principles of mutual co-operation, solidarity
and brotherhood towards rescuing one from unexpected losses and damages. This is
because Allah (SWT) never look at any material gains but at the sincerity of the hearts.
The Holy Prophet (SAW) said to this effect:
Narrated by Abu Huraira (R ) the Holy Prophet (SAW) said: Verily Allah (SWT) never
look at your physical shape nor at your appearance but considers sincerity in your
hearts..57
What more in an insurance transaction whereby the parties undertake must by all means
58
put their trusts and faith in Allah (SWT (in order to get His (SWT) protection from the
consequential unpredicted loss. This is because an insurer formally undertakes only to
compensate the insured against a loss or damage through he (i.e. the insurer) is not liable
to guarantee for an ultimate protection. This is because Allah (SWT) is the one who has
a power of protection over all in the universe. He (SWT) indicates it as follows:

55

Al-Quran, at 98:5.
Bukhari and Muslim, (agreed), Kitabul Iman.
57
Sahih Muslim, compiled in An Nawari, Riyadhussalihin (trans. Bangla) Ali, Maulana Syed Muhammad
et. At. Riadussaliheen, Vol. 1, Bangladesh Islamic Centre, Dhaka, 1990, No. 7 at 5.
58
Shafi, Mawlana Mufti Mohd ,.op. cit ,.at 36.
56

12

 To Him belongs the domination of the heaven and the earth:

and He has power over all things59 .

to give life and death:

Absolute Shariah Principles

ii)

An insurance business in the eyes of Islamic discipline will not be valid should any of its
aspect contravenes any Shariah principle. The Takaful Act (Malaysia) 1984 rules out
that a Shariah based insurance is enforceable if its aims and operations do not involve
any element which is not approved by the Shariah.60 Therefore, it is a pre-requisite for
the validity of an insurance contract that none of its aspect should be in contravenes with
any expressed or implied Shariah sanctions. It is also to be clarified here that Islam is
the only system of life recommended by Allah (SWT)61 and therefore, it is logical for any
transaction (including that of insurance) to be conformed with the Divine rules and
regulations. Any transaction which fails to be practised in line with such Divine will
therefore, become invalid. Allah (SWT) says to the effect:

If any one desires any system other than Islam never will it be recognised by Allah
(SWT62
iii)

Moral Attributes

An insurance contract and practice must also conform with moral sanctions. Those moral
sanctions and valued therefore, itemised as follows:
a)
The principle of Uberrimae fidei: In an Islamic insurance contract, the
parties should observe the principles of utmost good faith, honesty, disclosure and
truthfulness. This principle could be justified by the following verse of the Holy Quran:

Do not misappropriate your property among yourselves in vanities..63

b)
The parties involved in an insurance contract should not be greedy in
gaining something but should purify their purposes and aims based on the principle of
mutual co-operation in protecting one from an unexpected disaster or loss. This is in line
with Divine sanction:

..help ye another in righteousness and piety..64

59

Al-Quran at 57:2.
Takaful Act (Malaysia), 1984 at S. 2.
61
See in the Holy Quran, at 3:19, The System Before Allah (SWT) is Islam (Submission to His Will).
62
Ibid., 3:85.
63
Al-Quran, at 4:29.
64
Ibid., at 5:3.
60

13

iv)
Elements of Insurance Contract: It is suggested that the following elements
should be available in a Shariah-based insurance transaction:
65

a)

The parties to the contract must have legal capacity

b)

The availability of insurable interest

66

c)
Indemnity clause: The insurer is unilaterally bound to compensate the
insured for the loss to the agreed-subject matter;
d)
contract;

The payments of premiums by the insured as a consideration to the

e)
The presence of mutual consent by both parties. This requirement has
been justified by the Quranic sanction:

Do not misappropriate your property among yourselves in vanities, but let there be
amongst you traffic and trade by mutual good-will..67
f)
An offer and an acceptance to be expressed in a formal agreement between
the insurer and the insured, in which the terms and conditions being put are subject to the
doctrine of Uberrimae fidei, and of course in compliance with the Shariah principles;68
g)
Specification of period for the agreed policies which is to be contained in
the agreement.
v)

A contract of insurance should be operated based on the principles of interest)

Riba (but should be operated based on the principle of al-Mudharabah financing

technique69, whereby both parties will enjoy the share of profits and dividends made over
the paid premiums and companys policies.

Rational Outlook

65

One of the legal capacities is Inter Alia, majority The Takaful Act (Malaysia) 1984, at S 64 rules that a
person involving in a contract of insurance must be at least 18 years old.
66
See in Rashid ,op. cit ,.at 28.
67
Al-Quran, at 4:29.
68
See The Rules of Shariah Supervisory Board, Faisal Islamic Bank Sudan Publications, English Series
(5), Sudan n.d. at 12.
69
See in Shafi, Maulana Mufti Muhammad ,op. cit ,.at 36.

14

An insurance policy does not signify a change for a material gain nor to override the
power and determination of Almighty Allah (SWT) in ones life, death or destiny. But it
aims at achieving the pleasure of Allah (SWT) through the concept of mutual help and
co-operation with the goal of providing material assistance against unexpected future
damage, loss or peril. After all, Allah (SWT) does not prohibit one from making an effort
in overcoming difficulties or obstacles in life. Here are some of the basic purposes of
having an insurance policy outlined:
i) In insurance policy will enable certain helpless people to be rescued from unexpected
future material risk which may lead to hardship to those unfortunate lives. The Holy
Prophet (SAW) advised the Ummah to come forward in relieving ones hardship. He
(SAW) said in the following:

Narrated by Abu Huraira (R ) from Holy Prophet (SAW) saying that: whosoever
removes a wordly hardship from a believer Allah SWT) will remove from him one of the
hardship of the hereafter, Whosoever alleviates the needy person, Allah (SWT) will
alleviate from him in this world and the next70
ii)
An insurance policy contributed towards the reduction of poverty rates in the
society while ensuring a comfortable life for the poor. It is universal nature that anyone
might become poor resulting from any concurrence of material loss or damage. Such
material poverty could be solved should one have an insurance policy, insuring him/her
against such damage or loss. Insurance policy, hence, guarantees the insured a
comfortable life or material security against unexpected occurrence of loss or risk. Allah
(SWT), indeed, encourages people to seek for better life in the world and in the hereafter.
He (SWT) says to the effect:

.. Our Lord, give us comfortable life in both the world and the hereafter.71
iii)
Having an insurance policy may ensure a development of mutual cooperation and
the spirit of brotherhood as well as cultivating solidarity. The rational behind the
establishment of an insurance is further highlighted by the Takaful Act (Malaysia 1984 (
which reads as follows:

It is a scheme based on brotherhood, solidarity and mutual assistance which provides

for mutual financial aid and assistance to the participants in case of need whereby the
participants mutually agreed to contributed for the purpose.72

70

Sahih Muslim, as compiled in Nawawi Forty Hadith, (trans. Eng.) Ibrahim Ezzeddin et.al., IIFSO 1985,
No. 36 at 114f.
71
Al-Quran, at ch. 2:201.
72
See in Takaful Act (Malaysia ,1984 (at S. 2.

15

For example, the insured in a policy pays regular premiums to the insurer (insurance
company) which enables the insurer to invest and make profits, while the insurer
undertakes to provide material assistance for the insured unexpected loss, damage or
peril. Such financial co-operation could certainly strengthen brotherhood among the
parties to the policy in achieving economic progress and independence. Here the practice
of mutual co-operation is of course recommended by Allah (SWT):

maintain a mutual co-operation among yourselves in righteousness and piety.73

iv)
An insurance policy contributes towards producing a society with self reliance.
Such an insurance policy materially protects the insured from unexpected tragedy, loss or
damage. However, an availability of this material protection will ensure that the insured
will not be dependent on others assistance and help in difficulties. Allah (SWT) in this
respect always intends to facilitate and makes life easy and comfortable for all. He
(SWT) says to the effect:

Allah (SWT) intends easy life for you while he does not want your to be in
difficulties..74
v)
An insurance policy is based on the principles of al-Mudarabah financing
technique whereby the parties involved share the profits with an agreed portion.
Simultaneously avoiding the consumption of interest (Riba). An interest-based
transaction on the other hand, always leads to unfairness in the commercial society. The
practices of Riba is being prohibited not only by Allah (SWT) in the Holy Quran, it had
also been prohibited in other faiths as well. Aristotle, for instance, had rejected the
consumption of interest while Cato, in rejecting such practice, equated interest
consumption to that of homicide in 340 B.C. Lex Genucia had declared in Rome that
interest consumption was unlawful. According to the teachings of Judaism, interest was
considered as unfair and unfriendly appropriation. In 1311 A.D., Pope Clement
announced that all transactions involving usury were prohibited and hence, he declared
that all secular legislations in favour of such practice were null and void.75 As far as
Islam is concerned, Allah (SWT) has prohibited the consumption of interest or Riba for
the obvious reason of its unfairness. The Holy Prophet (SAW) said to the effect:

73

Ibid ,.at 5:3.

