ǫǣ     

by

AMMAR ALJASER

A thesis submitted in partial fulfillment of the requirements for the degree of Doctor of Juridical Science (S.J.D.) at the Georgetown University Law Center 2014

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Abstract

The focus of this thesis is Islamic insurance, which has generated significant debate within Saudi society. Insurance is a new phenomenon for Muslims in general, and for the Saudi society, in particular, because most Islamic schools have prohibited conventional insurance due to the fact that insurance contracts involve prohibited elements such as interestȂriba, uncertaintyȂgharar and gamblingȂmiser. In Saudi Arabia, in particularly in 1977, the Islamic authority declared that conventional insurance, as commercial insurance companies practice it, is prohibited under Islamic law. In 1979, the Islamic authority announced a type of insurance that could serve as an alternative to conventional insurance, the Islamic insurance. This type is structured on Islamic law based in mutuality and cooperation. In 2003 and after almost 40 years, Saudi Arabia enacted an Insurance Cooperative Law to regulate the insurance industry. The law became a controversial matter in Saudi society as the law might not comply with Islamic law and has created a debate between Islamic scholars. There have been criticisms and debates over whether or not the Insurance Law is in fact sanctioned under Islamic law. Because of this debate it seems that the main issue that the Islamic insurance industry faces is the application of Islamic insurance schemes. This thesis will address these issues in the context of the need for developing and regulating the Islamic insurance industry in Saudi Arabia. The extent that Saudi Arabia needs to actually apply Islamic insurance principles in order to have an impact on its insurance sector and whether or not certain insurance products should be banned if they do not comply with these principles is unclear.

Key words: Islamic Insurance Ȃ Conventional Insurance Ȃ Fatwa Ȃ Sharia Compliant Ȃ Cooperative Insurance Law.

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Dedication

I dedicate this dissertation to my family. Words cannot express how grateful I am to my mother and father for all of the sacrifices they made for their children to be successful and which paved the way for me to accomplish this feat. I would also like to thank my sisters and brother who, from afar, supported me in my American endeavors and my friends for their words of encouragement and honest input throughout this process. Finally, I would like to thank the Saudi Arabian Monetary

Agency for supporting my commitment to higher legal learning and making possible my aspiration of becoming a Doctor in Juridical Sciences.

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Acknowledgements

I would like to express my special appreciation and thanks to my advisor

Professor Kathryn Zeiler, who has been a tremendous mentor for me. I would like to thank you, Professor Zeiler, for encouraging my research and for providing me with insightful feedback which helped me grow as a legal scholar. I would also like to thank Professor Craig Hoffman and Professor Daoud Khairallah for serving as committee members to my defense. Finally I would like to thank Georgetown's academic staff for supporting me throughout this process and, more broadly, the

Georgetown University Law Center which has been a wonderful school to conduct my studies.

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Table of Contents ABSTRACT ...... III DEDICATION ...... IV ACKNOWLEDGEMENTS ...... V INTRODUCTION ...... 1 CHAPTER 1: AN OVERVIEW OF THE SAUDI LEGAL SYSTEM: THE NOVELTY OF ISLAMIC INSURANCE 1

1.1 FOUNDATIONS OF SAUDI LAW ...... 1

1.2 THE BASIC LAW OF GOVERNANCE ...... 4

1.3 STRUCTURE OF THE SAUDI LEGAL SYSTEM...... 7

1.3.1 The Legislative Power ...... 7 1.3.2 The Executive Power ...... 9 1.3.3 The Judicial Power ...... 10

1.3.3.1 The Sharia Courts ...... 10 1.3.3.2 The Board of Grievances ...... 11 1.3.3.3 Limited Courts: Special Committees ...... 12

1.4 COUNCIL OF SENIOR ULEMA (RELIGIOUS AUTHORITY) ...... 13

CONCLUSION ...... 14 CHAPTER 2: ISLAMIC DzSHARIAdz O DEFINE ISLAMIC INSURANCE...... 17

INTRODUCTION ...... 17

2.1. SOURCES OF ISLAMIC LAW ...... 18

2.1.1 Primary Sources ...... 19

2.1.1.1 The Holy Scriptures (Quran) ...... 19 2.1.1.2 Š‡”‘’Š‡–‘Šƒ‡†ǯ•”ƒ†‹–‹‘ȋ—ƒŠȌ ...... 21

2.1.2 Secondary Sources of Islamic Law ...... 22

2.1.2.1 Consensus (Ijma) ...... 23 2.1.2.2 Analogy (Qiyas) ...... 24

2.2 ISLAMIC LAW AND LEGAL THEORY ...... 25

2.3 INTERPRETATION OF ISLAMIC LAW: ISLAMIC SCHOOLS OF THOUGHT ...... 26

2.3.1 The Hanafi School ...... 27 2.3.2 The Maliki School ...... 27 2.3.3 The Shafi School...... 28 2.3.4 The Hanbali School ...... 29

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2.4 PRACTICAL APPLICATION OF ISLAMIC LAW IN SAUDI ARABIA ...... 30 CHAPTER 3: LEGAL ASPECTS OF ISLAMIC INSURANCE ...... 34

INTRODUCTION ...... 34

3.1 INSURANCE IN ISLAM ...... 37

3.2 THE ROLE OF ISLAMIC SCHOLARS IN STRUCTURING ISLAMIC INSURANCE ...... 38

3.3 INSURANCE AND ISLAMIC SCHOLARS ...... 40

3.4 ISLAMIC FINANCE PRINCIPLES ...... 45

3.4.1 Prohibited Transactions Under Islamic Law that Affect Insurance ...... 47

3.4.1.1 Usury Riba and Insurance ...... 47 3.4.1.2 Šƒ”ƒ”Dz ‡”–ƒ‹–›dz ...... 50 3.4.1.3 ƒ„Ž‹‰Dz‹•‡”dz ...... 51 3.4.1.4 Investment in Businesses that are Unacceptable or Unethical Under Islamic Law ...... 52

3.5 SHARIA-COMPLIANT INSTRUMENTS: ISLAMIC INSURANCE MODELS ...... 53

3.5.1 Mudarabah (Partnership) Model...... 54 3.5.2 Wakala (Agency) Model ...... 55 3.5.3 Hybrid Model ...... 55

3.6 COMPARATIVE ANALYSIS OF THE ISLAMIC INSURANCE THROUGH THE LENS OF THE EXISTING REGULATIONS 56 CHAPTER 4: THE INSURANCE INDUSTRY IN SAUDI ARABIA ...... 61

INTRODUCTION ...... 61

4.1 THE INSURANCE CONTROVERSY IN SAUDI ARABIA ...... 61

4.1.1 Historical Background of Insurance under the Saudi Jurisdiction ...... 63 4.1.2 1932 (Establishment of Saudi Arabia) Ȃ 1985 ...... 63 4.1.3 The National Cooperative Company for Insurance (NCCI - Tawuniya) 1985 - 2003 ...... 65

4.2 ROLE OF THE INSURANCE REGULATOR IN SAUDI ARABIA AND COOPERATIVE INSURANCE LAW ...... 66

4.2.1 Insurance Regulator (Saudi Arabian Monetary Agency) ...... 66 4.2.2 The Cooperative Insurance Law and Related Regulations ...... 67 4.2.3 The Impact and Analysis of the Law ...... 70

4.3 THE COOPERATIVE INSURANCE LAW DEBATE AND ISSUES FROM NON-PROFIT TO FOR-PROFIT ...... 72

4.3.1 ‘†‡”ƒ—†‹ •Žƒ‹  Š‘Žƒ”•ǯ‹‡™‘–Š‡  ...... 73 4.3.2 International Islamic Scholars Contribution to Islamic Insurance ...... 80

4.4 INSURANCE DISPUTE RESOLUTION ...... 82

4.4.1 The Insurance Dispute Resolution Committee ...... 83 4.4.2 Insurance Case (Bahri v. Al-Ahlia for Cooperative Insurance Company) ...... 85

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4.4.3 Issues within the Insurance Dispute ...... 89

4.5 AN EVALUATION OF THE COOPERATIVE INSURANCE LAW ...... 89

CONCLUSION ...... 92 CHAPTER 5: ANALYSIS OF THE CURRENT INSURANCE MARKET IN SAUDI ARABIA ...... 95

5.1 OVERVIEW OF ISLAMIC INSURANCE INDUSTRY ...... 96

5.2 DEVELOPMENT OF THE SAUDI INSURANCE MARKET (INSURANCE COMPANIES)...... 99

5.2.1 Types of Insurance Available in Saudi Arabia ...... 100 5.2.2 Features of the Saudi Insurance Market ...... 101 5.2.3 Policyholders and Community ...... 104

5.3 CHALLENGES FACING THE ISLAMIC INSURANCE INDUSTRY ...... 107

5.3.1 Sharia Compliance ...... 109

5.3.1.1 •—”ƒ ‡‘–”ƒ –‘ƒ–‹‘ȋDzƒ„ƒ””—dzȌ ...... 112 5.3.1.2 Takaful Fund: and the distribution ...... 114

5.3.2 Standardization of the Law and Interpretation of Islamic Law ...... 117 5.3.3 Three Minor Challenges ...... 120

5.4 ASSESSMENT OF THE EFFECTIVENESS OF ISLAMIC INSURANCE IN OTHER JURISDICTIONS ...... 123

5.4.1 The Malaysian Experience ...... 124 5.4.2 The Bahraini Experience ...... 129 5.4.3 Points of View on Islamic Insurance Regulations ...... 132

5.5 RELEVANCE OF ENACTING FURTHER REGULATIONS ON ISLAMIC INSURANCE IN SAUDI ARABIA ...... 133

5.5.1 Comparison with the Saudi Banking Sector ...... 133 5.5.2 Sharia boards: from solution to problem ...... 139

5.6 REACHING A MIDDLE GROUND: MODERNIZING ISLAMIC OFFERINGS ...... 145

5.7 PATHWAYS TO THE SUCCESSFUL DEVELOPMENT OF INSURANCE LAW IN SAUDI ARABIA ...... 149

CONCLUSION ...... 152 BIBLIOGRAPHY ...... 157

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Introduction

Most governments around the world have required citizens to carry some type insurance be it car, health or homeowners insurance. Even though the Saudi

Arabian government has required its citizens to purchase car insurance, some believe that this insurance is also forbidden under Islamic law and do not want to buy it because it would not adhere with their religious beliefs. Moreover, some

Islamic scholars have issued fatwas that prohibit insurance products sold by Saudi insurance companies because the new Cooperative Insurance Law seems to regulate conventional insurance rather than Islamic. In addition, a well-known Saudi Islamic scholar has issued studies claiming that Islamic insurance, as Islamic insurance companies structure it, is similar to the conventional insurance system. Therefore, if

Islamic insurance is allowed, conventional insurance should be as well. However, this opinion goes against the majority of Islamic scholars who advocate for the prohibition of conventional insurance. Other Islamic scholars support this view, giving the opinion some weight.

The Saudi insurance industry has been affected by a variety of opinions declared by Islamic scholars because the majority of Saudis citizen are Muslims, and

ƒ”‡ ‹ˆŽ—‡ ‡† „› –Š‡ •Žƒ‹  • Š‘Žƒ”•ǯ ‘’‹‹‘•. The scholars are the entities responsible for providing people with Islamic teaching. This prohibition on insurance has also resulted in people avoiding purchasing insurance policies. The insurance industry has had to modify its business models as well. It has had to implement sharia boards to ensure that their products comply with Islamic law. But

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while the debate continues, the implementation of insurance clearly has been beneficial somewhat to Saudi society.

This thesis will discuss insurance from the perspective of Islamic law, analyzing the opinions of Islamic scholarsǯ views of the Cooperative Insurance Law.

The purpose is to try to find some kind of middle ground in the debate that would allow for an acceptable insurance product that could suit Saudi society. This

”‡“—‹”‡• ƒ ‡‰‘–‹ƒ–‹‘ ‘ˆ–Š‡ ‡ˆˆ‹ ‹‡ › ‘ˆ–Š‡–™‘•›•–‡•™‹–Š–Š‡ ‰‘˜‡”‡–ǯ•

‹–‡”‡•–•‹‹–‡”˜‡‹‰‹‹–•’‡‘’Ž‡ǯ•ˆ”‡‡†‘‘ˆ„‡Ž‹‡ˆǡ‘”Žack thereof. Chapter 1 provides a summary of the Saudi legal system, introducing the structure of Saudi law and the government and reviewing –Š‡ƒ—†‹‰‘˜‡”‡–ǯ•’‘™‡”•ƒ†–Š‡”‘Ž‡ of religious bodies in legislation and regulation. Chapter 2 explains the hierarchy and sources of Islamic law and provides a context for the insurance rules under

Sharia. This is followed by a brief overview of the lawmaking process under Sharia so as to explain how the rules of Islamic insurance were derived from broader

Islamic legal sources. In addition, the latter part of the chapter covers the most important Islamic schools of thought, thus laying the groundwork for contemplating the practical application of Islamic Law in Saudi Arabia to the topic of insurance law.

Chapter 3 defines Islamic insurance and discusses its principles and presents the views of Islamic • Š‘Žƒ”•ǯ ”‡‰ƒ”†‹‰ ‹•—”ƒ ‡Ǥ Particular positions on the compliance of capital principles of Islamic finance such as the prohibition of interest and uncertainty avoidance are described. The Chapter also surveys sharia compliant instruments, which ought to be structured in a way that abides by Islamic law. The

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structure of Islamic insurance and its various models will be outlined. Finally the evolution and the development of Islamic insurance through the lens of existing regulations will be discussed. Chapter 4 will introduce the controversy underlying the insurance sector in Saudi Arabia, followed by a background of the insurance landscape in general and summary of the role of insurance regulators in Saudi

Arabia. Following is an analysis of the Law on the Supervision of Cooperative

•—”ƒ ‡‘’ƒ‹‡•‘ˆʹͲͲͶȋ–Š‡Dz‘‘’‡”ƒ–‹˜‡ •—”ƒ ‡ƒ™dz‘”–Š‡Dz dzȌǡ–Š‡ main law governing the insurance industry in Saudi Arabia. The Saudi Islamic scholarsǯ opinions on the new insurance law, including an international view will also be discussed along with the dispute resolution mechanism for insurance disputes. The Chapter concludes with an evaluation of the Cooperative Insurance

Law. Chapter 5 analyzes the Saudi insurance market looking at the issue of sharia compliance to determine whether the Saudi insurance industry needs to be regulated to be more Islamic. This chapter is divided into five sections. The first section provides a background of global insurance offerings. The second section focuses on the development of the Saudi Arabia market, covering both sides of the insurance business: insurance companies and the insured/customers. The third section discusses the challenges that face the Saudi insurance industry, focusing on sharia compliance and related issues that the Islamic insurance market is attempting to address. The fourth section deals with other Islamic insurance jurisdictionsȄMalaysia and BahrainȄto flesh out the differences among Islamic insurance systems and to pinpoint the lessons that can be learned from their experience. Finally, the current insurance situation in Saudi Arabia is compared to

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the banking industry, which shared similar characteristics and has also gone through sharia compliance issues. The conclusion synthesizes the main problems and offers suggestions on how they can be solved.

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Chapter 1: An Overview of the Saudi Legal System: The Novelty of Islamic Insurance

The root of –Š‡ ƒ—†‹ Ž‡‰ƒŽ •›•–‡ ‹• „ƒ•‡† ‘ –Š‡ ’”‡‹•‡ –Šƒ– ‘†ǯ• Žƒ™

•Š‘—Ž†ƒ –ƒ•–Š‡ ‘—–”›ǯ• ‘•–‹–—–‹‘ǡ ‘ —””‡–Ž›™‹–Šƒ ‘ŽŽ‡ –‹‘‘ˆƒ-made laws, known as Nizam. The term Nizam, translated into English, means regulation.

This resulted in a dual system, leading to potential controversies arising out of conflicts between Nizam and Islamic law. To address this situation, regulations need be based on sharia or must regulate a question that sharia did not disagree with. To fall within either of these categories, one has to go through an Islamic law interpretive process.

