CONCEPT OF INSURANCE provides for a system whereby

1. APPLICATION OF INSTITUTION OF WAKF IN PROMOTING ECONOMIC AND SOCIAL UPLIFT OF SOCIETY THROUGH TAKAFUL (ISLAMIC INSURANCE) CONCEPT OF INSURANCE provides for a system whereby a realistic evaluation is made of the eventualities and of the risk faced by individual members of the Society AND provides relief to offset the resultant loss, through mutual assistance. The loss caused is borne by the Community or the Group to which the affected member belongs by affinity, vocation or profession etc, and at the same time, the scheme of Insurance is so managed that the Insurance Company also receives benefit (profit) after making good the loss of the individual member.

2. HISTORICAL PRACTICE OF INSURANCE This concept of Insurance in original, appears to be not suffering from any deficiency as per principles of Shariah, rather it is a commendable concept and prevalence of such transactions were found operating since before advent of Islam. HISTORIAN: IBNE KHALDOON Traced history of this institution with the observation that “Arabs used to undertake two journeys in a year one in summer and the other in winter season. These are the journeys mentioned in Sura Al Quresh (30 : 106)”. SIMPLEST FORM OF INSURANCE A tacit agreement between the participants of the journey that all of them would share the loss, if any, caused or occurring to any of them. PRACTISE OF THE TRADERS As many a time merchandise of the Traders conducting sea trade would be lost in the sea causing immense loss and rendering the Traders pauper. The solution found was to offset the loss through mutual contributions. This simple arrangement grew into marine insurance.

3. ACCEPTABLE LIMITS UNDER ISLAMIC LAW & THE PRINCIPLE INVOLVED REASONING AND PRINCIPLES OF INTERPRETATION OF SHARIAH If there is neither any contrary provision nor a negative and adverse Ruling against any rule or custom prevailing and in vogue since prior to dawn of Islam, then such a rule or custom will be taken as approved and permissible and the same may be continued and followed. MAJORITY OF SCHOLARS The concept of Insurance as originally in vogue meets approval of Shariah reasoning, though the conventional Insurance and its operations in practice are held to be repugnant to and violative of Shariah reasoning and principles. This is the view of the majority Scholars of Islamic Law.

4. HISTORICAL PERSPECTIVE • Western World - Origin of the modern insurance: - Practices adopted by Italian merchants from fourteenth century onwards, although there is little doubt that the concept of insuring was known long before then. Losing ships and cargoes at sea instigated the practice of medieval insurance for many years. The habit spread to London merchants in the sixteenth century. A group of traders would agree to bear each other’s risks amongst themselves. The common law for a long time played no role in the regulation of disputes concerning insurance, as these disputes were outside normal legal system. Lord Chief Justice Lord Mansfield • In mid eighteen century took interest in insurance contracts by applying principles derived from the law merchant as well as more traditional law concepts. The jurisdiction of courts over insurance matters thus came to be established by the time Lord Mansfield retired in 1788.

5. LLOYD - THE COFFEE HOUSE OWNER LONDON 17TH CENTURY Developed the practice that the merchant wishing insurance would pass round to the people, willing to provide it and who were gathered at the Coffee-house, a slip of paper on which he had written details of the ship, voyage and cargo etc. The slip used to be initiated by those willing to accept a portion of risk and when the total amount of insurance required was under-written, the contract was complete. The influence of Lloyd on insurance and insurance law is significant as the standard Lloyd’s Marine Insurance Policy was adopted as the statutory form in Marine Insurance Act 1906. The principles of Marine Insurance have by and large been applied to other types of insurance subsequently developed.

6. APPPLICABLE LAW IN MALAYSIA • Leong Brothers Industries Sdn. Bhd v Jerneth Insurance Crp. Sdn. Bhd Wan Adnan J: HELD that the English Marine Insurance Act 1906 was applicable in Malaysia by virtue of Section 5 of the Malaysian Civil Law Act 1956. • Takaful (Islamic Insurance) and its operations stand regulated in Malaysia by statue called Takaful Act 1984.