Ibid., at 2:185. See in Pervez, Imtias Ahjmad, The Financial Instrument Used by Islamic Bank in New
Horizon, No. 45, No. 1995 at 3.
75
See in Pervez, Imtias Ahmad ,The Financial Instrument Used by Islamic Bank in New Horizon, No.
1995at 3.
74

16

 O ye who believe!

Do not eat usury, doubled and multiplied..76

The Mudharabah financing technique is however, considered by the Islamic jurists as a

fair and just transaction and hence, presents a fair commercial dealing to the community
as the best alternative to the unfair interest-based transaction.77
vi)
The case of life insurance policy has often been misunderstood by many Muslim
scholars as a transaction of determining ones life and destiny.78 Such misconception is
of course groundless. This is because life insurance policy is a transaction for welfare
aimed at compensating and providing material protection for the Inter Alia unfortunate
offsprings, who had been left helpless upon the death of the deceased (policy holder or
the assured). The Holy Prophet (SAW) had also advised people to provide for their
offsprings material protection. He (SAW) said to the effect:

.. Narrated by Amir bin Saad bin Abi Waqqas (R ), The Holy Prophet (SAW) said:
Verily it better for you to leave your offspring wealthy than to leave them poor asking
others for help.79
A life insurance policy guarantees future material security for the widow and
vii)
other dependents of the deceased (assured). The Holy Prophet (SAW) indeed encouraged
people to strive towards ensuring security for the widows and the poor in the society. He
(SAW) said in one of his traditions:

Narrated by Safwan bin Salim ( R), the Holy Prophet (SAW) said: The one who looks

after and works for a widow and for a poor person, is like a warrior fighting for the
cause of Allah (SWT), or like a person who fasts during the day and prays over the night.

80"
viii) A life policy guarantees future material protection for Inter Alia, orphans and it is
again justified by a tradition of the Holy Prophet (SAW). He (SAW) advised people to
provide security for the orphans for the purpose of getting great significance in the
hereafter. The Holy Prophet (SAW) said to the effect:

76

Al-Quran, at 3:130.
See in Shafi, Mawlana Mufti Muhammad ,op.cit ,.at 35.
78
See in Klingmuller, op.cit. at 35.
79
Sahih Bukhari (trans. Eng.) Khan, Dr. Muhammad Muhsin, Kazi Publication, Lahore, 1979, Vol. 8, No.
725, at 477f.
77

80

Ibid., No. 35 at 23.

17

 Narrated by Sahal bin Saad (R), the holy Prophet (SAW) said: I and the person who

looks after an orphan and provides for him security will be in paradise like this.81
ix)
Finally, an insurance policy also has its own hidden rational in the sense that it
generally ensures security for one from unexpected risk and this may encourage every
individual in the society to involve themselves in any lawful transaction without any
hesitation and fear of facing any future loss or damage. Allah (SWT) has always
encouraged people to be involved in any lawful trade. He (SWT) says to the effect:

.. Allah (SWT) permitted trade and transaction while prohibited in involving

usury.82

Sources of Takaful Law in the Islamic Economy

An insurance policy remain valid if none of its aspects contravene the Shariah
principles.83 Hence, every source of an Islamic insurance policy should absolutely be
based on the Shariah discipline.84 This section attempts to highlight the sources of
Islamic insurance contract which may mainly be divided into two categories:
Sources in General
The general sources of Islamic law begin with the holy Quran and the Sunnah or the
Tradition of the Holy Prophet (SAW). These two are regarded as the principal sources of
Islamic law. Other secondary sources of Islamic law indeed should strictly be based on
these two primary sources. This has been indicated in the following Divine injunction:

O ye who believe! Obey Allah (SWT) and obey the Prophet (SAW(..85

As regards to the basic sources of insurance contract under the Islamic law, remain the
Holy Quran and Sunnah or Traditions of the Prophet (SAW) while the other secondary
sources must remain in accordance with the above two primary sources. Prof. Abdur
Rahmah I Doi has acknowledged the fact that the Quranic injunctions are the code of
conduct for every Muslim from cradle to grave.86 He again went on to accept that the
Sunnah as the supplementary source to that of the Holy Quran.87
Generally, the sources of insurance contract could be itemised as follows:

81

Ibid., No. 34 at 23.

82

Al-Quran, at 2:275.
83
See Rules of the Shariah Supervisory Board, op. cit. at 12.
84
See also The Takaful Act (Malaysia ,1984 (at S. 2.
85
Al-Quran ,at 4:59.
86
See I. Doi, Abdur Rahman ,Sharia: The Islamic Law, A.S. Noordeen, Kuala Lumpur, 1984, at 36.
87
Ibid, at 49.

18

The Holy Quran

88

There are five hundred verses in the Holy Quran which deal with the legal sanctions
.
There are indeed a number of Divine injunctions in the Holy Quran which justify the
validity of an insurance contract. A contract of insurance contains the elements of mutual
co-operation89 it is a binding promise which binds both the insurer and the insured based
on the general principles of contract.90 It also contains the elements of alleviation of
hardships and provision of providing material security and assistance for those who are
facing unexpected risk and peril, so to ensure a comfortable life.91 All these elements of
a contract of insurance are justified by the Quranic principles. It is concluded here that
the Holy Quran is the principal guidance to provide an instrumental justification for the
application of insurance contract, as the Holy Quran is the plain statement and guidance
for mankind for their success.

it is a plain statement to man, a guidance and instruction to those who feal Allah
(SWT).92
The above sanction renders an opportunity for mankind to practice insurance policy so
long as one does not violate the Divine sanctions directly or indirectly.
Sunnah
The Sunnah or the traditions of the Holy Prophet (SAW) is the second source
immediately after the Holy Quran.93 As regards to the justification of an insurance
contract and practice, there are indeed numerous traditions justifying the validity and
permissibility of its concept and practices. For instance, an insurance policy embodies
the concept of Tawakkul where by one would strive hard in overcoming ones
unexpected future risk or peril before leaving ones fate and destiny in the hands of Allah
(SWT), such a concept had been justified in one of the tradition of the Holy Prophet
(SAW) which reads to the effect:

.. Narrated by Anas bin Malik (R), the Holy Prophet (SAW)

told a Bedwin Arab who

left his camel untied trusting to the will of Allah (SWT): Tie the camel first then leave it
to Allah (SWT).94
88

Al-Suyuti ,Itqan fi Ulumel Quran, as cited in I. Doi, Abdur Rahman, loc. cit., at 36.
See Al-Quran, at 5:2.
90
See Id .at 5:1.
91
See Id .at 2:201.
92
Id. at 3:138.
93
See Ibid, at 4:59
89

94

Sunan Al-Tirmizi, Vol. 4, Cagri Yayianlari, Istanbul, 1981, in Kitabu Sifatul Qiyamah Wal-Rakaik, Bab 60,
No. 2517 at 668.

19

Moreover, an insurance policy aims at protecting the insured from future material
constraints upon the occurrence of a particular unexpected future risk. Such idea of
protection for those who are in need is justified by the following tradition of the Holy
Prophet (SAW):

Narrated by Abu Huraira (R), the Holy Prophet (SAW) said:

whosoever removes a
wordly hardship from a believer, Allah SWT) will remove from him one of the hardships
of the day of judgment. Whosoever alleviate from one, Allah (SWT) will alleviate his lot
in this world and the next95
There are also other essential aspects of an insurance contract justified by the sunnah,
such as the fact that an insurance policy was originated from the ancient Arab custom of
al-Aqila which had been approved by the Holy Prophet (SAW) during his time.96
Moreover a life insurance policy aimed at providing in advance, material security for the
offsprings of the deceased (assured), is also justified by the traditions.97
Practices of the Companions:
An insurance policy was originated from the doctrine of al-Aqila. During the later
stage of the period of the second caliph Sayedina Umar (R ) who had practiced it and
directed citizens to practise the same.98
Ijtihad and Consensus of Opinions Among the Islamic Scholars:
The idea, meaning and legal characteristics of an insurance policy is practised in the
world of today had first been discovered by the famous Hanafi lawyer Ibn Abidin (17841836) after a critical effort99 in his book Radhul Mukhtar100 at volume 3, page 249.101
Abu Johra, another Hanafi scholar also accepted the idea of Ibn Abidin102, Mufti
Muhammad Abduh also agreed to the validity of insurance practices generally.103 In1906,
the Mufti of Egypt, Sheikh Muhammad Baqit also accepted the idea of insurance as laid
down by Ibn Abidin.104

95

Sahih Muslim, op. cit.