This chapter is a summary of the Saudi legal system, introducing a background of the Saudi law, the structure of the government and a review of the

ƒ—†‹‰‘˜‡”‡–ǯ•’‘™‡”•Ǥ††‹–‹‘ƒŽŽ›ǡ ™‹ŽŽ—†‡”• ‘”‡–Š‡”‘Ž‡‘ˆ–Š‡”‡Ž‹‰‹‘—• body that is responsible for the interpretation of the Islamic law.

1.1 Foundations of Saudi Law

Legal systems vary from one jurisdiction to another based on their sociological background and history. The legal world is divided into three main systems: the common law system, the civil law system and the religious law-based system. However, amongst the countries that follow the latter, few countries declare Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance that religion is the law of the land.1 Saudi Arabia is a country that follows religious law, yet the Saudi experience has been slightly different than that of other Islamic states that apply Islamic law.2 Š‡ ‘”‡ ‘ˆ –Š‡ ‘—–”›ǯ• ‘•–‹–—–‹‘ ‹• –Š‡ Quran

(the holy book of the Muslims) and the Sunnah ȋ–Š‡ ”‘’Š‡–ǯ• –”ƒ†‹–‹‘•), thus making Islamic law is the law of the land, and distinguishing it from other Western countries.3

ƒ—†‹”ƒ„‹ƒǯ•Š‹•–‘”›ƒ†Ž‘ ƒ–‹‘Šƒ˜‡„‡‡’ƒ”ƒ‘—–‹–Š‡•–”— –—”‡‘ˆ its legal system. Islam as a religion appeared in Mecca, the holy land of the Muslims, which is now a city in Saudi Arabia. The religion appeared in 610AD when the

Prophet Mohammed began the revelation of the Quran emanating from God.4 Since then, Muslims travel to Mecca to perform one of the five pillars of Islam, i.e. the pilgrimage, and Mecca became the capital city of the Muslims.5 As a result, Islam has become the ruling religion of the geographical area where Saudi Arabia is now located.

1 Hossein Esmaeili, The Nature and Development of Law in Islam and the Rule of Law Challenge in the Middle East and the Muslim World, 26 CONN. J. INT'L L. 329 (2011). 2 Islamic law is a body of rules that is derived from the QURAN and Sunnah (Sharia) through Islamic jurisprudence. The basic meaning of Sharia in Arabic is "path." As used in the context of religion, it means the method by which God rules as religious the beliefs, worshiping practices and rules from the QURAN and Sunnah. See HISHAM M. RAMADAN, UNDERSTANDING ISLAMIC LAW: FROM CLASSICAL TO CONTEMPORARY 3-4 (2006). 3 Royal Order no. A/90, 27/08/1412H, Mar. 1, 1992, Al-nizam al- 'asasi lil-hukm [Basic Law of Governance], art. 1 (Saudi Arabia). 4 See infra ch. 2. 5 Hossein Esmaeili, On a Slow Boat towards the Rule of Law: The Nature of Law in the Saudi Arabia Legal System, 26 ARIZ. J. INT'L & COMP. L. 2, 8 (2009).

2 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance

Muslims believe thƒ– •Žƒ‹•ƒDz ‘’Ž‡–‡dz”‡Ž‹‰‹‘–Šƒ–„‡ƒ”•‘ƒŽŽƒ•’‡ –• of life; therefore, the law ensures that Islam is appropriate to regulate society.6 That basic concept developed and became the applicable rule for the country in which such society is embedded.

Regarding Saudi Arabia specifically, in the 18th century, Mohammed bin

Abdul-Wahhab, the founder of the Wahhabi movement, met with Mohammed bin

Saud who was a local prince of a town which was located in modern-day Saudi

Arabia.7 They both shared the desire to establish an Islamic State.8 Abdul-Wahhab, as a religious scholar, and Saud as a prince vested with the power over the land became allies.9 Accordingly, the first Saudi states came about in 1744 based on the concept of an Islamic state.10 Since then, Saudi Arabia has followed that concept strictly and on September 18, 1932, King Abdul-Aziz bin Saud declared the establishment of the Kingdom of Saudi Arabia under a system of governance amounting to an absolute monarchy.11

6 FRANK E. VOGEL, ISLAMIC LAW AND LEGAL SYSTEM: STUDIES OF SAUDI ARABIA 3 (2000). 7 John Habib, Wahhabi Origins of the Contemporary Saudi State, in RELIGION AND POLITICS IN SAUDI ARABIA: WAHHABISM AND THE STATE 57-58 (Mohammed Ayoob & Hasan Kosebalaban, eds., 2009). 8 JAMES WYNBRANDT, A BRIEF HISTORY OF SAUDI ARABIA 118 (2004). 9 KOSEBALABAN, supra note 7, at 57-58. 10 WYNBRANDT, supra note 8, at 118. 11 3 AMOS J. PEASLEE, CONSTITUTIONS OF NATIONS 263, 276 (2d ed. 1956); Royal Decree No. 2716, 17/5/1351, Sept. 18, 1932, Ta'sis Al-mamluka Al-arabia Al-saudia [Establishment of the Kingdom of Saudi Arabia]. King Abdul-Aziz al-Saud is the founder of the modern kingdom of Saudi Arabia (1932), and he is the grandson of Mohammed bin Saud, the founder of the first Saudi state.

3 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance

For nearly seventy years, Saudi Arabia was ruled without a written constitution.12 This was due to the premise that only God can legislate; therefore, having a written constitution or legislative body was avoided.13 However, in 1992,

King Fahd introduced the first written constitutional do —‡– ƒ‡† –Š‡ DzŠ‡

Basic Law of GovernanceǤdz14 Along with this piece of legislation, the Consultative

Law, the Provinces Law, Law of the Council of Ministers and Allegiance Council Law make up the Basic Laws.15 Although all these laws constitute the most important foundational documents, the Basic Law of Governance is in and of itself the highest- ranked law in the country and it is considered to be the Constitutional law.16

1.2 The Basic Law of Governance

The Basic ƒ™ ‘ˆ ‘˜‡”ƒ ‡ ȋDzƒ•‹  ƒ™dzȌ was enacted on March 1st,

1992.17 Before it was enacted, collections of constitutional documents covered some

ƒ•’‡ –•‘ˆ‰‘˜‡”‡–’‘™‡”•ǡ‹ Ž—†‹‰–Š‡‘— ‹Ž‘ˆ‹‹•–‡”ǯ•ƒ™Ǥ18 The Basic

Law consists of eighty-three articles and nine chapters, mostly focusing on the

12 Rashed Aba-Namay, The Recent Constitutional Reforms in Saudi Arabia, 42 INT'L & COMP. L.Q. 295, n.1 (1993). 13 Rashed Aba-Namay, The New Saudi Representative Assembly, 5 ISLAMIC L. & SOC'Y 235, 236-37 (1998). 14 Basic Law of Governance. 15 Royal Order No. A/92, 27/8/1412h (1992), Nizam Al-ƒƒǯ–—ȏŠ‡”‘˜‹ ‡•ƒ™ȐǤ Saudi Arabia consists of thirteen Provinces, each governed by a Prince. This law explains the power of these ”‘˜‹ ‡•”‡Žƒ–‹˜‡–‘–Š‡–ƒ–‡ƒ†–Š‡”‹ ‡•ǯ”‹‰Š–•ƒ††—–‹‡•Ǥ•ƒ‰‡‡”ƒŽ”—Ž‡ǡ–Š‡‹” responsibility is to keep safety and provide services and protection to their citizens. More importantly, they are in charge of enforcing court judgments or orders. Royal Order No. A/135, 26/9/1427H (2006), Nizam Al-„—ǯ‹ƒŠȏŠ‡ŽŽ‡‰‹ƒ ‡‘— ‹Žƒ™Ȑ. The law's purpose is to create a body to regulate the procedure of succession of governance for the new King and the Crown Prince. Governance is limited to the sons of King Abdul-Aziz, the founder of Saudi Arabia and further descendants. Today, the King of Saudi Arabia is Abdullah bin Abdul-Aziz. For more details about the Consultative Law and Law of the Council of Ministers see infra § 1.3.1. 16 Ayoub Al-Jarbou, The Role of Traditionalists and Modernists on Development of the Saudi Legal System, 21 ARAB L.Q. 191, 196 n.15 (2007). 17 Basic Law of Governance. 18 ABA-NAMAY, supra note 12, at 1.

4 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance system of governance and the structure and power of the government. The Basic

Law provides for the Islamic Law, sharia, to be the law of the land since it is stated in article one that Saudi Arabia is an Islamic state and that the constitution is rooted in the Quran and Sunnah.19 Therefore, it was integral that the Saudi Arabian legal system derived from sharia principles.

The Basic Law also emphasizes the fact that the system of governance is a monarchy subject to its abiding to the rules and principles of Islamic Law, which govern all laws.20 It also provides that the governance depend on the principles of justice, consultation (Shura), and equality in accordance with the Islamic precepts.21

The Basic Law describes in detail the government powers and underscores the fact that separation of powers is one of the key characteristics to uphold.22 However, in practice these authorities sometimes conflict. 23 Accordingly, the government consists of a judicial branch, an executive branch and a legislative branch, which all derive their authority from the sharia, and cooperate among them in accordance to the Basic Law and other structural laws.24 Notwithstanding, the King is the final authority over these three branches.25 This emphasizes the fact that there is no separation between religion and the state, which under Islamic law gives the King the supreme authority as a ruler whose judgment is limited only by the Islamic

19 Basic Law of Governance, art. 1. 20 Basic Law of Governance, art. 5; BASIC LAW OF GOVERNANCE, art. 7. 21 Basic Law of Governance, art. 7. 22 Dz—–Š‘”‹–‹‡•‹–Š‡–ƒ–‡•ŠƒŽŽ ‘•‹•–‘ˆǣ —†‹ ‹ƒŽ—–Š‘”‹–›ǡš‡ —–‹˜‡—–Š‘”‹–›ǡ‡‰—Žƒ–‘”› Authority. These authorities shall cooperate in the discharge of their functions in accordance with –Š‹•ƒ™ƒ†‘–Š‡”Žƒ™•ǤŠ‡‹‰•ŠƒŽŽ„‡–Š‡‹”ˆ‹ƒŽƒ—–Š‘”‹–›dzǡƒ•‹ ƒ™‘ˆ ‘˜‡”ƒ ‡ǡƒ”–ǤͶͶ. 23 Ayoub Al-Jarbou, Judicial Independence: Case Study of Saudi Arabia, 19 ARAB L.Q. 5, 19 (2004). 24 Basic Law of Governance, art. 44. 25 Id.

5 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance law.26 A flagrant example of this conclusion is that the Basic law, despite affirming that the judicial system is independent and that there shall be no power over judges within their judicial function other than the power of the Islamic law,27 places the

King above the judicial system.

The Basic Law declares that the King holds the position of prime minister who heads the executive branch.28 The Basic Law also provides for the legislative power to be shared between the Council of Ministers and the Consultative Council

(or Shura Council), with the King retaining the ultimate legislative power as the monarch and prime minister.29 In Saudi Arabia, the executive and legislative powers have become one and the same considering the King is the only one who has the power to ratify laws through royal decrees that the King signs.30

Since the Saudi Arabian legal system is derived from the principles of sharia, it was necessary to create an Islamic body of laws. Therefore, the Basic Law mentions that fatwas (religious opinions) shall be based on the Quran and Sunnah, the common authority of the Senior Council of Ulema31 and the Department of

Religious Research and Ifta.32 Finally, the King is the only one who is entitled to amend the Basic Law.33

26 AL-JARBOU, supra note 23, at 19; see also VOGEL, supra note 6, at 170. 27 Basic Law of Governance, art. 46. 28 Basic Law of Governance, art. 56. 29 Basic Law of Governance, art. 67. 30 Dzƒ™•ǡ‹–‡”ƒ–‹‘ƒŽ–”‡ƒ–‹‡•ƒ†ƒ‰”‡‡‡–•ƒ† ‘ ‡••‹‘••ŠƒŽŽ„‡‹••—‡†ƒ†ƒ‡†‡†„› ‘›ƒŽ‡ ”‡‡dzǡBASIC LAW OF GOVERNANCE, art. 70. 31 i.e., Islamic scholars, see also infra § 1.4. 32 Basic Law of Governance, art. 55. 33 Basic Law of Governance, art. 83.

6 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance

1.3 Structure of the Saudi Legal System

1.3.1 The Legislative Power

The Basic Law does not designate the body that exercises the legislative power but rather refers to the general provisions of the Basic Law itself, as well as to the Council of Ministers Law and the Shura Council Law.34 These laws vest the legislative power in the King, the Council of Ministers and the Shura Council. As the

•›•–‡‘ˆ‰‘˜‡”ƒ ‡‹•‘ˆ–Š‡ƒ„•‘Ž—–‡‘ƒ” Š›–›’‡ǡ–Š‡‹‰ǯ•ƒ—–Š‘”‹–›Šƒ•‘ limitation but the principles of Islamic law. The King can enact laws by his own will through a royal order without consulting any authority.35 This process goes through his so- ƒŽŽ‡† Dz‘›ƒŽ Diwandz ˆ”‘ ™Š‡”‡ Š‡ •—’‡”˜‹•‡• –Š‡ •–ƒ–‡ ƒˆˆƒ‹”•ǡ36 but in practice the Council of Ministers and the Shura Council share legislative powers. In fact, making laws is also a prerogative of the Shura Council.

The Shura Council was established in 1992 with sixty-one members.37 Today, the number of members stands at one hundred and fifty, all of whom are appointed by the King.38 The Shura ‘— ‹Žǯ• ƒ‹ ˆ— –‹‘ ‹• –‘ ‰‹˜‡ ‘•—Žtation regarding the state general policy upon request of the King.39 It further discusses and provides

34 DzThe regulatory authority shall have the jurisdiction of formulating laws and rules conducive to the realization of the well-being or warding of harm to State affairs in accordance with the principles of the Islamic Šƒ”‹ǮƒŠ. It shall exercise its jurisdiction in accordance with this Law, and Laws of the Council of Ministers and the Shura ‘— ‹Ždzǡƒ•‹ ƒ™‘ˆ ‘˜‡”ƒ ‡ǡƒ”–Ǥ͸͹. 35 IBPUS.COM & INTERNATIONAL BUSINESS PUBLICATIONS USA, SAUDI ARABIA COMPANY LAWS AND REGULATIONS HANDBOOK 75 (2008). 36 ‘›ƒŽ‹™ƒ‹•–Š‡‹‰ǯ•Dz’”‹ƒ”›‡š‡ —–‹˜‡‘ˆˆ‹ ‡ǤdzSee HELEN CHAPIN METZ & LIBRARY OF CONGRESS. FEDERAL RESEARCH DIVISION, SAUDI ARABIA: A COUNTRY STUDY 198 (1993). 37 ABA-NAMAY, supra note 13, at 244. 38 Royal Order No. A/91, 27/8/1412, Mar. 1, 1992, Nizam majlis al-shura [Shura Council Law], amended by Royal Order NO. A/78, 1/3/1422, Nizam majlis al-shura [Shura Council Law], art. 3 (Saudi Arabia). 39 Shura Council Law, art. 15.

7 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance opinions regarding social and economic development planning.40 Also, the Council

‹˜‡•–‹‰ƒ–‡•–Š‡’‘–‡–‹ƒŽ†‹• ”‡’ƒ ‹‡•‘ˆ–Š‡‰‘˜‡”‡–ƒ‰‡ ‹‡•ǯƒ—al reports and provides an opinion whenever needed.41

Beside these duties, the Shura Council exercises the power of legislation and consequent power to interpret laws.42 In fact, all laws, treaties, international agreements and concession agreements are to be enacted and amended by royal decree after having been reviewed by the Shura Council.43 Moreover, the Council has the power to propose new laws, or amendments to laws already entered into force, after review from the King.44 The King reviews all the Shura Council resolutions, and he decides whether these need to be reviewed by the Council of Ministers. In such case, if the Council of Ministers agrees with the Shura Counc‹Žǯ•”‡•‘Ž—–‹‘ǡ–Š‡‹‰ merely signs it. In case of a disagreement, the King returns the law to the Shura

Council for a final review before he takes his final position.45

Finally, The Council of Ministers has two main functions: to serve as an executive branch as well as a legislative body.46 The Council of Ministers Law states that laws, bylaws, treaties, international agreements and concession agreements shall be enacted and amended by royal decree upon review of the Council.47 The

40 Id. 41 Id. 42 Shura Council Law, art. 15. 43 Shura Council Law, art. 18. 44 Shura Council Law, art. 23, amended Royal Order, no. A/198, 2-10-1424 (2003). 45 Id. 46 Royal Order No.13, 3/3/1414H, Nizam Majlis al-wuzara [Council of Ministers Law], art. 1, 29 (Saudi Arabia). 47 Id. art. 20.