7. VERDICT OF ISLAMIC FUQHA FIRST FAQIH ALLAMA IBN ABIDIN SHAMI: Who has examined “Insurance” with reference to Sharia. He in his book has commented upon “Sookarah” which is a specific kind of Insurance. “Sookarah” has its origin and is derived from French word “Sookortah” in Arabic Lexicon. This term signifies a type of Marine Insurance of the time. • Allama Shami, the “Sookarah” fails to fulfil conditions of Shariah and as such is impermissible as herein obligation is undertaken which Shariah does not oblige the party to undertake. This contract makes binding which is not legally binding due to the absence of any of the pre-requisites of a valid guarantee. The reasoning noted was not adopted or repeated by the other scholars (Fuqha) who later examined the Insurance operations. Majority of scholars declared these operations impermissible and repugnant to the injunctions of Islam. Contd……

8. Mufti of Egypt, Mufti Muhammad Abdu Held a specific kind of Insurance as permissible, likewise another scholar, Abdul Wahab Khallaf also held a similar type of Insurance permissible. • It is clear that they were asked about a specific kind of Insurance and the answer, therefore, should be restricted to that kind of Insurance and considered in the context of the question posed. GIST OF THE QUESTION MUFTI MUHAMMAD ABDU A group of persons provide finances to a company which may invest the same with the intent to earn profit arising there-from and in case of death of any of them, the profit may be received by their heirs. Answer: It is a sort of Muzarabat and as per Shariah, it is not necessary that Mudharib should necessarily be an individual and Mudharib can be more then one person, so such a venture is valid and permissible. Contd……

9. SHEIKH ABDUL WAHAB KHALLAF A situation presented to him as a kind of Muzarabat and though ordinarily in Mudharabah the ratio of profit must be laid down and determined but as in case in hand the element of mutual help and cooperation is present, the deficiency regarding laying down specifically of profit sharing ratio can be ignored. MUALANA ABUL KALAM AZAD OF INDIA When asked about Insurance, observed that such a type of arrangement should also be prevalent amongst Muslims. • It is obvious that opinion returned by these scholars was premised on the information provided and in the context of the features of the particular transaction described to them. So the answer given has to be seen and understood in the context of the question asked. Had the situation and the elements of the Insurance Policy and its scheme been fully and completely presented, the opinion would have been different. Contd….

10. ABDUL WAHAB KHALLAF & MUHAMMAD ABDU Describing the transaction as amounting to Mudharabat, the comments of Wahbah Al Zuhayli read as under:- • It is not valid to consider insurance a form of silent partnership (mudharaba) with one party working and the other financing, for two reasons: • (a) The instalments and payments paid by the insured become property of the insurer (insurance company). Thus the insurance company may use such monies anyway it wishes, and the insured loses those monies if no accident befalls him. • (b) A condition for the validity of a mudharaba is that the profits be shared according to fixed proportions between the financier and the entrepreneur e.g. one quarter or one third to one party, and the rest to the other. In insurance, however, the insured is often given a fixed percentage/interest payment (e.g. 3% or 4%), thus rendering the mudharaba invalid.

11. Even if this reason does not apply in a given contract, the first reason remains. Moreover, if the insured dies, the money instead of going to his heirs, may go to the one designated in the insurance contract. This is contrary to the case of death of a financier in a silent partnership (mudharabh). Contd…..

12. It is not valid to consider insurance a guarantee or surety, due to the absence of the four legitimate reasons which exist in a guarantee. Also, many insurance contracts do not have an element that may be considered the object of surety (makful), and even when such an element exists (e.g. in the case of auto accidents), it is unknown.