See in Gibb ,op. cit, at 29.
97
Such in Sahih al-Bukhari ,op. cit Vol. 8, No. 725 at 478.
98
See in Gibb ,op.cit ,.at 29f.
99
Kling Muller ,op.cit ,.at 30.
100
See Shafi ,op.cit ,.at 30.
101
Hadgha, Refat Muhammad ,Insurance Contract and Its Provision in the Islamic Shariah (an
unpublished thesis), IIUM, 1995 at 15.
102
Mankabady, Samir ,Insurance and Islamic Law, in Arab Law Quarterly, Vol. 4, 1989 at 199.
103
See in Id, at 201.
104
Ibid.
96

20

There are other Islamic scholars who did not oppose the idea of insurance policy such as
Muhammad Musa, Ahmed Ibrahim, Sheikh Shawkat Ali, Khan Muhammad Yusuf Musa,
Ahmed Taha Sanusi, Abdur Rahman Isa, Ali Khalif,105 Mustafa Zarqa, Dr. Nejatullah
Siddiqi and to name a few contemporary Islamic scholars who unanimously agreed on the
validity of insurance policy. However, despite the unanimous agreements among the
above mentioned Muslim scholars, there are still some contemporary Muslim scholars
who refuse to accept, it especially a life insurance policy based on certain grounds. The
diversification among the Ulama on this issue will be highlighted later in this chapter.
Analogical Sources
Analogical sources such as qiyas, instihsan and istishab could also be used as further
additional justification for the idea and practice of insurance policy, so long as nothing
contravenes with the sanctions of the Holy Quran nor the Sunnah of the Holy Prophet
(SAW), which advised people to come up with analogical decision if necessary so long as
such analogical decisions are not contrary to the Holy Quran and the Sunnah. Allah
(SWT) says to the effect:

..Think deeply o ye who understanding..106

Masaleh al-Mursalah:
An insurance contract as we see today had not exactly been practised during the time of
the Holy Prophet (SAW). However, life necessity and status of human being had since
been changing with the evolution of time and era. The necessity to practice insurance
policy arises to suit the changing environment, in the sense that there is an urgent need to
find a way of providing a material security for those who are suffering in the society due
to unexpected loss, damage or peril. Hence, an insurance is necessary for the public
interest in which the victim is to be rescued from the unexpected risk, and thus, it is
justified by the doctrine of Masaleh al-Mursalah. It is noted here that even though the
practice of insurance could also be based on the said doctrine, its validity is still subjected
to conformation with the Divine principles laid down in the Holy Quran and the Sunnah
of the Holy Prophet (SAW). The significance in an insurance practice for human beings
are Inter Alia to ensure a comfortable life which is also a wish of Allah (SWT) as evident
in the following verse:

Allah

(SWT) intends you to enjoy with an easy life. He does not wish you to face
hardships..107
105

See in Billah ,op. cit .at 315.

Al-Quran, at 59:2.
107
Al-Quran, at.2:185
106

21

Urf:
Urf is custom, practices or usage of the community. An Urf could also be used for a
justification of a particular matter provided that a Urf conforms with the Divine
sanctions of Allah (SWT). The development of insurance practices has in fact originated
from a popular ancient Arab tribal custom (Urf), the practices of Al-Aqila which had also
been approved by the Holy Prophet (SAW) in a dispute between two women from the
tribe of Hudhail.108 Hence, it is clear that the Urf or custom of Al-Aqila practised by
the ancient Arab tribes, and approved by the Holy Prophet (SAW) could stand as a valid
justification for the validity of insurance practice.
Fiqh
There are provisions in the Fiqh which deal with the practices of insurance. For instance,
Syed Sabeq, in the book Fiqh Al-Sunnah, under the section of Shirkatul Tameen
discussed the validity of insurance contract. An insurance contract is based on the
general principles of Al-Aqd al-Mudharabah, financing technique, al-Waqala, asShirkah and so on which have also been discussed in detail in his book.109
The Hedaya by Allama Murginani also focussed on partnership, waqala as well as
other relevant aspects of insurance. There are many other books of Fiqh which discuss
either directly or indirectly, partly or wholely, the relevant aspects of an insurance
practice.
Relevant Literatures of the Islamic Scholars:
There are indeed Islamic scholars who had come up with opinion of upholding the
validity of insurance policy as well as the essential procedures and solutions to it. The
ideas and solutions have been written by the Islamic scholars in their respective books.
For example, in 1982, Abdullah bin Jaid al-Mahmoud has written a book on insurance
entitled Ahkam Uqud Tameem wa Makaniha Min Shariat at Deen, Saad Abu Zaid, in
1989 had written At Tameem binal Khator wal Ibahat, while Mustafa Ahmad Zarqa, in
1984 had written Nizamul Tameem. In 1969, Dr. Mhammad Muslehuddin had written
Insurance and Islamic Law while Dr. Nejatullah Siddiqi wrote in 1985, Insurance in an
Islamic Economy.
As far as articles on insurance are concerned, there are also a number of them had been
written by various Islamic scholars. For instance ,Prof. Shamir Mankabadi wrote The
Concept and Development of Insurance in Islamic countries published by Islamic
Culture in 1969 and to name many others.

108

See Al-Aqila, in Gibb, op.cit. at 29.

See Sabeq al-Sabiq ,Fiqh al-Sunnah, Darul Kitab al-Arabi, Lebanon, 1971, Vol. 3.

109

22

All these literatures written by these distinguished Islamic scholars portray the validity of
insurance policies and its practices in the contemporary Muslim world.
Acts of Parliament:
There are several Shariah based insurance companies operating today in the
contemporary world. For example in Malaysia, Sudan, Brunei, Qatar, Saudi Arabia, to
name a few. These Islamic insurance companies were established and operated based on
the Shariah-based enactment and regulations directly or indirectly approved by the
Parliament of the respective countries. A clear examples of such enactment and
regulations is The Takaful Act (Malaysia) 1984 (Act 312) which is one of the acts of
Parliament aimed at controlling Islamic based insurance practices in Malaysia.
Rules of the Shariah Supervisory Board:
Behind the certain of every Shariah-based insurance company, there is a Council or
Board called the Shariah Supervisory Board. This Supervisory Board functions as the
supervisor of the Islamic Insurance activities run by that particular company, ensuring
that all these insurance activities are operating in accordance with the Divine principles of
the Shariah and some necessary circumstances they come up with regulations which
bind that Islamic insurance company. For instance, the Malaysian Takaful Operation is
supervised by a Shariah Supervisory Council by virtue of Section 8(5) (b) of The
Takaful Act and it has so far approved Inter Alia the under written guidelines and
procedures on general takaful on the 1st July 1994. In Sudan, moreover, there is a
Shariah Supervisory Board which supervises, Inter Alia, insurance business in the
country and also passed the Rules of the Shariah Supervisory Board published by the
Faisal Islamic Bank Sudan (n.d.).
Precedents:
Precedents could also play a role as one of the sources of insurance law and practice.
Some times, there are some Islamic scholars who had given a particular decision of
several issues on insurance policy and practice which we may find useful in governing
practice of Islamic insurance practices. For instance, the opinion given Ibn Abidin had
later became a precedent which influenced the Mufti of higher level to advise the
governmental departments and various bodies on insurance matters.110 Mufti Muhammad
Abduh had held on many occasions that insurance policy and practices are valid.111
Besides the precedents, set up by the independent Islamic scholars, there is also another
type of precedent set up by the courts relevant to the insurance practices.112 Such
precedents could also be considered as a valid source of insurance law.
Unanimous Decision of the Islamic Scholars
110

See Mankabadi ,op. cit .at 200.