8 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance

Council is also entitled to vote on laws for which it has not intervened in the drafting process if requested to do so by the King.48 Every minister has the power to propose a bill related to his ministry.49 All laws and royal decrees must be published in the official journal.50

1.3.2 The Executive Power

The King and the Council of Ministers jointly hold the executive power.51 The

‹‰ǡ ƒ• –Š‡ ’”‹‡ ‹‹•–‡”ǡ •—’‡”˜‹•‡• –Š‡ •–ƒ–‡ǯ• ‰‡‡”ƒŽ ’‘Ž‹ ›-making, the

Council of Ministers, all government agencies and the implementation of laws.52 The

King has the power to appoint the vice-presidents, the ministers and the other members of the Council.53 Additionally, the King has the power to exempt any member of the Council and has the power to dissolve the Council by royal decree.54

The Council is responsible for the executive and administrative affairs and its prerogatives include: (1) monitoring the implementation of laws and resolutions,

(2) handling matters of public interest, (3) monitoring general development planning, (4) creating committees to m‘‹–‘” ‹‹•–”‹‡•ǯ ™‘” ƒ• ™‡ŽŽ ƒ• ƒ› government agencies, which in turn must provide reports to the Council.55

48 Council of Ministers Law, art. 21. 49 Id. art. 22. 50 Id. art. 23. 51 Basic Law of Governance, art 24. 52 Council of Ministers Law, art. 29. 53 Basic Law of Governance, art. 57. 54 Id. 55 Council of Ministers Law, art. 24.

9 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance

1.3.3 The Judicial Power

The judicial system in Saudi Arabia provides for different types of dispute resolution depending on the subject-matter and is thus divided into three judicial orders: the Sharia Court (general court), the Board of Grievances or Administrative

Court and the Limited Courts also known as Special Committees.56 The Basic Law establishes that the judicial system is independent from the other powers, vesting judges with the judiciary powers subject only to, and in mandatory compliance with, the Islamic law.57 A judge is limited to the rules of Islamic law, based on the Quran and Sunnah, and any other law that does not conflict with sharia.58

1.3.3.1 The Sharia Courts

The Sharia Courts, or General Courts, have general jurisdiction over all disputes and crimes.59 Judges in the Sharia court apply Islamic law through an interpretation based on the Ijithad method (legal reasoning).60 These Courts have jurisdiction over cases that arise mostly from legislation that has not been codified, such as family affairs, civil disputes and certain criminal disputes.61 However, the legislature has reserved some legal areas to the jurisdiction of other entities through the Basic Law and Royal Decrees,62 which is further explained infra.

56 ABDULRAHMAN YAHYA BAAMIR, SHARIᦣA LAW IN COMMERCIAL AND BANKING ARBITRATION: LAW AND PRACTICE IN SAUDI ARABIA 19 (2010). 57 Basic Law of Governance, art. 46. 58 Basic Law of Governance, art. 48. 59 Basic Law of Governance, art. 49. 60 VOGEL, supra note 6, at 10. 61 AL-JARBOU, supra note 23, at 21-22. 62 E.g., the Board of Grievances. See infra § § 1.3.3.2-1.3.3.3.

10 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance

The Sharia court system consists of three levels, in decreasing order: the

Supreme Court, the Appellate Courts and the Courts of First Instance or Trial

Courts.63 The lower courts consist of five different types depending on the subject matter of the dispute at hand: General Courts, Limited Courts, Personal Status

Courts, Commercial Courts and Labor Courts.64

The court system is supervised and administered by the Supreme Judiciary

Council, and it is subject to the Judiciary Law.65 Š‡‘— ‹Žǯ•†—–›‹•–‘Šƒ†Ž‡–Š‡ internal judiciary affairs and it does not have power to review the outcomes reached by the courts in the cases they handle.66 The Council also has the power to create special ad hoc courts if needed upon approval of the King.67 Most importantly, the

King appoints and removes judges and he is the final controlling authority over the judicial system.68

1.3.3.2 The Board of Grievances

Š‡ ‘ƒ”† ‘ˆ ”‹‡˜ƒ ‡•ǡ ‘” –Š‡ †‹‹•–”ƒ–‹˜‡ ‘—”–ǡ ȋ–Š‡ Dz‘ƒ”†dzȌǡ ‹• ›‡– another type of court system.69 Unlike the Sharia court, the Board is only competent to hear cases based on regulations that do not conflict with sharia.70 This court is independent from the other branches of the judiciary and is linked directly to the

63 Royal Decree No. M/78, 19/9/1428 (2007), Nizam Al-qudah [The Judiciary Law], art. 9 (Saudi Arabia). 64 Id. art. 9. 65 Id. art. 6. 66 Id. 67 Id. art. 9.. 68 Basic Law of Governance, art. 56. 69 Id. art. 3. 70 Ayoub Al-Jarbou, The Saudi Board of Grievances: Development and New Reforms, 25 ARAB L.Q. 177, 188 (2011).

11 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance

King.71 Like the Sharia courts system, the Board consists of three hierarchical layers: the Supreme Administrative Court, the Appellate Administrative Court and the

Administrative Courts of First Instance. The Supreme Administrative Council is the body supervising these administrative courts, which has identical powers as the aforementioned Supreme Judiciary Council with respect to said administrative courts.72

The Board has broad jurisdiction over any dispute that relates to administrative law matters.73 As a result, the Board is notably responsible to supervise government actions and corresponding resolutions, judging their validity and granting compensation when necessary. An important prerogative of the Board is that it has the power to enforce foreign judgments and enforce arbitration awards.74 It is also worth noting that the Board is not entitled to hear any case that relates to acts of sovereignty.75

1.3.3.3 Limited Courts: Special Committees

• Dz‡š Ž—•‹˜‡ ‘—”–•dz –Š‡ ’‡ ‹ƒŽ ‘‹––‡‡• Šƒ˜‡ Œ—”‹•†‹ –‹‘ ‘˜‡” •’‡ ‹ˆ‹  areas of law. As the country developed, so did the need for this system of dispute.

Indeed, at the time of the establishment of the country, the judiciary system was not prepared –‘ †‡ƒŽ ™‹–Š –Š‡ ŠƒŽŽ‡‰‡• Ž‹‡† –‘ †‡˜‡Ž‘’‡– ƒ† Dz‘†‡”‹œƒ–‹‘dz hence special committees were created to fill the gap.

71 Royal Decree no. M/78, 19/9/1428 (2007), Nizam Diwan Al-mazalim [The Board of Grievance Law], art. 1 (Saudi Arabia). 72 Id. at art. 5. 73 Id. at art. 1. 74 Id. at art. 13(z). 75 Id. at art. 14.

12 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance

Some of these Committees fall under the supervision of the judiciary76 while

•‘‡ ‘–Š‡”• ˆƒŽŽ ™‹–Š‹ –Š‡ ‡š‡ —–‹˜‡ „”ƒ Šǯ• ’—”˜‹‡™.77 Few ministries and government agencies have their own dedicated Special Committees, but among those that do, Special Committees have been instituted to address disputes arising within the banking and the insurance sectors.78

1.4 Council of Senior Ulema (Religious Authority)

In 1971, the government created the Council of Senior Ulema as a religious legal body.79 Š‡ ‘— ‹Ž ‘•‹•–• ‘ˆ ƒ ’”‡•‹†‡–ǡ ‘” DzMuftidzǡ –Š‡ Š‹‰Š‡•– •Žƒ‹  scholar in the country, and twenty members comprised of senior Islamic scholars.80

As with any high legal body, it is the King who appoints the Mufti and the members of the Council.81 The Mufti and members of the Council are absolutely immune from criticism or any possible attack on the part of the media.82

Š‡‘— ‹Žǯ•”‡•’‘•‹„‹Ž‹–‹‡• are: (i) to provide religious opinion concerning issues referred by the King, and (ii) to advise the King regarding religious subjects that concern public law.83 Moreover, the government created a support department to assist the Council with the analysis of and related research on the issues

76 AL-JARBOU, supra note 23, at 39. 77 Ahmed Al-Ghadyan, The Judiciary in Saudi Arabia, 13 ARAB L.Q. 235, 247 (1998). 78 AL-JARBOU, supra note 23, at 32; see also infra ch. 5. 79 Royal Decree No. A/137, 13/7/1391H, Nizam Hayᦤat Kibar al-ᦣUlama [Council of Senior Ulema Law] art. 1 (Saudi Arabia). 80 Royal Decree No. 4, 19/2/1430, [ƒǯǯ™‡‡ ƒ›ᦤƒ–‹„ƒ”ƒŽ-ᦣŽƒƒȐȏƒ‡†‡™‡„‡”•ˆ‘” Council of Senior Ulema]. 81 Id. art. 2. 82 Royal Order No A/71, 13/4/1432H (2011) [Hamaiat al-ulema we adem al-ta'radth ll-mufti we ƒ›ᦤƒ–‹„ƒ”ƒŽ-ᦣŽƒƒ™‡ƒŽ-assa'ah we al-naqd] [Protecting Scientists and Prohibiting Criticizing or Offending the General Mufti of KSA and the Honorable Members of the Senior Scholars Authority]. 83 Council of Senior Ulema Law, art. 4.

13 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance presented to the Council.84 Additionally, the department issues religious opinions

ƒŽŽ‡†DzFatwadz†‹”‡ –‡†–‘•’‡ ‹ˆ‹ ‹†‹˜iduals about the practice of religion and adequacy of social life activities.85

The Council of Senior Ulema has exclusive jurisdiction over fatwas which must be approved by the Mufti.86 As an individual and confidential practice, the King explicitly excludes fatwa issued by Islamic scholars who do not sit on the Council.

The underlying rationale is that fatwa have enormous influence over the lives of

Muslims and the wrong fatwa relating to a sensitive subject could result in a controversy, or worse: to a wrongful act.

Finally, the opinion of the Mufti and the Council of Senior Ulema is of an advisory nature and is thus non-binding, either toward the King or individuals.

Nonetheless, the opinion could be upgraded and acquire statutory power either by

–Š‡‹‰ǯs approval, i.e. by converting it into a Royal Decree or through the Court system: the judges depend sometimes on fatwas, in case no law exists or in order to further substantiate the case.87

Conclusion

The relationship between the religion and the State is extensive. Saudi Arabia is comprised almost completely of Muslims and religion is of utmost importance to

84 The Department of Religious Research and Ifta are responsible for Fatwa. 85 Council of Senior Ulema Law, art. 4. 86 Royal Order No. 13876, 2/9/1431 (2010), [Qaser al-ˆƒ–™ƒƒŽƒ ƒ›ᦤƒ–‹„ƒ”ƒŽ-ᦣŽƒƒ™‡›ƒ- za'an lhm Al-malak] [Fatwa is Limited to only the Council of Senior Ulema]. 87 Diwan Al-mazalim [Board of Grievances], Circle Seven, Decision No. 58/D/A/7, Case No. k/1/761, (Saudi Arabia).

14 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance them.88 Since the establishment of Saudi Arabia, the government systematically provided support to religious legal endeavors. As sharia is the supreme law of the land, it was important to have an Islamic body that would carry the burden of harmonizing it, given its inherent interpretative nature. Moreover, Ulema have the exclusive power to decide what is Islamic and what is not. They are qualified to interpret sharia, and their opinions are most likely to be accepted by the government. They constitute a government agency and thus, their practice is not only religious but also political in the sense that they have to weigh the public interest. However, in case of conflict between the Ž‡ƒǯ• opinion and

‹–‡”’”‡–ƒ–‹‘‘ˆƒ•’‡ ‹ˆ‹ Žƒ™ǡ–Š‡‹‰ǯ•‘’‹‹‘•ŠƒŽŽ’”‡˜ƒ‹ŽǤ89

The Saudi legal system is based on Islam, but Islamic law does not cover some of the legal issues in modern society. Islamic scholars tend to portray this gap as flexibility provided by the sharia to Muslims so as to regulate some of their social needs.90 However, such liberty is not without limits, as all regulations should comply with the principles contained in the sharia. For instance, the subject of the Pension

Law and the Cyber Law could not have possibly been alluded to in the Islamic law.

The necessity of filling the void by newly created laws resulted in the coming into existence of additional laws that complyȄor at least do not conflictȄwith

Islamic principles. However, some others present more challenges as they do

88 See Saudi Arabia, in CIA World Factbook 567 (2011). 89 NATALIE GOLDSTEIN, RELIGION AND THE STATE 118 (2010). 90 Mohammad Hashim Kamali, Shari'ah and Civil Law: Towards a Methodology of Harmonization, 14 ISLAMIC L. & SOC'Y 415 (2007).

15 Chapter 1: An Overview of the Saudi Legal System: The Novelty of Insurance somehow conflict with shariaǤŠ‡•‡Žƒ™•”‡•—Ž–ˆ”‘ƒ—†‹”ƒ„‹ƒǮ•‡„‡”•Š‹’‹ many international organizations that require compliance with their own rules, which is not sharia-compliant.91 Some of such rules pertaining to international commerce gave birth in part to the Saudi Banking law, notwithstanding their partial contradiction with Islamic principles.92 As previously explained, in case such a conflict arises, it is always solved by the King as the highest and final authority of the state.

91 Amr Daoud Marar, Saudi Arabia: The Duality of the Legal System and the Challenge of Adapting Law to Market Economies, 19 ARAB L.Q. 91, 93, 103-107 (2006). 92 Id. at 93.

16

Chapter 2: •Žƒ‹ DzShariadzƒ™ƒ†–Š‡‡‡d to Define Islamic Insurance Introduction

Islamic law is the set of rules based on the religion of Islam as a whole, including the Quran, Sunnah and any other rules derived from religious practice, irrespective of their official titles. The legal rules mentioned in the Quran and

Sunnah pale in comparison to the total body of law that has evolved. Specific skills are needed for Islamic jurists to interpret sharia from its origins. For example,

‘˜‡–‹‘ƒŽ ‹•—”ƒ ‡ ‹• ’”‘Š‹„‹–‡† —†‡” •‘‡ •Žƒ‹  Œ—”‹•–•ǯ ˜‹‡™•ǡ „ƒ•‡† ‘ their conservative interpretation, even though the concept of insurance, in its modern-day meaning, is not mentioned in either the Quran or Sunnah.93

This prohibition has affected the insurance industry in the Muslim world in general and in Saudi Arabia in particular. In 1977, the Senior Council of Ulema prohibited conventional insurance contracts because they involved some elements such as interest and uncertainty prohibited under Islamic law.94 Instead, they introduced cooperative insurance contracts that comply with Islamic law.95 This fatwa became a law that was then cited by judges to invalidate regular insurance

93 MUSTAFA AL ZARQA, NIZAM AL-TAǯMIN: HAQIQATUH, WA AL-RAY AL-SHYARI FAH [SYSTEM OF INSURANCE: ITS NATURE AND THE SHARIA PERSPECTIVE] 6 (1984) (translated by author); see generally MAHMOUD A. EL- GAMAL, ISLAMIC FINANCE, LAW ECONOMICS AND PRACTICE 147- 51(2006). 94 See infra note 200. Fatwa No. 51 defined the Islamic cooperative insurance ƒ•Dza donation contract that aims at cooperation and participation in bearing responsibility when a catastrophe occurs through people's contribution with a sum of money allocated to compensate those who suffer some sort of affliction. Those who support this kind of insurance do not seek profit from others' wealth. Š‡›ƒ‹ƒ–™ƒ”†‹‰‘ˆˆ†ƒ‰‡”ƒ†„‡ƒ”‹‰Ž‘••dzȋ‡’Šƒ•‹•ƒ††‡†ȌǡDecision of the Council of Senior Ulema, Fatwa No. 51 of 25/3/1977; see also infra ch. 3. 95 Id.

CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE contracts, i.e. non-cooperative contracts. Moreover, when the government enacted the Cooperative Insurance Law in 2003,96 it was stated in the first article that insurance should be sharia compliant,97 but did not provide details about or an explanation of Islamic insurance. This thesis will continue to explain and analyze this mode of action that has resulted in a societal debate and has affected the insurance industry.

This chapter explains hierarchy and sources of Islamic law and provides a context for the insurance rules under sharia. This is followed by a brief overview of the lawmaking process under sharia so as to explain how the rules of Islamic insurance were derived from broader Islamic legal sources. In addition, the latter part of the chapter covers the most important Islamic schools of thought, thus laying the groundwork for contemplating the practical application of Islamic Law in Saudi

Arabia to the topic of insurance law.

2.1. Sources of Islamic Law

Islamic law is comprised of revealed and non-revealed sources,98 with the

Quran and Sunnah being the only ones considered to be revealed, i.e. that constituting the so- ƒŽŽ‡† Dz†‹˜‹‡ Žƒ™Ǥdz As a result, Islamic jurists unanimously

96 Royal Decree No. M/32, 3/9/2003, [Nizam muraqabat shirkat al-tamin al-tawuni [Law on the Supervision of Cooperative Insurance] (Saudi Arabia) [hereinafter Cooperative Insurance Law]. 97 Š‡‘‘’‡”ƒ–‹˜‡ •—”ƒ ‡ƒ™ǡƒ”–Ǥͳ•–ƒ–‡•ǣDz •—”ƒ ‡‹–Š‡‹‰†‘•ŠƒŽŽ„‡—†‡”–ƒ‡ through registered insurance companies operating in a cooperative manner as it is provided within the article establishment of the National Company for Cooperative Insurance promulgated by Royal Decree M/5 dated 17/5/1405 H, ƒ†‹ƒ ‘”†ƒ ‡™‹–Š–Š‡’”‹ ‹’Ž‡•‘ˆ •Žƒ‹ Šƒ”‹ǯƒdz (emphasis added). 98 MOHAMMAD HASHIM KAMALI, PRINCIPLE OF ISLAMIC JURISPRUDENCE 1 (2003).

18 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE consider the Quran and Sunnah the primary legal sources.99 Non-revealed sources have been considered to be secondary sources. However, most Islamic jurists agree that Islamic law sources also include consensus ȋDzIjmadzȌ ƒ† ƒƒŽ‘‰› ȋDzQiyasdzȌǤ100

Ijithad, or legal reasoning contributed to the creation and development of these law sources.101 Islamic jurists, subsequently added other sources, including Istihsan

(preference), Maslahah Mursalah (public interest), Urf (custom), Istishab

(presumptions of continuity) and Sadd al Dharai (blocking the means).102 Islamic jurists rank and use these sources differently depending on their approach to law finding. Most Islamic jurists agree on the following sources of Islamic law: (i) the

Quran, (ii) the Sunnah, (iii) Ijma, and (iv) Qiyas.103 Each of these sources is explained in turn thus laying the groundwork for a discussion of the varying complex approaches to the topic of Islamic insurance and the importance of defining the rules of Islamic insurance.

2.1.1 Primary Sources

2.1.1.1 The Holy Scriptures (Quran)

The Quran is the holy book of Muslims and is the first and foremost source of

Islamic law. It is defined as the word of God revealed to His prophet Mohammed Ȃ peace be upon him (PBUH) -- 104 in Arabic through the angel Gabriel.105 The Quran was not revealed at once but over a span of twenty-two years while the prophet

99 ARIF ALI KHAN, ENCYCLOPEDIA OF ISLAMIC LAW, CONCEPT OF ISLAMIC LAW 60 (2007). 100 MOHAMMAD HASHIM KAMALI, SHARIǯAH LAW AN INTRODUCTION 19 (2008). 101 Id. at 19. 102 KAMALI, supra note 98, at 323-452. 103 Irshad Abdal-Haqq, Islamic Law an Overview of Its Origin and Elements, 1 J. ISLAMIC L. 1, 51 (1996). 104 Š‡–‡”Dz‡ƒ ‡„‡—’‘Š‹dz‹•—•‡†ƒˆ–‡”‡˜‡”›‡–‹‘‘ˆ–Š‡”‘’Š‡–ǯ• name in the Muslim world as a mark of respect and shall be used throughout this dissertation for that purpose. 105 KAMALI, supra note 98, at 18.

19 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE

(PBUH) was in Mecca and Medina, (the holy cities, located in modern-day Saudi

Arabia).106

The Quran ‘•‹•–• ‘ˆ ͳͳͶ Šƒ’–‡”• ȋDzsurahdzȌ ƒ† ͸ǡʹ͵ͷ ˜‡”•‡• ȋDzayahdzȌǤ107

The three types of Quranic rules include: (i) the belief rules, i.e. the rules pertaining to the faith in God, (ii) the moral rules which positively and negatively define the permissible activities, and (iii) other legal rules which consist of all worshipping rules as well as the transactional rules.108 Roughly 350 of those verses pertain to legal rules thus constituting a jurisprudential body.109 However, the Quran is not a legal document itself but rather serves as a guidance book. 110

A useful example of a Quranic legal verse that impacts business to this day

ƒ „‡ ˆ‘—† ‹ –Š‡ •—”ƒŠ ‡–‹–Ž‡† DzAl-Baqarahdz ™Š‹ Š •–ƒ–‡• –Šƒ–ǣ DzŽŽƒŠ Šƒ• permitted trade and forbidden usury.dz111 This legally charged verse traditionally prohibits interest for loan agreements but it was further extended through the

Sunnah to cover more transactions,112 including insurance,113 explained in the next section.

106 KAMALI, supra note 98, at 22. 107 AMANULLAH FAHAD, SOURCE AND PRINCIPLE OF ISLAMIC LAW 25 (2009). 108 WAHBAH AL-ZUHAYLI, USUL AL FIQH AL ISLAMI [SOURCE METHODOLOGY IN ISLAMIC JURISPRUDENCE] 438 (1986). 109 Id. at 19. 110 KAMALI, supra note 100, at 19. 111 —ǯ”ƒ 2:275. 112 NABIL A. SALEH, UNLAWFUL GAIN AND LEGITIMATE PROFIT IN ISLAMIC LAW 42-3 (1992). 113 ALY KHORSHID, ISLAMIC INSURANCE, A MODERN APPROACH TO ISLAMIC BANKING 64 (2004).

20 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE

2.1.1.2 Š‡”‘’Š‡–‘Šƒ‡†ǯ•”ƒ†‹–‹‘ȋ—ƒŠȌ

Muslims believe that God sent Mohammed (PBUH) as his last messenger to introduce the last religion: Islam. Prophet Mohammed (PBUH) was born in Mecca

(570-632 AD), and the revelation is said to have begun in 610AD.114 Sunnah is the sum of practices of the Prophet Mohammed (PBUH), including his speeches, performed behavior and expressed or implied approvals regarding specific questions posed to him.115 These gathered and synthesized traditions later formed the Hadith.116

Sunnah is the second most important source of Islamic law. Sunnah is based on three types of rules: (i) rules that confirm Quranic texts, (ii) rules that clarify

Quranic text, and (iii) rules never mentioned in the Quran.117

Here is an example of a Hadith that has practical consequences today: "Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to handǤdz118 The concept stemming from this Hadith implies that when one trades a thing against another similar thing Ȃ e.g., money against money or gold against gold

114 ENCYCLOPEDIA OF ISLAM AND THE MUSLIM WORLD, Vol. 2. (Richard C. Martin, Eds., 2004). 115 AMANULLAH, supra note 107, at 56-57. 116 WAEL B. HALLAQ, AN INTRODUCTION TO ISLAMIC LAW 16 (2009); see generally JOHN BURTON, AN INTRODUCTION TO THE HADITH (1994). 117 KAMALI, supra note 98, at 81-84. 118 IMAM MUSLIM, 10 TRANSLATION OF SAHIH MUSLIM, Hadith no. 3853 (Abdul Hamid Siddiqui, trans., 1976).

21 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE

Ȃ then such trade must be on the same terms and for an equal amount, implying that interest cannot be charged.

Accordingly, Islamic jurists extended this Hadith by analogy to include other business transactions.119 Some Islamic jurists relied on this Hadith to prohibit commercial insurance due to the fact that a typical insurance contract includes interest.120 Indeed, they considered that the compensation for an insurance-covered event might exceed the amount paid for the purchase of the insurance policy, therefore such insurance policy would serve the same purposes as that of a contract for which interest is its consideration. Riba under Islamic law is a very complicated subject and has always been a matter of debate as to which contracts contain riba and which do not. Chapter Three will contemplate prohibition of insurance on the basis of riba and other elements such as gambling and uncertainty.

2.1.2 Secondary Sources of Islamic Law

The Sunnah does not carry the same legal strength as the Quran. Indeed,

Muslims believe that the Quran is a comprehensive book that is flawless and that is

†‡Ž‹˜‡”‡† –‘ —• –‘†ƒ› —ƒŽ–‡”‡† •‹ ‡ –Š‡ †ƒ›• ‹– ™ƒ• ™”‹––‡ „› –Š‡ ”‘’Š‡–ǯ• companions.121 On the other hand, the Sunnah ‹• –Š‡ ’”‘†— – ‘ˆ –Š‡ ‘’ƒ‹‘ǯ• sheer memory, which presumably resulted in errors and omissions.122 To cope with

119 SALEH, supra note 112, at 43. 120 MUHAIMIN IQBAL, GENERAL TAKAFUL PRACTICE: TECHNICAL APPROACH TO ELIMINATE GHARAR [UNCERTAINTY], MAISIR [GAMBLING] AND RIBA' [USURY] 22 (2005). 121 AMANULLAH, supra note 107, at 75-6. 122 Id.

22 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE this issue, Islamic jurists created the science of Hadith for the purposes of strengthening the reliability and validity of the Hadith.123

2.1.2.1 Consensus (Ijma)

Ijma is the third source of Islamic law that emerged after the death of the

Prophet (PBUH) due to the necessity to address new issues.124 Islamic jurists have not agreed on a common definition and criteria for applying Ijma.125 However, a majo”‹–› ‘ˆ –Š‡ †‡ˆ‹‡ ‹– ƒ• ƒ Dz—ƒ‹‘—• ƒ‰”‡‡‡– ‘ˆ mujtahidun (Islamic jurists) on a specific Islamic rule that occurred after the death of the Prophet

ȋ ȌǤdz126

Ijma is divided into two categories: (i) explicit consensus garnered by agreement of the entire community of jurists, and (ii) tacit consensus on which only some jurists agreed while the rest did not disagree.127 This source depends on, and is derived from, texts from the Quran and/or the Sunnah when faced with a case that was not addressed prior to the death of the Prophet (PBUH).128 However, this source of Islamic law is very hard to use due to the fact that it is very difficult to reach total agreement amongst Ulema. Therefore if Ijma is theoretically a source of law, it is practically almost impossible to ascertain. Instead, Islamic jurists use a lower methodological standard, which consists of obtaining a mere majority of jurists to agree on a rule. Such was the case with the opinion reached on the

123 Mohamed Abdel-Khalek Omar, Reasoning in Islamic Law: Part One, 12 ARAB L.Q. 148, 167 (1997). 124 Abdullah Saad Alarefi, Overview of Islamic Law, 9 INT'L CRIM. L. REV. 707, 713 (2009). 125 AL-ZUHAYLI, supra note 108, at 489-490. 126 KAMALI, supra note 98, at 230; see also AL-ZUHAYLI, supra note 108, at 489-90. 127 KHAN, supra note 7, at 88. 128 Al-ZUHAYLI, supra note 108, at 487.

23 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE prohibition of commercial insurance in Saudi Arabia based on the fatwa issued by the Senior Council of Ulema.129

2.1.2.2 Analogy (Qiyas)

Qiyas is the method by which an issue that the sharia did not contemplate is resolved by resorting to the solution reached for a similar issue that was already addressed under the sharia. Qiyas involves four cumulative conditions: (i) the jurist must introduce a new case, (ii) a similar case must exist under the Quran or Sunnah,

(iii) an Islamic rule must have been used to solve the similar case, and (iv) the underlying cause of action between the two cases must be similar.130 Islamic jurists exercise Qiyas individually, unlike Ijma, which implies a joint endeavor.

For example, the sharia prohibits the absorption of wine because it causes intoxication;131 by analogy, any drink or product causing a similar effect is forbidden as well, including beer, whiskey or marijuana.132 Similarly, the insurance field is considering new contracts that sharia does not regulate directly. In this instance,

Islamic jurists apply rules related to other types of contracts and theories already discussed and utilized in Islamic law such as the concept of riba.

129 See infra note 200; Fatwa No. 51. 130 WAEL B. HALLAQ , THE ORIGINS AND EVALUATION OF ISLAMIC LAW 141 (2005). 131 The prohibition of wine can be found in the QURAN, Surah Al-maidah, ͷǣͻͲDz›‘—™Š‘Šƒ˜‡ believed, indeed, intoxicants (all kinds of alcoholic drinks), gambling, [sacrificing on] stone alters [to other than Allah] and divining arrows are but defilement from the work of Satan, so avoid it that you ƒ›„‡•— ‡••ˆ—ŽǤdzSee Khan, supra note 99, at 96. 132 Id. at 96.

24 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE

2.2 Islamic law and legal theory

The root of Islamic law Dz•—ŽƒŽ-ˆ‹‰Šdz ‹•–Š‡‡–Š‘†‘ˆˆ‹†‹‰ ‘†ǯ•Žƒ™•‘”ǡ‹

‘–Š‡”™‘”†•ǡ†‡†— ‹‰ ‘†ǯ•Žƒ™ˆ”‘–Š‡ƒ˜ƒ‹Žƒ„Ž‡•‘—” ‡•Ǥ133 Ijithad is the method by which Islamic jurists achieve this result. This instrument is defined as the ability to investigate through the sharia to deduce Islamic law.134 This method was

‹–”‘†— ‡† „› ƒ—œ „‹ ƒ„ƒŽǡ ™Š‘ ™ƒ• ‘‡ ‘ˆ –Š‡ ”‘’Š‡–ǯ• ‘’ƒ‹‘•Ǥ – ‹• reported that when he appointed a judge in Yemen, the Prophet (PBUH) asked him:

DzŠƒ–”—Ž‡™‹ŽŽ›‘—‡’Ž‘›™Š‡›‘—ƒ”‡ˆƒ ‡†™‹–Šƒ ƒ•‡ǫdz–‘™Š‹ ŠŠ‡”‡’Ž‹‡†ǣDz  will judge by the book of God and if I do not find any rule, I will follow your practice, and if I still do not find any rule, then I will resort to IjithadǤdz135 Later, Islamic jurists developed Ijithad and set requirements to be eligible and capable to deduce Islamic law through this Ijithad type of legal reasoning.136 These requirements vary from one jurist to another but there is a set of clear common principles: the mujithad (the jurist who performs IjithadȌŠƒ•–‘„‡‘™Ž‡†‰‡ƒ„Ž‡‹Dzȋ‹Ȍ–Š‡• ‹‡ ‡‘ˆ–Š‡—”ƒ and its legal verses, (ii) the Science of Hadith, (iii) the Arabic language and the

• ‹‡ ‡‘ˆ •Žƒ‹ Œ—”‹•’”—†‡ ‡Ǥdz137 However, these requirements prove insufficient in the case of technical cases, such as insurance.138 In such a case, the mujtihad has

133 NOEL COULSON, A HISTORY OF ISLAMIC LAW 75 (1978). 134 ABDUR RAHIM, THE PRINCIPLE OF MUHAMMADAN JURISPRUDENCE 169 (1981). 135 24 SUNAN ABU-DAWUD, KITAB AL-AQDIYAH [THE OFFICE OF THE JUDGE], no. 3585, available at https://www.usc.edu/org/cmje/religious-texts/hadith/abudawud/024-sat.php. 136 HALLAQ, supra note 130, at 146. 137 Id. 138 SAIFUL AZHAR ROSLY, CRITICAL ISSUES ON ISLAMIC BANKING AND FINANCIAL MARKETS: ISLAMIC ECONOMICS, BANKING AND FINANCE, INVESTMENT, TAKAFUL AND FINANCIAL PLANNING, 347-49 (2005); see also TAKAFUL ISLAMIC INSURANCE: CONCEPTS AND REGULATORY ISSUES (Simon Archer, Rifaat Ahmed Addel Karim & Volker Nienhaus, eds., 2009) [hereinafter TAKAFUL ISLAMIC INSURANCE).

