TAKAFUL being an Islamic alternative to conventional insurance is well known now. Having progressed from late 1970s following the rise of Islamic banking and finance, it has established quite well in Saudi Arabia, other Middle East countries and Malaysia.

A great deal of work is being done on its development in the UK and other Western countries. However, there is a long way to go for takaful to come even any closer to conventional insurance in terms of size, net assets and business volume etc.

Takaful may progress even faster but unfortunately, it is painted as conventional insurance and takaful belong to two different worlds, and this is because of the fact that their differences rather than their similarities are highlighted.

One of the basic characteristics of insurance is ‘pooling or sharing of losses’

The fact is that the concept of conventional insurance is completely in sync with Islamic tenets. It is only in the practice in business that conventional insurance go in violation of certain fundamental principles of Islamic finance, as opined by Ulema.

The first and foremost is the presence of riba (interest). Insurance companies invest a sizable portion of their incomes in banks and earn profit through interest. Riba is prohibited in Islam and is not allowed in any form. The other objectionable elements found in the practice of conventional insurance, in some form or the other, include Exploitation, Gharar (uncertainty) and Maiser (gambling), as so opine by Ulema.

If we leave aside riba and look a bit critically into the issues of exploitation, gharar and maiser in conventional insurance, we can clearly see that either these issues have been blown out of proportion or the very concept of conventional insurance is not fully understood.

For exploitation, it is said that since the companies are owned and controlled by board of directors, so they can exploit the insured people at their free will to maximise profits But, we should not forget that insurance is a ‘regulated sector’. Unlike other tangible goods industries, it has certain distinctive features that make it compulsory for governments to regulate it.

These features are: that it (insurance) is a service for which payment is made in advance and its benefits are reaped in future, sometime in far distant future; the contract is a complex legal document far difficult for lay people to understand fully which put insurer at an advantageous position to use it unfairly in their favour; its exact costs are not known to the insurer when premiums are established thereby creating a temptation to charge too high or too little.

Charging too little inevitably results in removing the very security for which insurance is purchased, and charging too high may result in unwarranted profits to the insurer. This is because all markets in the world work under certain regulatory framework employing effective checks. Finally, insurance is regulated to control violations of the public trust.

Maiser is gambling, and to brand insurance as one is outright oversimplification, for gambling creates a new speculative risk, while insurance deals with an already existent pure risk. Secondly, gambling is socially unproductive as winner’s gain comes at the cost of the loser. Whereas, it’s not the case in insurance which is socially productive as both the insurer and the insured have a common interest in the prevention of a loss. Both parties win if the loss does not occur. Moreover, gambling transactions never restore the losers to their former financial position. In contrast, insurance contracts restore the insured financially in his position prior to loss.

Gharar is other major element found in insurance contracts and the objection is that there is uncertainty as these are not quantifiable and there is no certainty as to whether an insured event may or may not happen. Hence, speculation sets in which results in gharar.

Now, how is Gharar not present in a takaful contract? Because, as Ulema opine, all insured are partners who cooperate with each other when any one of them suffers a loss. The premium that they pay is called contribution which is given as Tabarru (volunteered gift) to bring the unfortunate one back to the position where he was prior to loss. This, as claimed by Ulema, is a way of indemnification by way of which costs are divided among all partners.

Interestingly, one of the basic characteristics of insurance is ‘pooling or sharing of losses’. Pooling is the spreading of losses of the few over the entire group (pool) whereby average loss is substituted for actual loss. In addition, the pooling involves the grouping of a large number of similar exposures so that the ‘Law of Large Numbers’ can operate to provide a substantially accurate prediction of future losses. Thus, pooling implies ‘the sharing of losses by the entire group’, and ‘prediction of future losses with some accuracy based on the Law of Large Numbers’.

The point is that Islam supports rational individual behaviour and social cooperation which is at the core of insurance concept. Quran says that “a person who has Roshd is a right-minded one”. Roshd should guide the Muslims to take care to protect their interests and their families against possible risk or loss at present or in the future.

So, instead of indulging in the intricacies of Exploitation, Gharar and Maiser, takaful should be projected as being a classic example of consumer driven model which prohibits involvement of any unethical business and harmful practices for the society. It prohibits unlimited profits and rather focuses more on the mutual help and welfare of the participants.

The ideology of Islamic financial system is justice for all mankind — in the arena of business and commerce. Are we doing that when we practice it…?

Published in Dawn, Business & Finance weekly, April 4th, 2016