See Ibid, 201.
112
For example the cases decided on Mirath, endownment, etc.
111

23

There are numerous conferences held on Islamic insurance in the Muslim globe, in which
Muslim scholars had unanimously agreed on the practices of insurance policy. Here are
some of the examples of such conferences:
a)

The Islamic Fiqh Week held in Damascus from 1st - 6th 1961; 113

b)
The Seminar held in Morroco on 6th May 1972 which upheld the validity of
insurance business with the exception of life insurance business:114
c)

The Second Conference on Muslim Scholars held in Cairo in 1965;115

d)
The Symposium on Islamic Jurisprudence held in Libya from 6th - 11th May
116
1972;
e)
The First International Conference on Islamic Economics held in Mecca from
21st - 26th February 1976;117
f)

The Islamic Conference held in Mecca in October 1976.118

Specific Sources
Principles of Contract ('Aqd:(
An insurance policy binds the parties unilaterally by an offer and an acceptance upon
reliance on the principles of contract. The fundamentals required in an insurance policy
are the parties to the contract, legal capacities of the parties, offer and acceptance,
consideration subject matter, insurable interest, and Uberrimei fidei, most of which are
available in general practices of contract. For example, a contract is a promise by an
offer and an acceptance and must be fulfilled as Allah (SWT) has commanded to the
effect:
O ye who believe! Fulfill your agreement119

In the case of legal capacity, as to age of the parties to the contract of insurance, for
instance. The Takaful Act (Malaysia) 1984 determines the age of the parties to be 18 and
above as a legal capacity:
A person under the age of eighteen years shall not have the capacity to enter into
contract of Takaful.120
113

Ibid.
See in Mankabadi ,op. cit.202 .
115
Hadagha ,op. cit. at 17.
116
Ibid.
117
Ibid.
118
Shawky, Muhammad ,Al-Islam wal Tameem, at 14 as quoted in Ibid.
119
Al-Quran, at 5:1.
114

24

The requirement of age of the parties in an insurance policy is the same as required in a
general practices of contract. Hence, the above principles, and other relevant principles
relating to contract are basically applied in the formation of an insurance contract.
Principles of Liability:
An insurance policy covers losses arising from the death, incident, disaster and other
losses to the human life, property or business. The insurer (insurance company)
undertakes in the policy to compensate against the losses to the agreed subject matter.
Such undertaking is considered as vicarious liability. For instance, in the case of Aqila
practiced in the ancient Arab tribes approved by the Holy Prophet (SAW) that, if a
person was being killed by another from a different tribe either mistakenly or negligently,
this would bring a vicarious liability to the whole inhabitants on behalf of the killer of
own tribe to pay blood money writ to the heirs of the slain.121
Moreover, the rights and obligations in an insurance policy mainly arise from the law of
contract and tort. For example, in a case of an accident of a motorbike, the insurer
(insurance company) is liable on behalf of the person who causes that accident (i.e. the
insured) to pay compensation to the victim. Here, the insurer is bound by the terms
stipulated between the insurer and the insured to pay that compensation.
Principles of Uberrimae Fidei:
In an insurance contract for the enforcement of the policy, the parties involved in it
should have good faith. Therefore, non-disclosure of material facts, involvement of a
fraudulent act, misrepresentation or false statement are all the elements which could
invalidate a policy of insurance. Allah (SWT) says to the effect:

.. Do not misappropriate your property among yourselves in vanities but let there be
amongst you traffic and trade by mutual good will122
Principles of Mirath and Wasiyah
In a life policy, the assured appoints the nominee who is not an absolute beneficiary.
This decision has been given in the Fatwa on succession and will by The National
Council for Muslim Religious Affairs, Malaysia in 1974, and also in the case of Karim vs.
Hanifa in 1970 in the high court of Karachi. In both decisions, it was ruled out that a
nominee in a life insurance policy is a mere trustee who would received benefits over the

120

See The Takaful Act (Malaysia) 1984, at S. 64.

For example, See Uddin M. Musleh ,Concept of Civil Liability in Islam and the Law of Torts, Islamic
Publication Ltd. Lahore, 1982 at 62, See also Niazi Liaqat Ali Khat, Islamic Law of Tort, Research Cell
Dayal Singh Trust Library, Lahore, 1988 at 339.
122
Al-Quran, at 4:29.
121

25

policy and distributed them among the heirs of the deceased, in accordance with the
principles of Mirath and Wasiyah.123
Principles of Al-Wakala (agencies:(
The appointment of the agent by the insurer and the broker by the insured are of utmost
importance. In fact such appointments had been widely practised for the purpose of
making the transaction and dealings between the insurer and the insurer more effective.
The governing principles of agents and broker however, are laid down in the Mejelle as
follows:

. Is for someone to put business of his one another and to make him stand in his own
place in respect of their business.124
Principle of Daman (guarantee(
In an insurance policy the insurer undertakes to guarantee a material protection for the
insured against unexpected future loss, damage or risk. The idea of such guarantee is
justified by the general principles of Daman or guarantee.125
Principle of Al-Mudharabah and Al-Musharakah:
The operation of an insurance policy under the Shariah discipline is in fact, based on the
principle of al-Mudharabah financing technique, which is an alternative to the interestbased technique.126 In this technique, one person provides the capital while the other
party contributes own business skills in a joint-venture in which both parties mutually
agree to share the profits accordingly.127 However, on insurance policy is a transaction
wherein both parties agree that the insured pays regular premiums and the insurer will
invest the cumulated premiums to a lawful business in which both the insured and the
insurer will share the profits in an agreed portion. At the same time, the insurer also
under takes to provide for the insured a compensation (in consideration of the paidpremiums) against unexpected future loss occurring on the subject matter. That is how
the principle of al-Mudharabah financing technique works in an insurance policy.

123

See in Billah, M. Masum ,op. cit ,at 319.

See Mejelle al-Ahkam al-Adliya (trans. Eng) Tyser, C.R., The Mejelle, Law Publishing Company,
Lahore n.d. at art 1449.
125
The principle of Daman is laid down in I. Doi, Abdur Rahman, op. cit., at 369.
126
See Shafi, Mawlana Mufti Muhammad, op. cit., at 36.
127
See the Mudharah Companies and Mudharabah Land Control Ordinance 1980 (The gazzette of
Pakistan, extra, June 26, 1980, part 1) at article 2(2) as cited in Niazi Liaqat Ali Khan, Islamic Law of
Contract, research cell, Dyal Sina Trust Library, Lahore 1900 at 228 and citation at 246, n. 5.
124

26

Meanwhile, an insurance policy also operates on the basis of the principle of almusharakah as both the insurer and the insured are partners in the policy run by the
company.128
Principles of Rights and Obligations:
An insurance policy is based on the principles of rights and obligations arising from
humanity and nature. For instance, it is logical and natural for every person in the society
to feel obliged to provide material security and protection as a right for themselves, their
property, family, for the poor and helpless, widows, children against an unexpected peril
and danger. Such natural obligations and rights could well be justified by the following
Tradition of the Holy Prophet (SAW). He (SAW) said to the effect:

.. Narrated by Saad bin Abi Waqqas (R ) the Holy Prophet (SAW) said it is
better for you to leave your offspring wealth than to leave them poor asking others for
help.129
The Holy Prophet (SAW) had also emphasized on the importance of providing a material
security for widows and poor dependents in the following Tradition:
Narrated by Safwan bin Salim ( R), the Holy Prophet (SAW) said: The one who looks

after, works for a widow and for a poor person, is like a warrior fighting for Allahs
cause or like a person who fasts during the day and prays over the night.130"
Principles of Humanitarian Law:
It is one of the purpose of Humanitarian Law to incalculate a mutual understanding in the
community, to protect one against unexpected loss, damage or other forms of risks or
hardships. Hence, an insurance policy contributes towards alleviating hardships from one
arising from an unexpected material risks, which is of course within the scope of the
principles of Humanitarian Law. This has been justified in the following Tradition of the
Holy Prophet (SAW) which reads to the effect:

Narrated by Abu Huraira (R),.

the Holy Prophet (SAW) said ..: whosoever

removes a worldly grief from a believer, Allah SWT) will remove from him one of the
grieves of the day of judgement. Whosoever alleviates a needy person, Allah (SWT) will
alleviate from him in this world and the next131

128

For further detail, see Mudharabah in Niazi Islamic Law of Contract, op. cit., at 227 ff and for Sharikah,
see at 420f.
129
Sahih al-Bukhari, op. cit ,.Vol. 8, No. 725, at 477f.
130

Ibid., No. 35 at 23.

131

Sahih Muslim ,as complied in An Nawawi, op. cit ,.No. 36 at 114f.