25 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE to be familiar with the subject from both the technical as well as the religious perspectives.139

2.3 Interpretation of Islamic Law: Islamic Schools of Thought

The Islamic law that is prevalent today is the result of twelve centuries of

Ijithad.140 •‘‡‘ˆ–Š‡‡š’‡”–ƒ—–Š‘”••ƒ‹†ǣDz •Žƒ‹ Žƒ™ƒ›„‡ Šƒ”ƒ –‡”‹œ‡†ƒ•ƒ

Œ—”‹•–ǯ•Žƒ™ǡ™Š‹Ž‡‘ƒŽƒ™‹•ƒŽ‡‰‹•Žƒ–‘”ǯ•Žƒ™ƒ†–Š‡ ‘‘Žƒ™‹•‡••‡–‹ƒŽŽ› a Œ—†‰‡ǯ• Žƒ™Ǥdz141 Š‡ Œ—”‹•–ǯ• ™‘” ‹• ‡ ‡••ƒ”‹Ž› ‘’”‹•‡† ‹ ‘‡ ‘ˆ –Š‡ •Žƒ‹ 

• Š‘‘Ž• ‘ˆ –Š‘—‰Š–ǣ DzMadhhab.dz Š‡ Sunni regime governs four Madhhab:142 the

Hanafi school, the Maliki school, the Shafi school and the Hanbali school.143 These schools emerged through centuries of practice as scholars became divided about the interpretation of Islamic legal issues and have been considered the greatest references regarding interpretation of Islamic law.144

Chapter one considers the fact that the Saudi jurisdictions have not codified some areas of law. Therefore, depending on these schools is indeed important for a judge who will rely on them to find the law. This section will analyze the difference between these schools of thought and how they have contributed to the

139 Id. 140 HALLAQ, supra note 130, at 204. 141 Cherif Bassiouni & Gamal M. Badr, Š‡Šƒ”‹ǯƒŠǣ‘—” ‡•ǡ –‡”’”‡–ƒ–‹‘ǡƒ†—Ž‡-Making, 1 UCLA J. ISLAMIC & NEAR E.L. 135, 137 (2002). 142 Most of the Muslims today are either Sunni or Shiite. The main distinction between these two ”‡Ž‹‰‹‘—•ƒ‹•–”‡ƒ••–‡•ˆ”‘ƒ‹‹–‹ƒŽ ‘–”‘˜‡”•›ƒ•–‘™Š‘™ƒ•‡–‹–Ž‡†–‘–Š‡”‘’Š‡–ǯ• succession as leader of the Muslim community: while the Sunni believe that it was Abo Baker (closest of the ”‘’Š‡–ǯ•ˆ”‹‡†•Ȍǡ–Š‡Š‹‹–‡„‡Ž‹‡˜‡–Šƒ–‹–™ƒ•Ž‹„‹ƒ„‹ƒŽ‹„ȋ–Š‡”‘’Š‡–ǯ• ‘—•‹ȌǤŠ‡•‡ two groups have their own Islamic schools of thought (the most important Shiite schools are Jaffirrey and the Zaide School). Ninety percent of Muslims today follow the Sunni Schools and since the Saudi legal system follows the Sunni schools, for the purposes of this research, the focus will be on the Sunni schools. 143 HALLAQ, supra note 116, at 31. 144 HALLAQ, supra note 130, at 153.

26 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE interpretation of the field of insurance and its elements. For the sake of clarity there is be a brief summary of the four schools with their general views on insurance.

2.3.1 The Hanafi School

The Hanafi School is considered the first school of thought, and it is the largest school in terms of number of followers today.145 The Hanafi School, like the other three schools, depends first on the Quran, then on Sunnah, Ijma and lastly

Qiyas. „— ƒ‹ˆŠ—ǯƒ‹„Šƒ„‹–ȋDz „Šƒ„‹–dzȌ‹• ‘•idered to be the founder of the School (699-767AD).146 Ibn Thabit trusted his own analogical method of interpretation.147 ‹• ƒ’’”‘ƒ Š ˆ‘” •‘Ž˜‹‰ ƒ ’”‘„Ž‡• †‡’‡†• ‘ –Š‡ Dz•—„Œ‡ –‹˜‡

†‡ ‹•‹‘ƒ‹‰dz”—Ž‡ǡ„ƒ•‡†‘–”ƒ†‹–‹‘ƒ†”‡ƒ•‘ƒ•ƒ•‘—” ‡Ǥ148 He would reach his opinion through Ijithad by using Qiyas and Istihsan (or preference) to find the applicable law. Ibn Abdeen was the first Hanafi jurist who discussed insurance in the nineteenth century, concluding that it was prohibited.149

2.3.2 The Maliki School

The Maliki School was founded by Malik ibn Anas Al Sbahi (d.795AD). He was the first to introduce Ijma as a source of Islamic law.150 The Maliki School started in

‡†‹ƒǡ–Š‡”‘’Š‡–ǯ•Š‘‡–‘™ǡŠƒ˜‹‰ƒ’”‘ˆ‘—†‹’ƒ –‘–Š‡• Š‘‘ŽǤ †‡‡†ǡ

145 THE ISLAMIC SCHOOL OF LAW, EVALUATION, DEVELOPMENT AND PROGRESS 26 (Peri Bearman, Rudolph Peters & Frank E. Vogel, eds., 2006). 146 1 ENCYCLOPEDIA OF ISLAM AND THE MUSLIM WORLD 8-9 (Richard C. Martin, ed., 2004). 147 See KAMALI, supra note 100, at 70. 148 Alarefi, supra note 124, at 718. 149 4 IBN ABIDIN, RADD AL-MUHTAR ALA AD-DURR AL-MUKHTAR [THE ANSWER TO THE BAFFLED OVER THE EXQUISITE PEARL] 170 (2000); see also Renta I. Bekkin, Islamic Insurance: National Features and Legal Regulation, 21 ARAB L.Q. 16-17 (2007); see also infra ch. 3. 150 MANSOUR H. MANSOUR, THE MALIKI SCHOOL OF LAW: SPREAD AND DOMINATION IN NORTH AND WEST AFRICA 8TH TO 14TH CENTURIES CE 3 (1995).

27 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE the Maliki School leans heavily on the Sunnah ƒ† –Š‡ –”ƒ†‹–‹‘• ‘ˆ –Š‡ ”‘’Š‡–ǯ• companions, known as the tradition of the people of Medina.151 The Maliki School is distinguished from the other three because Malik considered the tradition of the people of Medina as a legal source beside the four Islamic sources.152 The Maliki view permits all types of insurance contracts except life insurance because it is considered gambling.153 Today, the school is the second largest154 and is spreading in North Africa (except some parts in Egypt), Sudan, Bahrain and Kuwait.155

2.3.3 The Shafi School

The Shafii School is named after its founder Muhammad ibn Idris Alshafi (d.

820AD), who was a student of Malik.156 Shafi follows the Quran first, then Sunnah, ijma and Qiyas. However, he preferred not to depend on Ijma unless all Muslims could reach such consensus, which is naturally impossible.157 The Shafi School is the

‘ˆˆ‹ ‹ƒŽ • Š‘‘Ž ‘ˆ –Š‡ ‡‘’Ž‡ǯ• ƒŽƒ›•‹ƒ ‡’—„Ž‹ Ǥ158 ƒŽƒ›•‹ƒǯ• ƒ†Š‡”‡ ‡ –‘ –Še

Shafi School helps explain their interpretation of Islamic law. For instance, Malaysia was one of the first countries to have enacted an Islamic insurance law. The

Malaysian law contains Islamic insurance rules different than those in Saudi Arabia becaus‡ƒŽƒ›•‹ƒǯ•Žƒ™‹•„ƒ•‡†‘ƒ†‹ˆˆ‡”‡–• Š‘‘Ž‘ˆ–Š‘—‰Š–ǤƒŽƒ›•‹ƒ†‹†‘–

151 Id. at 4. 152 ALAREFI, supra note 124, at 719. 153 Samir Mankabady, Insurance and Islamic Law: Islamic Insurance Company, 1 ARAB. L.Q. 199, 200 (1989); see also infra ch. 3. 154 WINFIELD, supra note 124, at 124. 155 KAMALI, supra note 100, at 73. 156 Id. at 77. 157 Id. at 78. 158 Mercy A. Kuo, Islamic Finance in Southeast Asia: Strategic Context and Trends, 5 J. ISLAMIC ECONOMICS, BANKING & FINANCE 67 (2009).

28 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE depart from the Shafi ˜‹‡™‘‹•—”ƒ ‡ǡƒ•‹–‹’Ž‡‡–‡†–Š‹•• Š‘‘Žǯ•’”‘Š‹„‹–‹‘ of the concept of insurance contract in general.159

2.3.4 The Hanbali School

The last school created was the Hanbali School. It was named after its founder Abu Abd Allah Ahmad Ibn Hanbal (780-855AD).160 His method mostly depended on Sunnah to deduce the law and only on rare occasions would he rely on

Qiyas.161 Unlike the Hanafi School, Ibn Hanbal preferred to resort to a weak hadith on Qiyas, on the premise that even if a hadith is weak, it is still considered part of the

Sunnah.162 As a result, this method does not give the jurist much room or flexibility because of its dependence on the sharia text. This school is considered the smallest school in terms of outreach because of its conservative nature.163 The Hanbali view on insurance is not distinguishable from the Hanafi and Shafi, as it also prohibits insurance.164 The Hanbali School is the official interpretative school in Saudi

Arabia.165 Also, it is commonly used in Qatar, Bahrain, Oman, and Kuwait.166

The Islamic schools have an important role to play in the origination of the legal background of a certain jurisdiction. In most Muslim countries Islamic law

‰‘˜‡”• •‘‡ ƒ”‡ƒ• ‘ˆ Žƒ™Ǥ ‹˜‡ ƒ—†‹ ”ƒ„‹ƒǯ• ˆ‘ŽŽ‘™‹‰ ‘ˆ –Š‡ Hanbali School,

159 Mankabady, supra note 153, at 200. 160 ABDUL HAKIM I. AL-MATROUDI, THE HANBALI SCHOOL OF LAW AND IBN TAYMIYYAH 4 (2006). 161 KAMALI, supra note 100, at 83-84. 162 Abdal-Haqq, supra note 103, at 51. 163 AL-MATROUDI, supra note 160, at 13. 164 MANKAHADY, supra note 153, at 200. 165 AL-MATROUDI, supra note 160, at 13. 166 KAMALI, supra note 100, at 84.

29 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE which prohibits insurance, issues arose as to development of the insurance industry and its legality.

There is no clarity on the views of the Islamic jurists regarding insurance, either conventional or Islamic. Today, Islamic jurists have three different views regarding insurance: (1) prohibition of all kinds of insurance,167 (2) prohibition of commercial insurance but authorization of Islamic insurance,168 (3) authorization of insurance without distinguishing between commercial and Islamic.169 I will analyze these views thoroughly in Chapter 3.

2.4 Practical Application of Islamic Law in Saudi Arabia

Islamic law is the common law in Saudi Arabia, making the Quran and Sunnah the equivalent of a constitution and the primary source of law. Judges in the sharia court system apply Islamic law through an interpretation based on the Ijithad method, based on the aforementioned four Islamic schools of thought.170 However, the Hanbali School is in practice the sole official school used before the Sharia courts.171 For instance, Islamic law is practiced more strictly in Saudi Arabia than

Malaysia.172 Additionally, judges cannot be appointed without being qualified as an

Islamic law scholar by holding an Islamic legal studies degree.173 Other than Sharia court judges, another institution practices Ijithad: the senior council of Ulema. They

167 Sheikh Muhammad Bakhit al-Mutaei prohibited all types of insurance; see AL ZARQA supra note 93, at 25. 168 KHORSHID, supra note 113, at 73; Fatwa no. 51. 169 KHORSHID, supra note 113, at 44; Sheikh Mustafa Al-Zarqa allowed all types of insurance, see generally AL ZARQA, supra note 93. 170 VOGEL, supra note 6, at 10. 171 Id. 172 FRANK E. VOGEL & SAMUEL L. HAYES, ISLAMIC LAW AND FINANCE: RELIGION, RISK, AND RETURN 41 (1998). 173 The Judiciary Law, art. 9, art. 35.

30 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE constitute the interpretative institution of Islamic law. The basis for their practice is also Ijithad through research and fatwa.

On the other hand, the government enacts statutory regulations that

‘•–‹–—–‡Dz’‘•‹–‹˜‡ Žƒ™dz‹–Š‡ ƒ—†‹ Ž‡‰ƒŽ •›•–‡ƒ†™Š‹ Š†‘‘– ‘ˆŽ‹ – ™‹–Š sharia, such as administrative laws and commercial laws. Since no existing rules under sharia cover these areas of law sharia does not govern these regulations.

These regulations have always been controversial due to the fact that some Islamic jurists or judges contest that these regulations do not comply with sharia, such as the ones that concern insurance law.174 This argument is based either directly on the

•Žƒ‹ Œ—”‹•–ǯ•’‡”•‘ƒŽ˜‹‡™‘”‘–Š‡‰Ž‘„ƒŽ‘’‹‹‘ƒ†‘’–‡†„›‘‡‘ˆ–Š‡ •Žƒ‹  schools. Regardless, this position affects the judiciary system as a whole and leads to a distrust in business ventures.175 This issue led the government to take action and create special committees to handle any matter related to these regulations.176

Finally, the Islamic law we have today is primarily based on and devolved from Islamic sources of la™ǡ•‘—” ‡•–Šƒ–†‡’‡†‘Š—ƒ”‡ƒ•‘‘”DzijtihadǤdzŠ‹•

‡–Š‘†”‡Ž‹‡•‘–Š‡ •Žƒ‹ Œ—”‹•–ǯ•˜‹‡™™Š‹Ž‡Ž‘‘‹‰ƒ––Š‡”—Ž‡ƒ†‹–‹•Ž‹‡Ž›–‘ be misunderstood by the interpreter since interpretation requires subjective human

174 Sheikh Yoesf Al Shubaily (Saudi Arabian Islamic jurist) was asked on his website about whether engaging in the insurance business in Saudi Arabia was religiously permissible; he responded that the insurance business is subject to the insurance law which itself is not sharia compliant. Therefore, it is not permissible to deal with insurance companies. The Fatwa is available on Sheikh Yoesf Al Š—„ƒ‹Ž›ǯ•‘ˆˆ‹ ‹ƒŽ™‡„•‹–‡ƒ–ǣ http://www.shubily.com/index.php?news=291. 175 Al-Jarbou, supra note 16, at 204. 176 Al-Ghadyan, supra note 77, at 246-247.

31 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE reasoning. Furthermore, the opinions of the four schools of interpreting Islamic law vary in methodological diversity.

It is important to note that there is no codification of family law, inheritance law, and parts of criminal law and contract law. Indeed, the majority of the Islamic jurists in Saudi Arabia have resisted attempts to codify sharia because of the necessary limitations of such endeavor while the sharia is meant to be used as a all- encompassing legal source. 177 This is considered to be yet another issue since these areas of law depend on Ijithad and thus, variations in judgments necessarily occurs due to differing interpretations.

It should be noted, however, that codification of sharia is a difficult endeavor as with its numerous and scattered rules. Moreover, codifying areas of the law such as family law would prove to be a delicate issue because of cultural sensitivity.

