Islam is a complete societal system. It incorporates everything from the Qur’an and the Sunnah of Muhammad into the Islamic law, Shari’a.
Sometimes a question or dispute arises about a modern situation, which is not specifically addressed within the ancient doctrinal texts, because it was not a part of life back then. In that case, the issue is decided by means of a fatwa (Islamic legal ruling) from a Muslim who has extensive Islamic religious knowledge and authority to make a legal decision.
Islamic law and fatwas define and clarify what is permissible (Halal) or not permissible (Haram) in Islam. As Islam confronts the modern world, one big topic which gains importance is how finance is treated under Islamic law. Commercial insurance, for example, is a segment of finance, with Islamic law rules, that believing Muslims must follow.
Generally, any type of commercial insurance is not permissible by Islamic law. That rule applies to house, phone, car, or any other type of commercial insurance. But there are some special allowances. For instance, in the case of health insurance, it is permissible if there is no other way, or if it preserves a Muslim’s life. Islam prohibits avoiding risk altogether, but it allows a Muslim to reduce a risk to himself. Islam also teaches that Allah will provide for any Muslim if a need arises.
If a Muslim is in a country that does not legally require him to take out commercial insurance, then it is a sin for him to do so. The prohibition is detailed within Islamic law.
Commercial insurance is forbidden because any type of transaction where there is an outlay of money given with no guarantee of any return, with or without delay, is prohibited. It is also seen as a type of gambling. For instance, there could be a profit or loss incurred on such a financial transaction. However, Muslims do need to raise large amounts of money at times. The approved method is known as Islamic Finance.
Islamic Finance dates from the early Islamic state which Muhammad controlled. It then continued with later Caliphates. But this system of finance was lost in the early 20th Century, due to the collapse of the caliphate of the Ottoman Empire. However, in the 1970s, a new streamlined model of Islamic Finance was reintroduced within some Islamic countries.
Any stable societal system must be able to provide compensation for loss from accident, injury, or property damage or loss. Islamic law allows for its own such system of Islamic insurance, called takaful. It roughly translates as solidarity or mutual guarantee. As a finance model, it complies with Shari’a and is used throughout the Islamic financial sector.
Takaful derives from the traditions in the Sunnah of Muhammad, regarding the prohibition of Interest or gain, (riba) gambling (maysir) risk or uncertainty (gharar) The takaful scheme works by participants pooling money into a takaful fund. The funders are said to donate. The fund is meant to provide for all participants within the scheme. An agent is required to oversee this funding process, and he may be a Muslim or a non-Muslim. The fund participants also pay fees for the agent, plus administrative and marketing costs. There is also a separate shareholder fund, which is used for any needed start-up of the takaful fund.
Any surplus at the end of the year is invested into Shari’a-compliant businesses. Any returns on these investments are pooled back into the takaful fund and to shareholders. Also, the participants receive premiums for renewals. This ensures a rotation of the funds throughout the Islamic economy and the Islamic community.
The shareholders are required to be responsible for any loss the company may incur. There is an additional system called retakaful, by which Islamic institutions may invest into the system, to reduce the risk of insolvency; for example, in the case of many participants needing to claim at the same time, due to a natural disaster or unforeseen event.
The takaful scheme is open to Muslims and to non-Muslims, but investments from the surplus funds can only be made to Shari’a-compliant businesses. That requirement precludes investment into any businesses which deal with products such as pork, wine, gambling, or any financial businesses which earn interest, or that involve anything else that is prohibited by Shari’a.
An advisory board comprised of Islamic scholars is required to oversee the whole process, to ensure that all requirements for Shari’a are met. This includes oversight of conventional banks that offer Islamic Finance.
There has been controversy within the Islamic world as to whether takaful is really any different from commercial insurance. That dilemma has been largely resolved in recent times. Islamic Finance is now a rapidly growing sector. Since the 1970s, more than 5,000 takaful Islamic financial institutions and 300 Islamic banks have been established worldwide. Islamic financial institutions are operating in more than 75 Islamic and non-Islamic countries, and the industry is now estimated to be 2 trillion dollars.
In the UK, takaful has been approved by the Financial Services Authority as a suitable system for Shari’a-compliant finance. This is now an option within most conventional banks within the UK. Within two years, takaful is forecast to launch as a suitable alternative for Islamic student loans, as it has now been approved by Parliament. The Islamic financial sector is leading in the Gulf states, Asia, Africa, the Middle East, Iran, the UK, the USA, Canada, Australia, and Europe, all offer Islamic banking.
As Islam becomes stronger and allowances are made for Shari’a requirements, its demands are becoming larger, more frequent, and widespread. As conventional insurance is forbidden in Islam, but as insurance is required in Western countries, this legal and cultural conflict will inevitably clash more in the future. Shari’a finance through large institutions will draw funds into the Islamic economy, which will in turn give Islam more authority within Western lands, ensuring legislative changes, a more divided society, and the further breakdown of equality laws.