27

Principles of Mutual Co-operation:

In a policy both the insurer and the insured mutually agreed to a lawful co-operation, in
which the insured provides capital (through the payments of the premiums) to the insurer
(insurance company), enabling the insurer to invest the premiums in a lawful business
(based on al-Mudharabah) while the insurer, in return of the payments of the premiums
mutually agrees to compensate the insured in the occurrence of an unexpected loss or
damage or risk on the subject matter. Such mutual co-operation among the parties in an
insurance policy has been clearly justified by the Divine principle of mutual co-operation,
solidarity and brotherhood.132 The Quranic sanction to the effect:

Serve your mutual co-operation among yourselves in righteousness and piety.133

Dispute Among Muslim Scholars on Insurance) Takaful) Issue
The Ulama have mixed views on the validity of insurance. Generally these views of the
Muslims scholars be divided into three classes viz:
Insurance practice entirely and absolutely is lawful provided that it is free from element of
Riba (usury). Among the Ulama sharing this viewpoint are Shaikh Mohammad
Abduh.134 The Hanafi lawyer Shaikh Ibn Abidin,135 Mohammad Taqi Amini, Shaikh
Mahmud Ahmad, Mustafa Ahmad Zarqa, Syed Mohammad Sadeeq al- Ruhani, Ibrahim
Tahawi, Ahmad Taha Al-Sanusi, Yusuf Musa, Mohammad Al-Bahi, Ali Al-Khafif, Zafar
Shahidi, Mohammad Nejatullah Siddiqi, Mohammad Muslehudin, M.A. Manna, Ali
Jalamuddin Awad136 as well as Ayatullah Khomeni.137
a(
The second group accepts general insurance practice but objects to life insurance policy as
it involves the elements of gambling) Maisir) and uncertainty (Gharar) as well as it
contrasts with the principles of Mirath and Wasiyah. The Muslim scholars belonging to
this group decided this view in a seminar held in Morocco on 6th May 1972.138 Among
these are Abdur Rahman Isa, Ahmad Ibrahim, Shaikh Shawkat Ali Khan, Mohd. Musa,
Mufti Mohammad Bakheet, Mohammad Abu Zuhra,139 Shaikh al-Azhar Shaikh Jaid alHaq Ali Jaid al-Haq,140 the Muslim brotherhood published in 1941141 and the Muslim
World League Conference in 1965.142
132

See The Takaful Act (Malaysia) at S. 2.

Al-Quran at 5:3.

133
134
135
136

137

138
139
140
141
142

See in Vardict, op. cit., at 32, Mankabady, op. cit., at 201

See in Kling Muller, op. cit., at 30
See in Siddiqi, M.N., Muslim Economic Thinking: A Survey of Contemporary Literature, in Studies in Islamic
Economics (ed) Khurshid Ahmad, The Islamic Foundation, UK, 1980, at 265 - 315
See in Khomeni, Ayatullah, Tawzih al-Masaill, 1979, Problem No. 2863-65 as cited in Amin, S.H. Islamic Law
in the Contemporary World, Glassgow, 1985 at 79
See in Mankabady, op. cit., at 202
See in Siddiqi, M.N. Muslim Economic Thinking op. cit., at 216
See in Al-Iqtisadul Islami, July 1995 at 60
See in Kling Muller, op. cit., at 35
The Conference was held in Cairo in 1965, see in Rashid, op. cit., at 37 n. 17

28

b) The third group clearly and totally rejects any practice of insurance policy or business
on the ground that it involves the elements of Riba, Maisir and Gharar which are
strictly prohibited by the Shariah. Among the Islamic scholars who are in favor of the
third view are Mustafa Zaid, Abdullah al-Qalqeeli, Jalal Mustafa. al-Sayyad and
Shawkat Ali Khan.143
c)We have seen how Muslim scholars in particular and Muslims in general have objected
the validity of insurance policy and practice. In my effort to justify the validity of
insurance practice, allow me to highlight the misconceptions that have been surrounding
the very idea of insurance as well as its operations which may have urged some Muslim
scholars to such rejection to insurance practice. Finally, I would also like to refute these
misconceptions in my sincere and humble effort to prove that insurance practice may
become valid in the eyes of the Shariah.
Misconceptions
i)
An insurance policy contains the element of Riba 144.Hence, any transaction
which involves Riba is void ab initio. Allah (SWT) has clearly forbidden Riba based
transaction in the following verse to the effect:

...

Allah (S.W.T.) permitted trade while prohibited Riba145 ...

ii)
It contains an element of betting. This is because, the insured, in an insurance
policy, hopes to get the opportunity for a material gain and hence this is similar to that of
betting. This view had been developed unanimously by some Ulama146.
iii)
It contains the element of al-Gharar. Al-Gharar means uncertainty in either the
object or the subject matter of a transaction. Any transaction involving the element of
Gharar is void ab initio in the eyes of the Shariah. The Holy Prophet (SAW) had
prohibited any transaction involved the element of Gharar in the following tradition to the
effect:
..........

The holy Prophet (s.a.w.) prohibited transaction by Gharar, (uncertainty)

147
iv)
It contains the element of Maisir (gambling) which had been strictly prohibited
by Allah (SWT) in the Holy Quran.148 A transaction involving gambling is that the
gambler pays a certain amount of money in which the gamblers hope for a material gain.
Hence, it was argued that an insurance policy has the elements of Maisir as the insured
pays the premiums with the hope for a chance to a material gain with a large amount of
143

144
145
146
147

148

See Siddiqi, M.N., Muslim Economic Thinking, op. cit., at 216

Ibid ,see also Shafi, Mawlana Mufti Mohd .op. cit., at 86
Al-Quran at ch. 2:275
The decision was made in a Judicial Conference held in Mecca in Shaban , 1398H
Anas , Imam Malik bin al-Muatta, compiled by Dr. Saad, Faruq, Darul afaq al-Jadidah, Bairut, 1985 at Baiul
Garar, No. 63, at 554
See al-Quran, at ch. 2:219

29

money. Therefore, such transaction is alleged to involve unlawful element of Maisir.

Thus it is not permissible. As Allah (SWT) prohibited Maisir in the following sanction:

.They ask you concerning the wine and gambling. Say: In them is great sin... 149

v)
There is also no expressed authority from the Divine principles justifying the
validity of the practice of insurance policy. Hence, it was argued that any transaction or
dealing which is inconsistent with the Holy Quran and the Sunnah or Tradition of the
Holy Prophet (SAW) should be held void. Allah (SWT) has indicated to the effect:

........... if anyone desires a system other than Islam never will it be accepted from him
150 ...

vi)
It is contrary to the principle of Tawakkul. In an insurance policy, the insured
puts a trust on the insurer to protect him against an unexpected loss instead of putting his
trust on Al-Mighty Allah (SWT). Such practice is against the principle of Tawakkul as
every believer is obliged to put his own trust (Tawakkul) on Allah (SWT.) only. Allah
(SWT) says to the effect:

........... but on Allah (SWT) put your trust (Tawakkul) if you have faith151 ....

vii)
It is contrary to the principles of Mirath and Wasiyah. This is because, in a life
insurance policy the nominee(s) is (are) an absolute beneficiary(s) over the policy after
the demise of the insured, in which the nominee(s) deprived the heirs of the deceased
from their legal rights based on the principles of Mirath and Wasiyah.152
viii) Some Muslims and even some Islamic scholars claim that life insurance policy
means to ensure ones life against death and such practice is unlawful. Among those
who support this opinion are Shaikh Al-Azhar Shaikh Zad al-Haqq Ali Zad al-Haqq153
the publication of Muslim brotherhood published in 1914, 154 the unanimous decision of
the Muslim scholars in a Seminar held in Morocco on 6th May 1972 155 and also the
verdict of the Supreme Islamic Court in Egypt on December, 27th 1926.156 The above
view is mainly based on the ground that no creature can ensure ones life or death but
Almighty Allah (SWT) who is the only powerful Cherisher and Sustainer of the whole
universe. Allah (SWT) justifies to the effect:

149

150
151
152
153
154
155
156

Ibid
Id., at ch. 3:85
Id., at ch. 5:26
See generally in Billah, M.Masum , op. cit., at 316
See in Al-Iqtisadul Islami, supra
See in Kling Muller, op. cit., at 35
See in Mankabady, op. cit., at 202
See in Al-Sanhuri, Civil Law, Vol. 7, 1964 at 1088 (Arabic), as cited in Mankabady, op. cit., at 201