Codification of some legal areas that deal with business transactions should be easier to handle and could thus be considered. Because this kind of regulation involves business entities and, often time, international law, codification could help sustain vitality of the businesses in Saudi Arabia.

At a minimum, codification could also help give stability to the judiciary and consequently the entire society. Similarly, the rules of insurance law need to be precisely defined and not, as is the case today, be restricted to complying with

177 Al-Jarbou, supra note 23, at 23; see also Al-Jarbou, supra note 16, at 193-197.

32 CHAPTER 2: ISLAMIC DzHARIAdz LAW AND THE NEED TO DEFINE ISLAMIC INSURANCE sharia. The regulator has to make the law unambiguous so that no one can issue a fatwa either prohibiting or allowing any types of insurance.

33

Chapter 3: Legal Aspects of Islamic Insurance

This chapter defines Islamic insurance and discusses its principles. Toward that end, this cŠƒ’–‡”ǣ ͳȌ ’”‡•‡–• •Žƒ‹  • Š‘Žƒ”•ǯ ˜‹‡™• ”‡‰ƒ”†‹‰ ‹•—”ƒ ‡ǡ analyzing particular positions on the compliance to capital principles of Islamic finance such as the prohibition of interest and uncertainty avoidance; 2) surveys the sharia compliant instruments, which ought to be structured in a way that abides by

Islamic law; 3) outlines Islamic insurance, contemplating its various models; and 4) analyzes the evolution and the development of Islamic insurance through the lens of existing regulations.

Introduction

Originating in the 1960s,178 Islamic finance is an alternative financial system to the conventional financial system that derives its rules from Islamic law. The global growth of Islamic finance in the past decades has attracted much attention to the industry179 since the Islamic finance industry was less affected by the recent crisis than the traditional industry, suggesting that the system is worth consideration.180

178 NATALIE SCHOON, ISLAMIC BANKING AND FINANCE 3 (2009). 179 Islamic finance assets are currently valued at approximately $1.3 trillion globally. Saudi Arabia is one of the biggest contributors to the Islamic finance industry with $94 billion in contributions which accounts for 8.2 percent of global assets. Press Release, Deloitte, Deloitte: Saudi Arabia Islamic Finance Assets estimated at US$ 94 billion (June 21, 2012), available at http://www.deloitte.com/view/en_IQ/iq/press/press- releases/ef78506e6fe08310VgnVCM2000001b56f00aRCRD.htm. 180 Paul Parashar, How Did Islamic Banks Do During Global Financial Crisis?, 5 BANKS & BANK SYSTEMS, no. 4, 2010 at 54, 60; see also Maher Hasan, Jemma Dridi, The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study (IMF Working Paper WP/10/201, 2010).

Chapter 3: Legal Aspects of Islamic Insurance

Today, Islamic finance is a set of services provided by sharia compliant financial institutions.181 These institutions include Islamic insurance companies.

Financial regulations and Islamic law govern these institutions. They provide various services including both banking and insurance products. Both Islamic financial institutio• ƒ† ‘˜‡–‹‘ƒŽ ‘‡• ™‹–Š Dz •Žƒ‹  ™‹†‘™•dz •‡ŽŽ –Š‡•‡ financial products.182

One of these services is an Islamic insurance product. Insurance is a new phenomenon in the Muslim world. However, insurance has been a controversial matter since it first appeared in Muslim countries. The majority of Islamic scholars prohibit the sale of insurance as sold in most of the modern world. Islamic law forbids some of the elements of conventional insurance.

Insurance is a method of transferring risk from one, the insured, to another, the insurance company.183 This transfer occurs through a contract, whereby the insured pay the insurance company a monthly premium in the current period in expectation that the insurance company will provide future compensationȂ indemnitiesȂ in case of a specified event.184 The purpose of the insurance contract is to transfer risk.185 The insurance company depends on the premiums from each

181 Mark Cammack, Islamic Finance: Prospects and Significance, 18 SW. J. INT'L L. 113 (2011). 182 SAMY NATHAN GARAS, INTERNATIONALIZATION OF ISLAMIC FINANCIAL INSTITUTIONS: CHALLENGES AND PATHS TO SOLUTION 1, available at http://www.albaraka.com/media/pdf/Research-Studies/Book- Internationalization.pdf. 183 JOHN LOWRY & PHILIP RAWLINGS, INSURANCE LAW: DOCTRINES AND PRINCIPLES 1 (1999). 184 TAKAFUL ISLAMIC INSURANCE, supra note 138, at 9; see also 1 JEFFREY E. THOMAS, NEW APPLEMAN ON INSURANCE LAW LIBRARY EDITION, § 1.03 (LexisNexis); see also ROBERT H. JERRY, II & DOUGLAS R. RICHMOND, UNDERSTANDING INSURANCE LAW (4th ed. 2007). 185 THOMAS, supra note 184, at § 1.03.

35 Chapter 3: Legal Aspects of Islamic Insurance

customer to enable it to invest for the purpose of making a profit, as well as allowing it to pay out any future claim.186

Islamic scholars question the nature of an insurance contract as sold by commercial insurance companies. Insurance contracts include interest riba, uncertainty gharar and gambling miser, all prohibited by Islamic law.187 Islamic scholars introduced Islamic insurance as an alternative to conventional insurance.

This form has gained tremendous momentum and spread all over the world recently because it fulfills the Muslim need. Empirical studies conducted in Muslim countries have shown that religion and culture affect the insurance market; notably, they found that life insurance is rejected in some Muslim countries because it is not permissible by Islamic law.188

The Islamic insurance scheme is in its youth and still under development.

However, the industry has been one of the most controversial subjects in the Muslim world and particularly in Saudi Arabia. One of the most challenging issues facing the

Islamic insurance industry is the legitimacy of the principles that govern insurance and whether the services they provide comply with Islamic law. This issue is a

‘ ‡” ˆ‘” —•Ž‹• „‡ ƒ—•‡ǡ ƒ ‘”†‹‰ –‘ –Š‡ •‘‡ •Žƒ‹  • Š‘Žƒ”•ǯ interpretations, insurance is prohibited altogether or its application is

186 DENNIS A. CHEN & MARK SEBASTIAN, THE OPTION TRADERǯS HEDGE FUND: A BUSINESS FRAMEWORK FOR TRADING EQUITY AND INDEX OPTIONS 8 (2012). 187 See generally Ahmed Al-Ghadyan, Insurance: The Islamic Perspective and its Development in Saudi Arabia, 14 ARAB L.Q. 332 (1999). 188 Erik Feyen, Rodney Lester, & Roberto Rocha, What Drives the Development of the Insurance Sector? An Empirical Analysis Based on a Panel of Developed and Developing Countries (World Bank Policy Research Working Paper No. 5572, 2011); see also KHORSHID, supra note 114, at 113.

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problematic.189 Today, Islamic scholars have come up with three different views on whether insurance should be allowed or prohibited. These views remain the result of their interpretations of Islamic law, which explained later in this chapter.

3.1 Insurance in Islam

•—”ƒ ‡‹•‰‡‡”ƒŽŽ›†‡ˆ‹‡†ƒ•Dzƒˆ‘”of risk shifting and risk spreading among persons.dz190 Islamic insurance and conventional insurance share the same goal of protecting people from future loss.191 Under Islamic law the concepts of sharing responsibility and transferring risk ring back to the era of the Prophet.192

This practice was known as the Al-aquila system, and in the case of a murder, the family or the tribe of the murderer was responsible for paying blood money, called diyya.193 The diyya is a type of compensation paid mutually by the family of the killer to the family of the victim in order to escape the legal punishment.194 Today, Islamic insurance companies practice Al-aquila „›–”ƒ•ˆ‡””‹‰–Š‡”‹•–‘–Š‡’ƒ”–‹ ‹’ƒ–•ǯ fund.195 This chapter will illustrate some of the principles that distinguish Islamic and conventional insurance schemes.

The current form of Islamic insurance can be characterized as a method for gathering a group of individualsȄthe insured or participantsȄthat agree to

189 See infra § 3.3. 190 JEFFREY W. STEMPEL, PETER N. SWISHER & ERIK S. KNUTSEN, PRINCIPLES OF INSURANCE LAW § 1.02 (2012). 191 BRIAN B. KETTELL, INTRODUCTION TO ISLAMIC BANKING AND FINANCE 129 (2011). 192 Id. at 129. 193 Id. at 129. 194 Mohd. Masum Billah, Islamic Insurance: Its Origins and Development, 13 ARAB L.Q. 386, 388-89 (1998). 195 THE FOUNDATIONS OF ISLAMIC BANKING: THEORY, PRACTICE AND EDUCATION 193 (Mohamed Ariff & Munawar Iqbal, eds., 2011).

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contribute an amount of money as a donation that stands in for a premium deposited in an Islamic insurance fund.196 By doing this, the group shares the responsibility of preparing for predetermined categories of risk. Technically, this is done through an insurance agency, which acts as the manager of the insurance fund created for that purpose.197 Thus, in the event a participant claims a loss, the

‘’ƒ› ‹• ”‡•’‘•‹„Ž‡ ˆ‘” ‘’‡•ƒ–‹‰ –Š‡ ’ƒ”–‹ ‹’ƒ– ˆ”‘ –Š‡ ’ƒ”–‹ ‹’ƒ–ǯ• pool, in accordance to the terms of the agreement between them.198

3.2 The Role of Islamic Scholars in Structuring Islamic Insurance

The diverse Islamic practices and schools of thought in the Muslim world have resulted in various interpretations of what constitutes Islamic law.199 Different interpretations can lead to different rules regarding what is permissible and what is forbidden. The stance of Islamic scholars in opposition to conventional insurance

Šƒ• Šƒ‰‡†–Š‡‹•—”ƒ ‡‹†—•–”›ǯ•Žƒ†• ƒ’‡‘–‘Ž›‹ƒ—†‹”ƒ„‹ƒ„—–ƒŽ•‘ƒ–

196 ‘”‡šƒ’Ž‡ǡ–Š‡ƒŠ”ƒ‹‹Žƒ™†‡ˆ‹‡† •Žƒ‹ ‹•—”ƒ ‡ƒ•ǣDz •—”ƒ ‡ ‘’ƒ‹‡•–Šƒ–‘’‡”ƒ–‡ according to Islamic jurisprudence similar to the principles of Co-operatives and Mutual Funds but where capital to run the business is provided by the shareholders and premiums are considered as capital to operate the insurance fund and where policyholders share in the insurance related profits ˆ”‘ƒŽŽ Žƒ••‡•‘ˆ„—•‹‡••ˆ‘”ƒŽŽ†—”ƒ–‹‘•Ǥdz See 3 Central Bank of Bahrain, Rulebook, pt. B: Glossary ‘ˆ‡ˆ‹‡†‡”•ȋʹͲͲͷȌǤŽ•‘–Š‡ƒŽƒ›•‹ƒƒƒˆ—Ž –†‡ˆ‹‡•ƒƒˆ—Žƒ•Dzƒ• Š‡‡„ƒ•‡†‘ brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that ’—”’‘•‡ǢdzƒŽ•‘–Š‡ –†‡ˆ‹‡•–Š‡Dzƒƒˆ—Ž„—•‹‡••dzƒ•ƒDz„—•‹‡••‘ˆ–ƒƒˆ—Ž™Š‘•‡ƒ‹•ƒnd ‘’‡”ƒ–‹‘•†‘‘–‹˜‘Ž˜‡ƒ›‡Ž‡‡–™Š‹ Š‹•‘–ƒ’’”‘˜‡†„›–Š‡›ƒ”‹ƒŠǤdzSee Malaysian Takaful Act, Act 312, 1984 (Malaysia). 197 HAND BOOK OF ISLAMIC BANKING 39 (M. Kabir Hassan & Mervyn Lewis, eds., 2007). 198 TAKAFUL ISLAMIC INSURANCE, supra note 138, at 32. 199 M. Fahim Khan, Setting Standards for Shariah Application in the Islamic Financial Industry, 49 THUNDERBIRD INTǯL BUS. REV. 303 (2007).

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the global level. This can be attributed to the fact that fatwa take center stage in the validation of insurance schemes, which is explained later.200

Currently, any Islamic finance product, including Islamic insurance, has to be approved by an Islamic scholar before it can enter the market.201 Such approval takes the form of a fatwa that can be issued either individually or jointly by the sharia board.202 This requires Islamic insurance companies to establish Sharia-

Supervisory Boards. Generally, these boards consist of three members. The role of the board is to supervise –Š‡ ‘’ƒ›ǯ•ƒ –‹˜‹–‹‡•–‘‡•—”‡–Šƒ–‹–ˆ— –‹‘•™‹–Š‹ the rules of Islamic law.

Additionally, a number of international organizations have taken on the responsibility for issuing standards for the Islamic finance industry, including the

Islamic insurance markets. The organizations consist of Islamic scholars from the

Muslim world, with the Islamic Financial Services Board (IFSB) 203 and the

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

200 Decision of the Council of Senior Ulema, Fatwa No. 55, 25/3/1977 [hereinafter Fatwa no. 55]; see also Fatwa no. 51. 201 Shaykh Yusuf & Talal DeLorenzo, Shari'ah Compliance Risk, 7 CHI. J. INT'L L. 397, 399-400 (2006- 2007). 202 Id. at 399-402. 203 DzŠ‡–‡”Ta¢ful is derived from an Arabic word which means solidarity, whereby a group of participants agree among themselves to support one another jointly for the losses arising from specified risks. In a ƒ¢ful arrangement, the participants contribute a sum of money as ƒ„ƒ””—ǯ commitment into a common fund, which will be used for mutual assistance of the members against •’‡ ‹ˆ‹‡†Ž‘••‘”†ƒƒ‰‡ǤdzSee ISLAMIC FINANCIAL SERVICES BOARD, REVISED CAPITAL ADEQUACY STANDARD FOR INSTITUTIONS OFFERING ISLAMIC FINANCIAL SERVICES [EXCLUDING ISLAMIC INSURANCE (T# ) INSTITUTIONS AND ISLAMIC COLLECTIVE INVESTMENT SCHEMES] 129, available at http://www.ifsb.org/standard/2014-01- 28_eng_IFSB15%20Revised%20Capital%20Adequacy_(Jan%202014).pdf.

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being the most prominent.204 These organizations aim to unify the Islamic finance principles, including insurance. However, the standards issued by these organizations are purely advisory, and they will only be adopted only if regulation is lacking.205

3.3 Insurance and Islamic Scholars

In Saudi Arabia, the Council of Senior Ulema206 defines Islamic cooperative insurance as:

Dzƒ donation contract that aims at cooperation and participation in bearing responsibility when a catastrophe occurs through people's contribution with a sum of money allocated to compensate those who suffer some sort of affliction. Those who support this kind of insurance do not seek profit from others' wealth. They aim at warding off danger and bearing loss.dz207

Using this definition, the Ulema allowed operating insurance companies to exist, subject to the establishment of insurance contracts free from interest, uncertainty and gambling. Conventional insurance contracts are commutative contract and Islamic law prohibits the sort of uncertainty that arises in commutative contracts.208 Therefore, Islamic scholars modified the language of the contract to be based on the concept of donation so as to eliminate gharar and gambling.209 This is because under Islamic law, a donator cannot anticipate a gain from a donation.210

204 ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS (AAOIFI), see infra § 4.4.2. 205 HASSAN & LEWIS, supra note 197, at 375. 206 See supra § 1.4. Council of Senior Ulema. 207 See supra note 23. 208 MUHAMMAD AYUB, UNDERSTANDING ISLAMIC FINANCE 420 (2007). 209 SOHAIL JAFFER, ISLAMIC INSURANCE: TRENDS, OPPORTUNITIES AND THE FUTURE OF TAKAFUL 202 (2007). 210 Oliver Agha, Islamic Finance: Principal Before Profit, 2 BERKELEY J. MIDDLE E. & ISLAMIC L. 134 (2009).

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Therefore, insurance buyers do not seeking profit but pay the contribution with the intent of sharing the risk of losses that might be realized by one of them.