13. FACTORS FOR WHICH FUQHA HOLD CONVENTIONAL INSURANCE AS INVALID (I) UNCERTAINITY (GHARAR) (II) INTEREST (RIBA) (III) GAMBLING (QIMAR)

14. GHARAR CONTRACTS Insurance Contracts fall in this category:- • The outcome is probabilistic (depending on the existence of the object of contract or non-existence thereof). • Holy Prophet (PBUH) forbade Gharar sales and an analogy may be made to cover financial commutative contracts. Thus Gharar affects such contracts in the same manner as it affects sales. • Since insurance by necessity deals with future events that may or may not occur, Gharar is a necessary component of insurance.

15. GENERAL INSURANCE AND GHARAR • Uncertainty is present as the premium which is paid is known but the interest payment that the Company may have to pay is not known. • The quantum of damage or loss is not known. • How much loss would be compensated is not known.

16. LIFE INSURANCE AND GHARAR • Policy holder pays the premium and the Company maturity pays the insured sum of money with profit on the basis of a formula. • The amount of the premium paid monthly or annually is pre-determined and known. • What amount will be paid on maturity to the insured is not known. • The time for which the insured will live is not known. • It is also not known whether the insured will live till period for which policy has been taken. All the above factors contribute to uncertainty.

17. RIBA (INSURANCE OPERATIONS – INFESTED WITH AN ELEMENT OF RIBA) • When a claim in General Insurance is paid, it is in cash. • If the amount of the claim to be paid is more than the amount of premium, then the additional amount is Riba/interest. • If the premium paid is more than the claim, the amount retained by the Company is Riba/interest. Market Position • Ordinarily the position is that the Company hands out less sum of money in claims than the amount of the premium received. • Such retention is usurpation and illegitimate.

18. ANOTHER INFESTATION OF RIBA • Investments made by the Insurance Companies in such businesses which are not approved by Shariah. (I) Advancing loans on interest. (II) Making investments in Riba infested and Haram businesses. Example:- The investment in shares of Companies producing liquor.

19. QIMAR (GAMBLING) INSURANCE? Some scholars are of the view that gambling is not involved. Others hold otherwise. REASON FOR DIVERSION OF OPINIONS IS THE DEFINITION OF QIMAR

20. DIFINITION OF QIMAR Maysir and Qimar are used as identically in Arabic. HOLY QUR’AN “Maysir” is the word used for prohibition of gambling and wagering (2:219 & 5:90, 91) HADITH LITERATURE Discusses this act generally in the name of “Qimar”.

21. VIEW OF JURISTS Difference between Maysir and Qimar is that Qimar is an important kind of Maysir. “Maysir” derived from ‘Yusr’ – wishing something valuable with ease and without paying an equivalent compensation (iwadh) for it or without working for it, or without undertaking any liability against it., by way of game of chance.

22. “Qimar” – also means receipt of money, benefit or usufruct at the cost of others, having entitlement to that money or benefit, by resorting to chance. A person puts his money at stake wherein the amount being risked, might bring huge sums of money or might be lost or damaged.

23. MAULANA MUFTI TAQI USMANI His view on the basis of Qur’an, Sunnah and books of Fiqh reveals that four elements must exist to certify presence of Qimar. (i) The transaction under consideration amounts to Aqd-Muawadh between both the parties. (ii) Every party to the transaction places his part of Asset on risk.

24. (iii) The transaction is such that accrual of additional value is dependant on an event, which may or may not occur. (iv) The transaction is such that property/ Asset of one party may passon to the other party without any corresponding consideration or one party takes over the property/Asset of the other without consideration. Convention Insurance due to presence of the above factors, as per Shariah scholars, is violative of the principles of Shariah.

25. MALAYSIA, PAKISTAN AND SUDAN Scholars started search for alternate modes and modals making mutual insurance as basis of study. To provide security in the face of distress, calamity and loss, three distinctive modals were adopted by the scholars in the three countries.