30

......... Verily the knowledge of hour is with Allah (SWT) . It is He who sends down rain,
and He who knows what is in the wombs nor does anyone know what it is that he will earn
tomorrow, nor does anyone know in what land he is to die. Verily with Allah (SWT) is full
knowledge and He is acquainted (with all things)....157

ix)
An insurance policy stands towards ensuring ones wealth and property. In the
light of the Shariah, a transaction which guarantees protection of others property is said
to be invalid except in three situations: fear for unjust enrichment; fear of losing ones
property; and fear of ones property being destroyed or perished. This view was upheld
by Shaikh al-Azhar Zal al-Haqq in denying the validity of life insurance policy.158
x)
A life insurance contract involves unlawful elements. A contract which is based
on unlawful elements is not binding as the Holy Prophet (SAW) said in one Tradition to
the effect:
......... Muslims are bound by their conditions except the condition which prohibits the
lawful one or the one which permits the unlawful one....159

ix)
Finally, the Shaikh al-Azhar Zad al-Haqq Ali Zad al-Haqq recently in a fatwa
session advised the Muslim Ummah against practicing life insurance policy as it involves
unlawful elements and therefore, Muslim should not be making money or profits through
unlawful means. 160

Response to the Misconception

i)
An Islamic model of insurance policy does not involve the element of Riba
because it is practiced based on the principle of al-Mudarabah financing technique161 in
which both the insurer and the insured share the profits, and dividends made out over the
paid premiums in agreed proportion. Such a transaction is based on the mutual agreement
between the parties and therefore, the Shariah Supervisory Board in Sudan held that
such transaction does not contravene with the Shariah rule nor does it contain any
unlawful element 162. Moreover, it is further justified by the Divine principle of mutual
transaction as Allah (SWT) says to the effect:

..... O ye who believe! do not misappropriate your property among yourselves in vanities,
but let there be among you traffic and trade by mutual good will163 ....

157
158
159
160
161
162

163

Al-Quran, at 31:34
See in Al-Iqtisadul Islami, op. cit., at 60
Al-Tirmizi as quoted by Shaikh Jad al-Haqq in Al-Iqtisadul Islami, loc. cit .
See Al-Iqtisadul Islami, loc. cit
See, Shafi, Mawlana Mufti Muhammad, op. cit, at 36
See in Rules of the Supervisory Board, Sudan, op. cit., at 12*
See Al-Quran, at 4:29

31

ii)
An insurance policy does not supersede the will of Allah (SWT). In such a
policy, particularly in a life insurance policy, it is not the aim to ensure and determine
ones life or death nor does one intends to determine the future material luck of ones
dependents. A life insurance policy also does not connote the idea of the assured trying to
protect his life from death against the will of Allah (SWT). An insurance policy also does
not mean that the insured is determining his future financial capacity. A policy, be it
general or life, simply means that, both the insurer and the insured, in a contract of
insurance mutually agree to work for a compensation or security against an unexpected
tragedy. Such concept is of course in line with the Islamic principles whereby Islam
encourages the Ummah to strive hard themselves in overcoming difficulties in their lives.
The Prophet (SAW) said to the effect:

..... Narrated by Abu Huraira (R ) the Holy Prophet (SAW) said: Whosoever removes a

worldly grief from a mumin, Allah (SWT) will take away from him one of the grieves of
the hereafter. Whosoever alleviates a needy person, Allah (SWT) will alleviate from him
in both the world and the hereafter... 164
iii)
In an insurance policy, the insured is not putting own trust ( Tawakkul) on the
insurer for a future protection but it is a mere mutual transaction whereby both parties
agree to work for the welfare or protection of the insured against an unexpected
occurrence of loss or damage. This is of course in line with the Divine principle of mutual
co-operation as Allah (SWT) commanded to the effect:

....

do mutual co-operation one another in righteousness and piety....165

iv)
An insurance policy does not involve the element of gambling or betting .
Mustafa Al-Zarqa maintains that the gambler, in a transaction of gambling or betting is
always hoping for a material gain in a chance with the spirit of defeating each other
rather than cooperating.166 In contrast, the parties in a contract of insurance are bound
together in a manner of mutual co-operation and good will in providing material security
for the orphans,167 widows,168 other dependents169 as well as ones own self against an
unexpected future loss, damage or peril.
v)
A contract of insurance also does not involve element of Gharar or
uncertainty. In an insurance policy generally, the subject matter is the property against
which the risk is presumed to occur in the future. The subject matter of the insurance
contract is definite and certain. Similarly, the subject matter of a life insurance policy is
the life of the assured which is also definite in the sense that the assured had been given
with a life by Allah (SWT) and will one day die by the will of Allah (SWT). Such
164
165
166
167
168
169

Sahih Muslim in an Nawawi, op. cit., at 114f

Al-Quran, at 5:3
See in Al-Zarqa, Mustafa, Nizam al-Tameen, Muassasatul Risalah, Beirut, 1984 at 46
For justification, see in Sahih al-Bukhari, op. cit., Vol. 8, No. 34, at 23
Id., at No. 35
Loc. cit

32

occurrence on life or death is of course definite and certain as Allah (SWT) says to the
effect:

......

Every soul shall have a test of death.... 170

Therefore, the allegation that insurance policy involves the element of Gharar or
uncertainty and thus, making it invalid, is groundless.
vi)
Some believe that an insurance policy cannot be justified by express Divine
sanction, hence, making it unlawful. In responding to this misconception, there are a
couple of Divine provisions in the Holy Quran and the Tradition or Sunnah of the Holy
Prophet (SAW) approving the principles of mutual co-operation171 and Mudarabah
financing technique.172 Thus both Divine elements mentioned above are contained in a
Shariah based insurance policy. Moreover, the idea of insurance policy and practice was
originated from the traditional doctrine of al-Aqila, which had later been approved by the
holy Prophet (SAW) in one of his verdicts against a dispute between two women from
Hudhail tribe.173 The case in which the Holy Prophet (SAW) gave the above judgement
could well be seen in the below Tradition:

Narrated by Abu Huraira (R ( that two women from Hudhail tribe fought with each other

and one of them flung a stone at the opponent, killing her and what was in her womb, the
case was brought to the Prophet (SAW) in which he gave verdict that the dyat (Blood-wit)
of her unborn child is a male or female slave of the best quality and he also decided that
the vicarious liability of the dyat on behalf of the slainer is to be rendered to her paternal
relatives while the Prophet (SAW) made her son and those who were with them her
heirs... 174
The same doctrine of al-Aqila was subsequently approved by the second caliph
Sayyedana Umar (R ), who even practiced it mandatorily in some cases.175 Thus, it is
baseless to allege that insurance policy and practice have no basis for justification.
vii)
Some argue that the practice of insurance policy is contrary to the Islamic
principle of Tawakkul (putting trust on Allah (SWT)) . It is admitted here that the
insurer and the insured, in a policy, mutually agree to take an initiative for the protection
of the insured against an unexpected risk, loss or damage on the subject matter, but they
ultimately still put their trust on Al-Mighty Allah (SWT) who is the sole Cherisher and
Sustainer of the whole universe. In fact , the initiative which is taken by both parties does
170
171
172
173
174

175

Al-Quran, at 3:185
See Id., at 5:3
Shafi, Mawlana Mufti Mohammad, op. cit., at 36
See Ibn. Asir, An Nihayat Garibil Hadith., Vol. 3, at
For the text, see Sahih al-Muslim, (Tahqiq) Mohd. Nasiruddin al-Albani, Laznatu Ihya al-Sunnah, Ashare,
Arabi, Asyuf (n.d.) , Kitab Tahreem al-Dimaa wa Zitnil Qisas al al-Diyyat, No. 1032, at 274. Also see Sahih
al-Bukhari, Kitab al-Diyyat, Bab Janeen al-Marat, No. 6395. For translation see Sahih al Muslim (translation
English), Siddiqi, A. Hamid, Darul arabia, Lebanon, 1978, Vol. 3, No. 4:68, at 905
See in Gibb, op. cit., at 29

33

not deviate from the principle of Tawakkul, as such an initiative is only an effort made
to the best of their ability to overcome future unexpected difficulties and nothing more.
Indeed, in accordance with the Islamic concept of Tawakkul, man is asked to strive to
the best of ones ability in performing a particular act or job before putting ones trust on
Allah (SWT). The Holy Prophet (SAW) gave a paradigm nature of Tawakkul in the
following tradition which reads to the effect:

The Holy Prophet (SAW) told a Beduin Arab who left his camel untied, trusting to the
will of Allah (SWT) , tie the camel first then leave it to the will of Allah (SWT(..176

Therefore, it is concluded here that the practice of insurance policy does not contravene
the Islamic principle of Tawakkul.
viii) Life insurance policy does not contravene the principles of Mirath and
Wasiyah. In a life insurance policy, the nominee(s) is nothing more than a trustee, as
held by the supreme court of Pakistan in the case of 177, who is under an obligation to
receive the benefits over the policy on behalf of the heirs of the deceased (assured) and
distribute the benefits among the heirs of the deceased in accordance with the Islamic
principles of Mirath and al-Wasiyah.
Hence, the nominee(s) here is not an absolute beneficiary(s) but a mere trustee and the
nominee(s) may only receive a portion of the benefits if he or she, him or herself is one of
the legal heirs of the deceased.