 Š‘Žƒ”•ǯ ‘’‹‹‘• ƒ„‘—– ‹•—”ƒ ‡ ˜ƒ”›Ǥ  ’ƒ”–‹ —Žƒ”ǡ certain Islamic scholars adopt the extreme view, which prohibits both Islamic insurance and conventional insurance. For example, Saudi scholar Dr. Sulaymaan ibn Ibraaheem al-Šƒ‹›ƒƒ Žƒ‹•–Šƒ––Š‡ ‘ ‡’–‘ˆ •Žƒ‹ ‹•—”ƒ ‡‹•ƒDzŽ‹‡ǡdz‹•‘ˆƒ”ƒ•–Š‡•‡ companies operate in a similar way to the conventional ones.211 He claims that insurance companies deceived Islamic scholars by pretending that the company was sharia compliant to obtain fatwa.212

On the other hand, some Islamic scholars such as sheikh Mustafa Al-Zarqa have argued that the insurance contract is a new type of contract under Islamic law and that, as such, nothing forbids insurance in Islam.213 This debate puts Muslims in a stalled position regarding the legitimacy of insurance under Islamic law, in respect to which fatwa to follow. Having different fatwa makes people question other divergent opinions.

The first Islamic scholar who studied insurance was the Hanafi scholar Ibn

Abidin (1786-1836).214 The particular case he analyzed was a cargo insurance

211 Dr. Sulaymaan ibn Ibraaheem Al-Thaniyaan, The True Nature of Insurance and the Rulings concerning it, reprinted in Shaykh Muhammad Al-Munajjid, The True Nature of Insurance and the Rulings Covering it, ISLAM QA, http://islamqa.info/en/ref/8889. 212 Id. 213 AL ZARQA, supra note 93, at 6. 214 Bekkin, supra note 149, at 16-17.

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case.215 In that case, he discussed whether an insurance contract between Muslims and non-—•Ž‹•™ƒ•’‡”‹••‹„Ž‡Ǥ ‡‹ Ž—†‡†‹Š‹•ƒ•™‡”–Šƒ–Dzȏ‹Ȑˆƒ‡” Šƒ– rented a ship to carry his goods and he paid a fee for another person to ensure his goods from any risk, then if the risk-covered event occurs, it would not be permissible for this Muslim merchant to claim compensation if the contract was signed on Muslim land. However, for contracts signed on non-Muslim land, then it would be permissible for such Muslim merchant to claim compensation. The rationale is that it is permissible because insurance is allowed on non Muslim

Žƒ†Ǥdz216

Moreover, with the spread of the insurance business in the Muslim world,

Islamic scholars, such as the mufti of Egypt sheikh Mohammed Bekiet have issued fatwas217 prohibiting insurance.218 This fatwa was followed by a court decision from the Egyptian family Supreme Court in 1926 regarding life insurance in which the

Court ruled that insurance is invalid under Islamic law.219

This case was a simple insurance case at that time, and the fatwa did not cover the whole spectrum of insurance as it does today. The validity of insurance vis-à-vis Islamic law falls within three different views. According to the first view, shared by the majority of Islamic scholars, conventional insurance is seen as illegal.

215 Mankabady, supra note 153, at 200. 216 Id.; see also AL ZARQA, supra note 93, at 22. 217 Today, the mufti of Egypt permits all types of insurance including conventional schemes. See MURAT ÇIZAKÇA, ISLAMIC CAPITALISM AND FINANCE: ORIGINS, EVOLUTION AND THE FUTURE 192 (2011). 218 Mankabady, supra note 153, at 200. 219 Id.

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This view is based on an opinion of the Council of Senior Ulema in Saudi Arabia which, although it decided not to go as far as the above-cited 1926 fatwa where it was considered that conventional insurance was strictly forbidden, agreed that insurance contracts involve some activities forbidden under Islamic law. 220

Insurance contracts revolve around three common issues: interest riba, uncertainty gharar and gambling miser.221 The majority of Islamic scholars agree that Islamic law forbids these three elements because they are unethical and, as a result, unjust.222

The second view forbids conventional insurance under Islamic law but approves an alternative type of Islamic insurance. In 1972 the Council of the Senior

Ulema in Saudi Arabia found that commercial insurance223 violates Islamic law and thus, is a forbidden contract. By so doing, it agreed with views that advocate for the prohibition of insurance. However the Senior Ulema did not issue a fatwa: they postponed the issuance of a fatwa pending studies to find an alternative solution.224

In 1977, the Council of Senior Ulema issued a fatwa that suggested an alternative to traditional commercial insurance based on a cooperative model.225

The majority of the members of the Council issued this fatwa. Importantly, this

220 Fatwa no. 51. 221 ISLAMIC FINANCE: INSTRUMENTS AND MARKETS, BLOOMSBURY INFORMATION LTD (2010). The terms riba, gharar and miser are defined infra. 222 See infra § 3.5.1. 223 •Žƒ‹ • Š‘Žƒ”•—•‡–Š‡–‡”Dz ‘‡” ‹ƒŽ‹•—”ƒ ‡dz‘”Dz ‘˜‡–‹‘ƒŽ‹•—”ƒ ‡dz–‘”‡ˆ‡”–‘ƒŽŽ for-profit insurance companies. See Bekkin, supra note 149, at 18. 224 See Billah, supra note 194. Fatwas of the permanent committee, Islamic Da`wah and contemporary issues, Contemporary juristic issues, insurance, Part No. 15, Page No. 286, available at http://www.alifta.net/Default.aspx. 225 Fatwa No. 55 and Fatwa no. 51.

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fatwa was adopted globally when the Islamic Fiqh Academy of the Muslim of the world league agreed with the position of the Council and adopted the Saudi fatwa.

The Fiqh academy consists of various Islamic scholars from different jurisdictions and thus, their fatwa•ǯ ˜ƒŽ—‡ ‹• ‘”‡ ƒ—–Š‘”‹–ƒ–‹˜‡ –Šƒ –Š‡ ƒ—†‹ fatwa in the

Muslim world.226 As a result, these fatwas enabled the birth of the Islamic insurance industry.

The third view states that insurance is permissible under Islamic law. It is a modernist yet minority view, adopted by those who approve of conventional insurance. One of the famous supporters of the validity of insurance is sheikh

Mustafa Al-Zarqa.227 He has written several books and articles analyzing insurance contracts and responding to those who advocate for forbidding insurance. He claims that insurance gives rise to a new kind of contract never before considered by

Islamic law. In this way, these contracts cannot violate Islamic law because they are outside of its purview.228 This is because Islamic contract law does not recognize the principle of the insurance contract. He thus argues that not only does Islamic law not prohibit insurance but it actually allows for it.229

Likewise, in Saudi Arabia, sheikh Abdullah Al- ƒ‡ǯƒ, a senior member of the

Council Senior of Ulema and a member of the board of several Islamic financial

226 The International Council of Fiqh Academy Resolution No. 9 (2/9) (1985). 227 AL ZARQA, supra note 93, at 36. 228 Id. 229 Id.

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institutions, has agreed with Al-Zarqa.230 Sheikh Al-ƒ‡ǯƒ was a member of the

Council of Senior Ulema when the latter issued the above-mentioned fatwa that prohibited commercial insurance. However, he did not sign the fatwa because he believes that there is no reason to distinguish between commercial and Islamic insurance which both operate in the same manner.231 He claims that both types of insurance should be permissible as they share five common characteristics: insurer, insured, subject matter, premium and indemnification for loss.232 Sheikh Abdul-

Mohsen Bin Al-Obeikan also argued in defense of conventional insurance as permissible under Islamic law by pointing out that the Islamic scholars who strive to prohibit insurance are in a paradoxical position since they themselves receive pension benefits after retirement, the mechanism of which is similar to life insurance.233

3.4 Islamic Finance Principles

The key difference between Islamic finance and conventional finance is that the former derives its rules from the principles of Islamic law, as interpreted by

Islamic scholars. Thus, the • Š‘Žƒ”•ǯ†‡–‡”‹ƒ–‹‘•Šƒ˜‡„‡ ‘‡–Š‡ˆ”ƒ‡™‘”‘ˆ the Islamic finance system.

230 See His Eminence Shaykh `Abdullah Al-ƒ‡ǯƒ, SAUDI ARABIA GENERAL PRESIDENCY OF SCHOLARLY RESEARCH AND IFTA, http://www.alifta.net/Fatawa/MoftyDetails.aspx?languagename=en&ID=6 for more information about the scholar. 231 Cooperative Health Insurance Council, Sheikh Al-ƒ‡ǯƒǣ‘–Š‘‡” ‹ƒŽƒ†‘‘’‡”ƒ–‹˜‡ Insurance are Halal, COOPERATIVE HEALTH INSURANCE MAGAZINE, Aug. 2008 at 11, available at http://www.cchi.gov.sa/en/Magazine/MagazineLibrary/magazine2.pdf [hereinafter Both Commercial and Cooperative Insurance are Halal]. 232 Id. 233 SHEIKH ABDUL-MOHSEN BIN AL-OBEIKAN, AL-QUWAL ALǯMOǯMINRIE HUKM ALǯTAMǯIN [A SIGNIFICANT OPINION IN INSURANCE], available at: http://al-obeikan.com/books/algol-almwbin-fi-7km-altamin.pdf.

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Islamic financial institutions adopt an interest-free system by using Islamic financial instruments based on Islamic law.234 Therefore, Islamic law prohibits interest-based transactions at a fixed interest rate.235 Rather, Islamic finance relies

‘ Dz’”‘‘–ȏ‹‰Ȑ ‡“—‹–› ‘” †‹”‡ – ƒ••‡– ˆ‹ƒ ‹‰ǡ ™Š‹ Š ƒŽŽ‘™• ˆ‘” ”‹•-sharing instead of risk-•Š‹ˆ–‹‰Ǥdz236 This also entails avoiding practices that the sharia prohibits under principles of Islamic finance. In effect, insurance is included in the main principles of Islamic finance in the following contexts: (1) the avoidance of interest riba, (2) the avoidance of uncertainty gharar, (3) the avoidance of gambling miser, (4) and the avoidance of engaging in unacceptable or unethical businesses under Islamic law, such as ones related to alcohol and weapons.237

So far, these rules are still debated under Islamic law and do need an explanation and analysis as to what these rules encompass given their different interpretations. For example: to what extent is uncertaintyȄthat is speculation in financial transactionsȄpermissible? This is indeed one of the main issues facing

Islamic finance today.

234 ABDULLAH SAEED, ISLAMIC BANKING AND INTEREST: A STUDY OF THE PROHIBITION OF RIBA AND ITS CONTEMPORARY INTERPRETATION 1 (2006). 235 Agha, supra note 210, at 127. 236 Hossein Askari, Islamic Finance, Risk-Sharing, and International Financial Stability, 7 YALE J. INT'L AFF. 1 (2012). 237 THE CHANCELLOR TO THE LEGAL SHARIǯA ASPECTS OF ISLAMIC FINANCE 166 (Humayon Dar & Umar Moghul, eds., 2009).

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3.4.1 Prohibited Transactions Under Islamic Law that Affect Insurance 3.4.1.1 Usury Riba and Insurance

Riba Ž‹–‡”ƒŽŽ› ‡ƒ• Dz‹ ”‡ƒ•‡Ǣdz238 ‹– ‹• ‘”‡ •’‡ ‹ˆ‹ ƒŽŽ› †‡ˆ‹‡† ƒ• Dz–Š‡

Ǯ’”‡‹—ǯ–Šƒ–—•–„‡’ƒ‹†„›–Š‡„‘””‘™‡”–‘–Š‡Ž‡†‡”ƒŽ‘‰™‹–Š–Š‡’”‹ ‹’Ž‡ amount as a condition for the loan or for an extension ‹–Š‡†—”ƒ–‹‘‘ˆŽ‘ƒǤdz239

Riba is prohibited under Islamic law and it is considered as a source of complexity that Islamic finance is facing nowadays, due to necessary adaptation to world markets in the context of globalization. It is commonly linked today with the concept of interest, although interest, as paid in a financial transaction, is only one type of the riba.240

Riba is clearly prohibited by the Quran, which states:

DzŠ‘•‡™Š‘ Šƒ”‰‡—•—”›ƒ”‡‹–Š‡•ƒ‡’‘•‹–‹‘ƒ•–Š‘•‡ ‘–”‘ŽŽ‡†„› –Š‡†‡˜‹Žǯs influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usuryǤdz241 Dz ‘† ‘†‡•—•—”›ǡƒ†„Ž‡••‡• Šƒ”‹–‹‡•Ǥdz242 Dz›‘—™Š‘„‡Ž‹‡˜‡ǡ›‘— shall observe God and refrain from all kind of usury, if you are „‡Ž‹‡˜‡”•Ǥdz243

This divine order is aimed at maintaining a balance and fairness in transactions.244 As a result, sharia forbids making money from money or the use of money as a means to generate revenue.245 Sharia allows only for the use of money

238 See AYUB, supra note 208, at 58. 239 ZAMIR IQBAL & ABBAS MIRAKHOR, AN INTRODUCTION TO ISLAMIC FINANCE 59 (2d ed. 2011). 240 EL-GAMAL, supra note 93, at 145. 241 QURAN 2:275. 242 QURAN 2:276. 243 QURAN 2:277. 244 LEWIS, supra note 197, at 46. 245 SCHOON, supra note 178, at 20.

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to assess the value of goods.246 Today, interest-based debt is the most common riba transaction offered by financial institutions,247 known under Islamic law under the

ƒ‡‘ˆDzriba al duyundz‘”riba that is based on credit.

More specifically, different types of riba transactions are prohibited by hadith, i.e., the transactions that arise within commercial contracts such as insurance or mortgage contracts. This general form of riba encompasses different sub-types and Islamic scholars have different views about what it actually covers.

Nevertheless, consensus exists on the notion that trade-related riba is divided into two groups:

x DzRiba al- nasiahdz™Š‹ Š‹”ƒ„‹  ‘‡•ˆ”‘–Š‡ ‘ ‡’–‘ˆ†‡ˆ‡”‡–ǣ this refers to any increase over the principle paid due to deferment of exchange whether the subject matter is money or goods.248

x DzRiba al-fadldz‘”riba-surplus which occurs while trading similar items ȋ‡Ǥ‰ǤDz‰‘Ž†ˆ‘”‰‘Ž†dzȌ™‹–Š–Š‡’—”’‘•‡‘ˆ‘„–ƒ‹‹‰ƒ‹‡“—ƒŽ‹–›‹–Š‡ quantity of the payment at some time in the future.249 For instance, selling two future carats of gold in exchange for one today is not allowed.

These prohibited transactions involving the concept of riba •–‡ˆ”‘–Š‡”‘’Š‡–ǯ• hadith, which lists specific items:

DzGold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt, like for like and equal for equal, payment being made hand to hand. If these classes differ, then sell as you wish if payment is made hand to hand.dz250

246 Id. 247 Dar & Moghul, supra note 237, at 31. 248 AYUB, supra note 208, at 52-53. 249 EL-GAMAL, supra note 93, at 50. 250 IMAM MUSLIM, supra note 118 (emphasis added).

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These six specific ‹–‡• ‘–ƒ‹‡†‹–Š‡”‘’Š‡–ǯ•hadith are referred to as

–Š‡Dz‹–‡•‘ˆriba.dz ‘–”‘˜‡”•›ƒ”‘•‡ƒ‘‰ •Žƒ‹ • Š‘Žƒ”•ƒ•–‘™Š‡–Š‡”–Š‹• prohibition is applicable to other items by analogy. The answer varies depending on the Islamic school of thought: whereas some schools adopt a broad applicability of the prohibition, some adopt a restrictive view narrowed down to these items only.251 That being said, the majority of scholars have agreed that money is considered one of the prohibited items based on gold and silver.252

The main question at stake here is: under what circumstances does riba occur in insurance? The Council of Senior Ulema and the Islamic Fiqh Academy have declared that riba is an element of the conventional insurance contract that takes both forms: riba alfadl and riba al-nasiah.253 Their argument is that the insurance contract itself is buying money for money. Therefore, if the insurance company paid an indemnity that (i) surpasses the amount paid by the policyholder as a premium, then it constitutes riba alfadl, or (ii) is equal to such amount, then its riba al nasiah because of the deferment of payment.254 Additionally, the investment tools used by insurance companies to generate profits are mostly dependent on interest-based financial contracts such as derivatives and hedge funds.255 Islamic law does not allow these types of investments because they are based in riba. Islamic insurance

251 Priya Uberoi & Ali Rod Khadem, Islamic Derivatives: Past, Present & Future, in ISLAMIC CAPITAL MARKETS: PRODUCTS AND STRATEGIES 147, 151-152 (Michael Mahlknecht & Kabir Hassan, eds. 2011), see also 15 BERNARD G. WEISS, STUDIES IN ISLAMIC LAW AND SOCIETY 346 (2001). 252 See AYUB, supra note 208, at 52. 253 Fatwa no. 55. 254 Id. 255 TAKAFUL ISLAMIC INSURANCE, supra note 184, at 257.