26. MALAYSIA – MUDHARABAH Takaful – pattern of Mudharabah. Though some sort of donation (Tobarru) is also involved but as this type of transaction resembles Mudharabah concept, hence the name.

27. OBJECTIONS BY SOME SENIOR SCHOLARS According to them: Mudharabah does not receive anything from the surplus pool but in Mudharabah modal the Company receives a share from the surplus. Providing guarantee is objectionable.

28. SUDAN – WAKALA MODAL Operator creates a pool of contributions received from participants and manages it for their benefit. OBJECTIONS BY SCHOLARS Contributors constitute a Board and the ownership of the amount contributed vests in the Board, as the understanding is that the amount of premium contributed is a donation to the Board which in case of loss accruing to any participant, will make donation to the said participant.

29. OBJECTIONS (Contd…) Same position as in conventional insurance, there is also a Board, which is considered owner of the pool and which makes payment of claims. When a participant pays the premium, he would stand divested of this amount and in such a case, ownership vests in whom? Some operators do not establish a Board and themselves carry out the activities of the Board. The Board should have a separate legal entity to qualify and meet the standards of Shariah.

30. ANSWERS TO SOME OF THE OBJECTIONS Participants/policy holders pay the premium with the understanding of making donation to the Board, so this amount goes out of their ownership and vests in the Board. ISSUE IN PRACTICE In case the participants stand divested of the ownership, then on what basis these participants can lay claim to receive a share from the “Surplus Pool” and if they still are the owners, then they are liable to pay Zakat on their amount and in case of this, it will form part of contributable property. However, in practice such is not the case.

31. WAKF MODAL – PAKISTAN DISTINCTION BETWEEN WAKALA & WAKF MODAL Wakf has a sole legal entity. Contributions made to Wakf Pool come under its ownership. Under Wakala Modal, the pool does not have its separate legal entity and to provide for this deficiency, a Board is constituted, the legal capacity of which is not recognized fully.

32. Shariah recognizes Wakf to have its own entity. It is capable of owning property and managing its assets for achieving the objectives of the Trust. Any activity not within the goals and objectives of the Trust Deed, cannot be carried out without amending it, subject to the rider that no activity, business or trade prohibited by Shariah cannot form part of its business.

33. MOST IMPORTANT FEATURE OF WAKF MODAL Property, money or asset donated to Wakf goes out of the ownership of the person making the donation and vests in the Wakf which has a sole legal entity.

34. ISLAMIC INSURANCE – TAKAFUL AS A WAKF Company after incorporation will constitute a Wakf by contributing a specified part of its capital to it. Wakf has to fulfill conditions of a valid Wakf pertaining to the legal character of Wakf, the asset of the property bequeathed and the beneficiaries. Wakf so constituted as the Company being itself a legal entity, is competent to create a Wakf and the amount related to the Wakf is owned by it. Law does not prohibit it from creating a Wakf.

35. The asset being bequeathed is currency which is specified and known and has intrinsic value and having lasting characteristic. A thing, which is consumable, cannot be bequeathed but the currency, which is contributed to Wakf, will be invested and reinvested in low risk avenues. This amount is not to be utilized for paying the claims or for meeting other expenses. Contd…

36. Argument:- The currency (amount) bequeathed stands consumed when it is invested and reinvested, so it does not possess lasting characteristic, considered essential for the property to be bequeathed. Jurists’ Explanation:- One of the principles is that in case of currencies, Dinars and Derhams, specification of some currency towards a Contd…..

37. certain deal or merchandize does not amount to such a specification that the seller of goods gets a right to get those very currency notes, which were shown at the time of deal or conclusion of contract, as neither principle of Shariah ordains to deliver those very currency notes as other notes of same value can be given nor any court can be approached for such a relief. It follows that capital which the Company has bequeathed that is not the particular currency notes but it is the amount or value, which constitutes Wakf.

38. The third component is the beneficiaries who are also known, as Wakf Deed will not only specify the persons but also the circumstances on account of which they will receive the benefit.

