What Makes Conventional Insurance is Impermissible and Takaful Permissible
In The Name of Allah, The Beneficent, The Merciful
All Praise is due to Allah and may Peace and Salutations be upon the last and final messenger Muhammad Sallallahu Alaihi Wa Sallam.
Over the past few years, a general awareness seems to have been created with regards to the impermissibility of dealing in interest, and therefore dealing with conventional banks. Many people seem to have understood why most of the dealings of conventional Banks are prohibited from a Sharia point of view. People have understood that their transactions are by and large interest based and are thus not acceptable. People have also understood that the transactions of an Islamic Banks are asset backed, and not interest based which is the key factor that makes the profits that they earn acceptable in terms of the Sharia. However, the question as to why conventional insurance is impermissible and as to what the basis for the permissibility of Takaful is, is a question that is still not clear to many. The present short article aims at briefly addressing this question.
It is my hope and prayer that Allah accepts this insignificant effort and makes it a means for people to carry out all their transactions in a manner that will please our Creator, Allah.
At the outset, it should be clearly understood that Islam does not condemn the basic concept of insurance which is to protect oneself from potential loss or in other words to manage one risk (risk management). Infact, Islam has promoted assisting one another in cases of loss. This is a concept has been endorsed by the Sharia at the highest of levels. The Holy Quran promotes mutual assistance and protection of one another. Similarly The Holy Prophet Sallallahu Alaihi Wasallam has endorsed the paying of blood money by the “Aaqila”, a third party, to the family of the injured which serves as a form of compensation for them. There are also other traditions of the Holy Prophet Sallallahu Alaihi Wa Sallam that indicate towards the acceptance of the concept of risk management. One such example is the incident in which Rasulullah Sallallahu Alaihi Wa Sallam restricted Hazrat Sa’ad ibn Abi Waqqas (R.A.) to giving only one third of his wealth to charity saying that leaving your heirs in a wealthy condition is better than leaving them poor and thus compelling them to stretch their hands out before others. This Hadith clearly depicts that the Sharia condones the concept of risk management. Sharia scholars also use this particular Hadith as a hadith that supports the concept of risk management in the case of life insurance. Another tradition that supports the concept of risk management is the Hadith that has been reported in Bukhari which explains that Rasulullah Sallallahu Alaihi Wa Sallam gave his wives the provisions of the entire year to come.
Hence, the concept of protecting oneself from potential loss and the concept of risk management is one that is well within the framework of the Sharia. However, it is the method in which this concept is implemented that would either make the system permissible or impermissible.
Why conventional insurance is not Sharia Compliant
Conventional insurance has certain features that are not consistent with some of the essential values of an Islamic financial contract. Ulama (Shariah Scholars) have highlighted three of these features as being the main reasons for conventional insurance being unacceptable from a Sharia point of view.