Further Justifications for the Validity of Insurance in the Islamic Economy

Besides the grounds which have already been mentioned above in justifying the
mentioned-ideas and practices of insurance policy, there are some additional grounds
which could well justify an insurance policy. These grounds are pointed out as follows:
i)
An insurance transaction is quite similar to the principle of al-Wadiyah (deposit)
whereby two parties engage themselves in an agreement in which one of them deposits
money to the other as a trust or Amanah for the purpose of safe keeping.178 Likewise,
such methods of dealing also exists in a contract of insurance as the insured deposits
money to the insurer for future safety. The governing principles of al-Wadia had been
developed from the Holy Quran. Allah (SWT) says to the effect:

176
177

178

Sunan al-Tirmizi, op. cit., No. 2517 at 668

[1974] PLD 185 (SC)

See in Al-Zubaidi, Mohammad ,Tajul Aris, Vol. 2, Kuwait, 1967, at 591.

34

.... Verily Allah (SWT) commands you to render back your trust to those to whom they
are due179 ...

ii)
Any transaction originated from the ancient custom or Urf is permissible so long
as such custom was not contravene with any of the Divine principle enshrined in the Holy
Quran and the Sunnah of the Prophet (SAW). Islam in this matter has always been
flexible in accepting any custom or Urf of the people which may be convenient for the
society, but of course with the condition that such custom is in line with the Shariah.
The justification of Urf is indicated in the following Hadith:

.......... Whatever Muslims see good it is appreciated towards Allah (SWT 180 .(

An insurance contract was thus, originated from the ancient Arab custom) urf (the
doctrine of al-Aqila which had been approved by the Prophet (SAW)181, hence, making
the custom and at the same time the practice of insurance is justified and having legal
entity.182
iii)
The origin of every transaction is permissible unless an authority proves one
invalid. This principle has been laid down by Ibn Nazim in the following maxim:
The origin in everything is lawful unless an authority proves one unlawful183 .

In an insurance contract the fundamental aspects of it; such as its origin is from the
ancient Arab custom of al-Aqil ,its objective is a mutual co-operation justified by alQuran at 5:3 , its operation is based on al-Mudarabah financing technique for the
purpose of public interest relying on the doctrine of al-Masalih al-Murasalah have all
been highly approved and justified by the Shariah. Hence, it is only logical and natural
to hold such practice of insurance policy valid.
iv)
Any transaction, in which the parties undertake to fulfil their respective lawful
obligations is naturally valid and binding on both parties. This is because, the Shariah
has emphasised a lot on the performance or undertakings and promises. The Prophet
(SAW) once said in one of his traditions:
Muslims are bound by their conditions except the one which prohibits the permitted one

or permits the prohibited one...184

This is further justified in the holy Quran:
179
180
181
182

183
184

Al-Quran, at ch. 4:58

Qudama, Ibn .Raudatul Nadhir) n.d.) at 85
See in Gibb, op. cit., at 29
See also The Mejelle, op. cit., at arts. 36, 40 and 45
Suyuti, Al-Imam Jalaluddin Abd. Rahman ,Al-Ashbah Wa - al-Nazair., Darul Kutub al-Alamiyyah, Lebanon
1983, at 60
At Tirmizi, as quoted by Shaikh Jad-al-Haq, op. cit

35

O ye who believe! fulfil your promises185

The terms and conditions to be required in a contract of insurance between the two parties
are lawful and hence binding on them. The school of Maliki made a remark on the
practice of insurance contract when it said that it is a binding promise and hence
permissible in the eyes of the Shariah.186
v)
The practice of insurance policy is also actually based on Inter Alia the doctrine
of public interest or Masalih al-Mursalah for the purpose of eliminating hardship from
ones life, while taking an initiative to look after the welfare of the poor who may have
suffered resulting from an occurrence of loss or damage. It is thus, justified in the holy
Quran, that Allah (SWT) has always wishes good and convenient life for His creatures
without having to face any difficulty. Allah (SWT) says to the effect:

..... Allah (s.w.t.) intends easy life for you while He does not want to put you to

difficulties....187
vi)
An insurance policy does not signify an opportunity for the insured to hope for a
chance for a material gain. In fact, it is a transaction whereby the insured takes an
initiative, to the best of ones ability, to be compensated or in the event of unexpected
loss, damage or peril. Such compensation and indemnity has been mutually agreed by
both the insurer and the insured. And this further signifies the element of mutual cooperation between both parties to the contract of insurance. The principle of mutual is
justified in the Shariah. Allah (SWT) says to the effect:
...... Maintain a mutual co-operation among yourselves in righteousness and piety188 ...

vii)
An insurance contract also operates for the purpose of necessity. Any transaction
operating along the line of necessity is permissible as justified in maxim:

Necessity makes forbidden things cannoncially harmless....189

Hence, a life insurance policy also operates based on the principle of necessity in
providing material protection for the unfortunate widow, offsprings and so on in the event
of the death of the assured. Islam again justifies such. The prophet (SAW) advised in
one of his traditions:
Narrated by Saad bin Abi Waqqas (R): The Holy Prophet (SAW) said: It is better for

you to leave your offspring wealthy than to leave them poor asking others for help...190
185
186
187

188
189

Al-Quran, at 5:1
See in Hadagha, op. cit., at 56
Al-Quran, at 2:185
Id., at 5 :2
The Mejelle, at article 21, see also Nazim , Ibn, op. cit ., at 84

36

The holy Prophet again said to the effect:

Narrated by Safwan bin Salim (R ) , the Holy Prophet (SAW) said: The one who looks

after and works for a widow and for a poor person is like a warrior fighting for the cause
of Allah (SWT) or like a person who fasts during the day and prays over night..... 191
viii( An insurance policy involves an element of donation or Sadaqah. For instance,
the insured in a general policy pays regular premiums for the purpose of compensation in
case of an unexpected loss or damage occurring to a particular subject matter. However,
if there is no occurrence of loss to that subject matter, the premiums will be considered as
Tabarru 192 in general insurance, which means that the premiums will be nonrefundable. Meanwhile in a life insurance policy, the assured pays regular premium like
a gift for the welfare of his dependents and at the same time the assured pays amount of
donation from the charitable fund for the beneficiary(s) of the assured as an addition to
the paid-premiums and share of profits.193 The Holy Prophet (SAW) also used to accept
donation. 194 Thus, a transaction like insurance contract which involves the element of
donation could be held lawful.
ix)
The nature of life insurance policy is similar to that of a retirement pension
scheme .Al-Zarqa and Al-Alwan apparently discovered that, all contemporary Islamic
scholars unanimously agreed on the lawfulness and validity of a retirement pension
scheme.195 Adil Salahi accepted the fact that all scholars of Islamic Jurisprudence had
approved the idea of pension scheme for the reason of ensuring material security for the
subscriber himself as well as his family in cases of difficulties or death.196 Salahi went on
to defend the validity of life insurance in reliance of the approval of all Islamic scholars
to the pension scheme, posed a question why family security should be rendered lawful
in a pension scheme, and unlawful in a life insurance policy? When their method of
operations are practically the same?197 It was also inferred that the reason why all Ulama
accepted the idea of retirement pension is that it was widely accepted during the time of
Omar (R ). Hence, it is submitted that, life insurance policy is similar to that of pension
scheme and hence should be held valid.