39. WAKF DEED For the administration of the Wakf property, two things are most important:- 1. Wakf Deed; and 2. Wakf Rules

40. The said Deed is an irrevocable document. Every Wakif (person creating a Wakf) under Shariah, is entitled:- (i) to prescribed conditions for the Trust; (ii) to specify the beneficiaries; (iii) to specify the circumstances in which they will receive benefit; (iv) to specify in whom will vest the authority to administer the Wakf property and assets; and (v) to lay down the rules and bylaws of administering the Wakf.

41. ENTITLEMENT OF THE COMPANY The Company being Wakif is entitled to execute a document wherein all the principles and rules pertaining to the Wakf are to be provided, complying all essential requirements of institution of Wakf as laid down by Shariah.

42. WAKF DEED OF TAKAFUL COMPANY It inter alia includes the following matters:- (i) Original Wakf capital shall be preserved by making investment and reinvestment in low risk ventures and transactions; (ii) Description of Assets which include original Wakf Asset and Profit; (iii) Rights and obligations of the Operator; (iv) Sources of income of Wakf Pool and items on which expenses may be incurred; Contd…

43. (v) The extent to which the claims of those who make donations to the Wakf, are to be compensated; (vi) Deed also explains the manner in which from the surplus pool, if any, the persons other than donors to the Wakf are to be provided relief as was being extended to the Donors of the Wakf Fund; (vii) In case of winding up of Company, what treatment is to be given to the Wakf Fund;

44. (viii) Wakf specifies the person in whom shall vest management and administration of the Wakf; and (ix) Wakf Deed also lays down that Company has the power and the right to modify and amend the Rules and bylaws of the Wakf and also make additions therein.

45. The Wakf Rules and Bylaws contain the mode and manner of achieving the objectives set forth in the Trust Deed. These are essentially explanatory of the provisions contemplated therein and has to conform to scheme and the principles of Wakf enunciated by Islamic Law.

46. FORMATION & COMMENCEMENT OF TAKAFUL OPERATIONS (i) A body corporate is constituted and established under law as a legal entity. (ii) It obtains a license after complying with the legal formalities and execution of proper documents to enable it to commence the Takaful operations. (iii)This legal entity creates a Wakf but donating a reasonable amount from its capital.

47. (iv) Immediate utilization of the capital of the Company to create “reserves” so as to invest this amount which will remain with the Company in order to provide Qardh Hasan to the Waqf as and when required. (v) Participants are then invited to make donations to the Waqf by determining the amount of contribution to be made by them so as to give them membership.

48. (vi) Amount of contribution should be sufficient to make good the loss suffered and the insurable risk covered of the person so obtaining membership. (vii)Insurable risk being covered of all the participants should be of the same kind or category. (viii)Insurable risk coverage normally is on the same lines as is in vogue in conventional insurance. (ix)Contributions made by participants belong to Wakf Fund, invested by the Company and the losses of the insured is paid out of the profit earned and the contribution of the participants.

49. MALAYSIAN TAKAFUL ACT, 1984 SECTION 13:- Statutory Requirement:- At the time registration, a Takaful Operation has to deposit RM 3,00,000 for each class of Re-Takaful business, which is to be placed with the Accountant General of Malaysia. SECTION 14:- Alternatively, a Bank Guarantee (Waad Bank) can be furnished by the Re-Takaful Operator and as prescribed in the format of the Bank Negara, Malaysia.

50. ASSET/CAPITAL VALUE OF A WAKF It is what the Company establishing the Wakf contributes out of its capital. No limit of this contribution toward Wakf has been prescribed by Islamic Jurists. Any appropriate amount may be contributed by Company to constitute Wakf. In Pakistan One Takaful Company contributed Rs.500,000/-, the other contributed Rs.10,00,000/- another constituted Wakf with the declaration that it shall keep on contributing necessary amount as and when needed.