Indeed, based on the above mentioned arguments, it is submitted and asserted that
insurance policy which is based on the Islamic principle of al-Mudaraba is valid and
190
191
192
193
194
195

196

197

Sahih al-Bukhari, op. cit., at Vol. 8, No. 725 at 477

Id., at 35 at 23
See in Rashid, op. cit., at 34
See in Billah, M. Masum, op. cit., at 324
See in Al-Sanani, Mohammad, Subul al-Salam , Egypt , 1987 , Vol. 1-3 at 90
See in Al-Zarqa , op. cit. at 62; and also Al-Alwan, Abdullah, Hukum al-Islam fi Tameen, Darul Islam, Egypt,
1987, at 13
Salahi, Adil, Is Life Insurance Haram? in New Horizon, Islamic Banking and Insurance, No. 45, Nov. 1995 at
12
Ibid

37

enforceable. It is also observed that the arguments forwarded by Islamic scholars

opposing the idea and validity of insurance are entirely rebuttable.
The scope of insurance business under the Common Law if somewhat limited to a
transaction whereby the subject matter is speculated to be at risk. A contract of
insurance, in an insurance business is bound by the general principles of the law of
contract. For instance, in the issue of legal capacity of the parties as well as other general
provisions of contract of insurance is not enforceable if its subject matter or object is
unlawful.
The purpose of having an insurance policy is to indemnity one against an unexpected
loss, peril or any form or risk.
As far as the essentials and fundamentals of a contract of insurance under the Common
Law, which determine its legality and validity, are the legal capacity of the parties to the
contract, consideration (i.e. the payments of premiums) subject matter of the insurance
contract and insurable interest of the beneficiary. Finally, the parties to a contract of
insurance must also abide with the doctrine of Uberrimae Fidei.
The sources of an insurance policy under the Common Law, they are the relevant Acts of
Parliament, custom, judicial precedents as well as relevant literatures on insurance such
as books, articles, papers and so on.
As far as the view on the validity of insurance policy under the Common Law is
concerned, it is found that there was no diversification of views among the Common Law
scholars or jurists. However, prior to the development of insurance policy and practice,
the people of the primitive society used to object to the practice of insurance based
transaction for the reason that they lived in the tribal society in which they used to be well
protected by their tribes and families against any risk or peril.198 Hence, they did not feel
a necessity of having insurance policy.

Final Remarks:
In Islam, insurance policy and practice was originated from the custom practiced by the
ancient Arab tribe before the rise of Islam in the form of the doctrine of al-Aqila which
was subsequently approved by the Prophet Mohammad (SAW) during his life time in one
of his decisions given against a woman from Hudhail tribe. Later such insurance
transaction was gradually practiced and was even made mandatory in some cases during
the period of the second Caliph, Saydina Omar (R ).199
In the contemporary world of today, there are many Shariah based insurance companies
established in many countries such as Malaysia, Brunei, Singapore, Indonesia, Iran,
Sudan, Saudi Arabia, Qatar, Luxemborg, Bahrain and to name some. However, the
198

See in Clayton ,op. cit ,.at 13. See also Rehman Afzalur ,op. cit ,.at 19.
See in Gibb ,op. cit., at 29.

199

38

debate as regards to the validity of insurance policy is still going on among the Islamic
scholars.
An insurance contract is mainly based on the principle of mutual co-operation, solidarity
and brotherhood which is operated based on the Mudharabah financing technique in
which the parties to the contract share the profits (made out over the paid-premiums) at
the agreed proportions as an alternative to the interest-based financing technique.200 The
paid-premiums of the general insurance is to be given away as tabarru or donation in the
case of non occurrence of loss or damage to the subject matter. In life insurance policy,
the beneficiary(s) cannot claim the exact agreed-sum of money from the insurer. The
beneficiary(s), however, may claim the total paid-premiums, the share of profits over the
paid-premiums, dividends and bonuses besides the donation from the charitable fund
according to their financial status. Similarly, if the assured sustains own life until the
maturity of the policy, he is also entitled for the claims entitled by the beneficiary(s) with
the exception of the donation.201 The nominee(s) in a life insurance policy is not an
absolute beneficiary but a mere trustee who receives the benefits and distributes them
among the heirs of the deceased assured which had been decided in Karim vs. Hanifa202
Moreover, it is also suggested here that the agents should enjoy the share of profits as a
salary from the company. Such proposal is due to the fact that the agents are working for
the company.
An insurance practice should not be valid if it involves the elements of Riba or usury.
Hence, insurance policy must be operated based on the principles of al-Mudarabah
financing technique in order for it to remain valid and enforceable. Insurance business is
to be conducted only for the purpose of solidarity, brotherhood an mutual co-operation
towards protecting the insured against loss or risk. The parties to the contract of
insurance are not allowed to hope for a change for material gain per se, but must have
sincerity against unexpected future damage or loss to the subject matter. Every aspect of
an insurance practice must comply with Shariah principles absolutely.203
The fundamentals and essentials of an insurance contract are ,Inter Alia the sincerity of
the parties towards the protection of the insured against an unexpected loss, legal capacity
of the parties, paid-premiums, insurable interest as well as maintenance of utmost good
faith during the whole transaction.
There are few rationals that could be presumed from the practice of an insurance policy.
The practice of insurance policy could develop mutual co-operation in promoting
solidarity and brotherhood among the parties to the contract.204 It could also take care of
the welfare of those who are in need of compensation against occurrence of loss, risk or
peril. Apart from the above purposes and rationales, an insurance policy also strives at
200

Shafi, Mawlana Mufti Muhammad ,op. cit ,.at 36.

See in Billah ,op. cit ,.at 323.
(1970) 202PLD at 683.
? 203See The Takaful Act (Malaysia) 1984 at SS 2, 8(5)(a), (b). See also The Roles of the Shariah
Supervisory Board, Sudan, op. cit., at 11f.
204
See in The Takaful Act (Malaysia) at S. 2.
201

39

reducing poverty rates while having an economic stability in the society. This would also
ensure the society to live comfortably without having any material constraint.
As far as the sources of insurance law under Islamic principles, they could be divided into
two categories: namely the sources in general while the other is in specific. In general,
the sources of insurance law include the Holy Quran, the Sunnah or Tradition of the Holy
Prophet (SAW), Ijma, Qiyas, Ijtihad, Istihsan, Masalik al-Mursalah, Urf, Fiqh,
Shariah based literatures and regulations enacted by the legislative body. Meanwhile,
specifically the sources of insurance are the general principles of contract, the laws on
liability, the principle of al-Mudharabah, the principle of Agency, the principle of mutual
co-operation, the principle of humanitarian law, the concept of welfare and so on.
Despite the development of insurance practice in the world, the Ulama or Islamic
scholars are still not unanimous as regards to the validity of insurance policy. These
Muslim scholars are divided into three groups. The first group totally accepts the idea
and practice of insurance. The second, accepts the idea and practice of general insurance
while rejecting the idea and practice of life insurance, while the third group opposes to
the entire idea of any insurance practice arguing that it is totally against the principles of
the Shariah.205 It is also to be clarified here that a model of an Islamic insurance policy
which is different from the conventional one. This model is justified by the Shariah
principles of Mirath and Wasiyah. Therefore, it is submitted here that there are enough
justifications to uphold the validity of insurance policy in the eyes of the shari'ah
principles and the Muslims scholars should no longer be divided on this issue.

For the purpose of enabling the contemporary Muslim Ummah to practice insurance
justified by the Shariah principles, it is recommended that:
i)
An insurance policy and practice should not be based on interest) Riba) but on the
principle of profit sharing (al-mudharaba) which may enable the parties involved to
enjoy a fair transaction on the basis of friendship, brotherhood and mutual co-operation.
ii)
The agents and the brokers naturally work for the promotion of the insurance
practices. It is suggested that they should also enjoy with the share of profits according to
the companys policies.
iii)
The nominee(s) in the life insurance policy should be a mere trustee and would
only be entitled to enjoy the benefit if he/she falls within the categories of the deceaseds
legal heirs. The nominee(s) should not become the absolute beneficiary(s).
iv)
Once insurable interest should not be determined based on the nomination clause
but based on the principles of Mirath and Wasiyah.
v)
The beneficiary(s) in a life insurance policy, should not claim the agreed amount
in the policy. The beneficiary(s) could only claim for the paid-premiums plus a share of
205

See in Rashid ,op. cit ,.at 20.

40

its profit, dividends, bonuses, etc. which may enable both the insurer and the
beneficiary(s) to enjoy a fair transaction without any risk.
vi)
Finally, it is to be suggested here that the scholars should not remain in diversity,
but should contribute towards finding a solution to eliminate any unlawful elements from
insurance policy. In doing so, they must design a model of an insurance transaction
which may enable the Muslim Ummah to benefit from a fair and legal transaction.

It is humbly and sincerely hoped that all insurance policies and transactions be practiced
based on the principles of profit sharing. This is because such a transaction is based on
mutual co-operation and good will, and therefore, the parties involved in any contract of
insurance may look after each others welfare. Finally, it is humbly hoped that the
Islamic scholars would not remain in diversification of views as regards to the validity of
the idea and operation of insurance, but to invent an alternative model of insurance as
opposed to the conventional model for the benefit and betterment of the present Ummah.

=END=

41

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