49 Chapter 3: Legal Aspects of Islamic Insurance

‘’ƒ‹‡•ǯ ‹˜‡•–‡–• —•– ˆƒŽŽ ™‹–Š‹ –Š‡ ”—Ž‡• ‘ˆ •Žƒ‹  Žƒ™ •— Š ƒ• •Žƒ‹ 

„‘†•DzsukukǤdz256

3.4.1.2 Šƒ”ƒ”Dz ‡”–ƒ‹–›dz

Gharar is another factor that greatly affects Islamic finance transactions. It is actually the primary reason that some Islamic scholars prohibit insurance contracts.

The prohibition of gharar ‹• „ƒ•‡† ‘ –Š‡ ”‘’Š‡–ǯ• hadith –Šƒ– Dzforbids sale of gharar.dz257 Gharar is an Arabic word that translates into English as uncertainty or risk. Under Islamic law, any transactions that involve potential risk or uncertainty are forbidden.258 For that reason, it is important that a contract be clear and unambiguous with regards to the subject and the price.259

This issue affects the Islamic insurance industry because of the scarcity of investment tools allowed by sharia. In our modern world, this prohibition poses serious problems with respect to insurance and its use of derivatives products, such as futures or options,260 which are widely used for both hedging and speculative

256 A.M. BESTǯS TAKAFUL REVIEW, 2013 ed., available at http://www.ambest.com/resources/takaful_review.pdf. Sukuk or Islamic bonds are financial securities that comply with the Islamic law. 257 Abdul Rahim Al-Saati, The Permissible Gharar (Risk) in Classical Islamic Jurisprudence, 16 J.KAU: ISLAMIC ECON., no. 2, 2003 at 3, 7. 258 For example, Islamic law prohibits various types of contracts that are uncertain by nature such as the purchase of fruit before ripeness, the purchase of unborn animals and the purchase of fish still in the water. See Id. at 8. 259 See AYUB, supra note 208, at 58. 260 Futures and options are types of financial instruments and derivatives. Futures are contracts for the purchase and sale of assets or commodities for future dates and specified prices. Options are contracts that give the holder of the financial instrument the right but not the obligation to sell or buy an asset or commodity at a predetermined time and specific price. See Nuradli Ridzwan, Shah Mohd Dali & Sanep Ahmad, A Review of Forward, Futures and Options From The Shariah Perspective: Dz ”‘‘’Ž‡š‹–›–‘‹’Ž‹ ‹–›dzǡ”‡•‡–‡†ƒ–‡‹ƒ”‘‘‹Ƭ‡™ƒ‰ƒ •Žƒȋ ʹͲͲͷȌ

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purposes. Some mechanisms have been put into place to accommodate those needs such as the Mudarabah and sukuk, which utilizes Islamic bonds.261

Additionally, gharar occurs in any contract that bears a high risk, such as gambling or speculative transactions. Most Islamic scholars claim that gharar is an element contained in any conventional insurance contract.262 Their argument hinges on the fact that the subject matter of such contracts is premised on the idea of coverage of risk, and uncertainty, and none of the parties has control over the outcome of the contract.263 Besides, in the event that the covered loss actually happens, the policyholder is unsure of how much he will receive, which is yet another uncertain element.

3.4.1.3 ƒ„Ž‹‰Dz‹•‡”dz

Š‡ —”ƒ •–ƒ–‡•ǣ  DzO you who have believed, indeed, intoxicants, gambling,

[sacrificing on] stone alters [to other than Allah], and divining arrows are but defilement from the work of Satan, so avoid it that you may be successful.dz264 It is clear from this Quranic text that gambling is forbidden under Islamic law. The rationale for the prohibition of gambling is that gains depend on chance, which causes injustice to the other contracting party.265

Conference, ESSET Bangi, Aug. 29-30, 2005, available at http://www.kantakji.com/fiqh/Files/Fatawa/15405.pdf. 261 See infra § § 3.5., 3.5.1. 262 See supra note 197. 263 Id. 264 QURAN 5:90. 265 LEWIS, supra note 197, at 39.

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Moreover, gambling transactions involve yet another element that is prohibited under Islamic law: uncertainty or gharar.266 This fact greatly influenced the majority of Islamic scholars who claim that insurance contracts are a form of gambling. The view of these scholars is clear: insurance is a risk-taking venture and the commutative part of an insurance contract is a possible gain depending on pure chance.267 As a result, the contracting parties would benefit from the contract only if the other party loses.

Nevertheless, some Islamic scholars do not see it that way. Indeed, sheikh bin

Al-ƒ‡ǯƒ disagrees with this view and explains that the insured is in fact buying reassurance and that the cost of purchasing an insurance policy is considered as a premium for the indemnity payment by the insurance company.268 He goes even farther and argues that if conventional insurance is truly a form of gambling because it is based on pure chance, then Islamic insurance is as well since it also contains this element where the insured pays the premium and, most often than not, no loss occurs and no amount is received from the insurer.269

3.4.1.4 Investment in Businesses that are Unacceptable or Unethical Under Islamic Law

Alongside the prohibition of riba, gharar, and miser, sharia prohibits businesses that involve elements such as alcohol, weapons, adult entertainment, and

266 See AYUB, supra note 208, at § 3.2.3. 267 Fatwa no. 51. 268 The Cooperative Health Insurance Council, supra note 231. 269 Sheikh Abdulla Bin Suleiman Al-Mane'e, Ž–ƒǯ‹„‹‡ƒŽŠƒŽƒŽ™‡—ŽŠƒ”ƒȏ •—”ƒ ‡„‡–ween Permissible and Prohibition], ALMUKTAR AL-ISLAMI, [ISLAMIC SELECT] http://islamselect.net/mat/28371.

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pork products.270 The activities that are considered prohibited under Islamic law are therefore insurance companies are forbidden to insure them or invest in them.

‘™‡˜‡”ǡ –Š‡•‡ ’”‘Š‹„‹–‹‘• ƒ „‡ ƒ†Œ—•–‡† †‡’‡†‹‰ ‘ –Š‡ •Žƒ‹  • Š‘Žƒ”•ǯ views or the jurisdiction in which the activities take place. For example, some scholars are against investing in the hotel industry because most hotels serve alcohol.271

3.5 Sharia-Compliant Instruments: Islamic Insurance Models

Islamic finance offers financial products that comply with Islamic law. These products are structured in a way that avoids the prohibited activities under sharia, such as interest, while being a viable Islamic substitute to the conventional financial instruments. Islamic insurance was developed as an alternative to conventional insurance products.

Islamic insurance operates through Islamic financial instruments that are approved by Islamic law. The instruments, Mudarabah (Partnership), Wakala

(Agency) and Hybrid models, are the most common ones used nowadays by insurance companies serving Muslims.272 However, each country decides which models are best for their market.273

270 This also includes businesses involving lottery services, casinos, music, tobacco products and Conventional Financial Services. See supra note 45. 271 MAHA- HANAAN BALALA, ISLAMIC FINANCE AND LAW, THEORY AND PRACTICE IN A GLOBALIZED WORLD 26 (2011). 272 Mervyn K. Lewis, The Evolution of Takaful Products, in ISLAMIC CAPITAL MARKETS: PRODUCTS & STRATEGIES 185, 192 (Michael Mahlknecht & Kabir Hassan, eds., 2011). 273 IQBAL, supra note 239, at 219.

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One of the main differences between conventional insurance and Islamic insurance is that the latter operates under two funds. To operate an Islamic insurance business, one needs to establish two separate funds: (i) a fund for the investment paid by the owners of the insurance company (shareholders) that operates under Mudarabah rules, and (ii) an Islamic insurance fund paid by the

‹•—”‡† Dz’ƒ”–‹ ‹’ƒ–•ǡdz ™Š‹ Š –Š‡ ‘’ƒ› ƒƒ‰‡• —†‡r the Wakala or

Mudarabah principle, or both.274

3.5.1 Mudarabah (Partnership) Model

Mudarabah is similar to a partnership in that it is structured on the basis of the principle of profit and loss sharing.275 Partnership in Islamic finance is an investment contract between the entrepreneur, or mudarib, and the capital owner or rabb al-mal.276 In Islamic insurance, the company, or mudarib, manages the operation and the participants provide their contributions in order to protect against future losses. Since this model is based on profit and loss sharing, the company shares with the participants the profit (surplus), after excluding the underwriting costs and the administration fee, that are made from investing the

’ƒ”–‹ ‹’ƒ–•ǯ ‘–”‹„—–‹‘•ǡ –Š‡ Dz‹•—”ƒ ‡ ’‘‘ŽǤdz 277 This model includes an agreement that specifies the surplus distribution in advance.278 If a deficit in the participant account occurs the company is responsible for backing up the loss

274 TAKAFUL ISLAMIC INSURANCE, supra note 138, at 83. 275 BALALA, supra note 271, at 27. 276 HASSAN & LEWIS, supra note 197, at 119. 277 Dar & Moghul, supra note 237, at 300. 278 ID.

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through an interest-ˆ”‡‡Ž‘ƒdz–Šƒ––Š‡’ƒ”–‹ ‹’ƒ–•ƒ”‡”‡•’‘•‹„Ž‡ˆ‘”’ƒying back from a future surplus.279

3.5.2 Wakala (Agency) Model

Wakala is another instrument used in Islamic insurance markets. It is a contract of agency between the insurance company and the participants. The insurance company acts as an agent and bears the responsibility to operate the company on behalf of the participants.280 The insurance company is subject to a pre- fixed fee specified in the contract. Š‡•—”’Ž—•ƒ†–Š‡’”‘ˆ‹–ˆ”‘–Š‡’ƒ”–‹ ‹’ƒ–•ǯ fund goes to the participants.281 Unlike the mudarabah model, the participants own the Islamic insurance fund. Therefore, the investment profits made from the

’ƒ”–‹ ‹’ƒ–•ǯ ˆ—† ”‡–—” –‘ –Š‡ ˆ—† ƒ† –Š‡ —†‡”™”‹–‹‰ǯ •—”’Ž—• ‹• †‹•–”‹„—–‡† among the participants.282 However, the participants are liable for their fund deficits.

3.5.3 Hybrid Model

The hybrid model is another model that has been established as a combination of both the wakala and mudarabah models. This model is very common because the company can engage in insurance activities both as a mutual support system and as an investment tool. As noted above, under the wakala model, the

‘’ƒ› ƒƒ‰‡• –Š‡ ’ƒ”–‹ ‹’ƒ–•ǯ ˆ—†•ǡ –Š‡ ‹•—”ƒ ‡ —†‡”™”‹–‹‰ ƒ† –Š‡

279 Id. 280 CRAIG R. NETHERCOTT & DAVID M. EISENBERG, ISLAMIC FINANCE LAW AND PRACTICE 282 (2012). 281 JAFFER, supra note 209, at 88. 282 Dar & Moghul, supra note 237, at 303.

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investment, in exchange for a fixed fee, which is agreed upon in the contract.

However, in the hybrid model, the wakala model applies only to the insurance underwriting for a fixed fee.283 On the other hand, the company invests the

’ƒ”–‹ ‹’ƒ–•ǯˆ—†‹ƒ ‘”†ƒ ‡™‹–Š–Š‡mudarabah rules, which are based on the profit-loss sharing principle.284 The profit or loss is distributed between the company and the participants through the ratio agreement made in advance.285

3.6 Comparative Analysis of the Islamic Insurance through the Lens of the Existing Regulations

The contribution of the Islamic scholars toward developing the Islamic insurance industry is considered the cornerstone of the system today. However, that effort was not enough to get the Islamic insurance business started. As previously mentioned in this chapter, the key difference between conventional insurance and

Islamic insurance is that the latter prohibits dealing with interest and other types of business that are prohibited under Islamic law. This fact limits Islamic insurance businesses to restricted categories of activities, not including conventional insurance, which allows for investing in any kind of commercial activity, even those that are considered highly risky such as fixed income securities.

Traditionally, every Islamic insurance company has a Sharia advisory council, which is in charge of approving any takaful transaction and deciding whether a specific transaction is sharia compliant. This council is considered to be

283 Id. at 305-06. 284 Id. 285 Id.

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an actual regulator of the takaful industries in a country where no precise regulations or rules delineating the Islamic insurance legal industry exist. The main challenge facing the Islamic insurance industry - or even Islamic finance in general - is the lack of standardized rules. In fact, those scholars who allow Islamic insurance have different views on how Islamic insurance should work. For instance, the rules that govern Islamic insurance are slightly different in Saudi Arabia and in

Malaysia.286 This is due to the diversity of Islamic schools of thought.

Malaysia for example, was the first country to enact a takaful law. According to the Takaful Act of 1984, the Malaysian Central bank is responsible for the supervision and regulation of the insurance industry.287 Today, there are two sets of regulations for its insurance sector. One is aimed at conventional insurance and the other at Islamic insurance.288 A few other countries take this approach and enacted similar Islamic insurance regulations. These countries are Bahrain, Pakistan and the

United Arab Emirates. They have also implemented a parallel insurance system, including both a conventional insurance market and an Islamic insurance market.

Conversely, Saudi Arabia has enacted only one set of regulations that regulates Islamic insurance. The Law on the Supervision of Cooperative Insurance

Companies was enacted in 2003.289 Š‡Žƒ™ǯ•‰‘ƒŽ™ƒ•–‘”‡‰—Žƒ–‡•‘Ž‡Ž›–Š‡ •Žƒ‹  insurance business. It is indeed stated in its first article that: Dz •—”ƒ ‡ ‹ –Š‡

286 Rahail Ali & Mustafa Kamal, Standardising Islamic Financing: Possibility or Pipe Dream, 10 BUS. L. INT'L 19, 22 (2009). 287 Takaful Act 1984, pt. 5, 54. 288 Central Bank of Malaysia, Law, Policy and Guideline, available at http://www.bnm.gov.my/. 289 Cooperative Insurance Law.

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Kingdom shall be undertaken through registered insurance companies operating in a cooperative manner as it is provided within the article establishment of the

National Company for Cooperative Insurance promulgated by Royal Decree M/5 dated 17/5/1405 H, and in accordance with the principles of Islamic Šƒ”‹ǯƒǤdz290

However, the law gave rise to criticism from Islamic scholars and insurance experts who asserted that the law was ambiguous due to an effective lack of Islamic insurance rules.291

Indeed, when comparing the Malaysian Takaful Act and the Saudi insurance regulations, one would argue that the Saudi regulations lack real Islamic insurance rules, unlike the Malaysian Takaful Act, which covers more details and defines the scope of Islamic insurance. In fact, the Saudi insurance law did not define Islamic insurance or issue Islamic rules to govern the insurance industry.292 This might have been designed purposefully to enable the creation of a parallel insurance market. On the other hand, the regulators might have taken into account the fact that sharia is already the law of the land and, as such, there was no need to enact a specific set of

Islamic insurance rules like in Malaysia. Indeed, this can be inferred from the first article of the Saudi insurance law, which articulates that insurance business shall be within the principle of Islamic law.293 Today, some insurance companies in Saudi

Arabia depend on a sharia board.

290 Id. at art. 1. 291 See infra ch. 4. 292 See QURAN 5:90. 293 Id.

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Islamic scholars have strong affiliations with, and influence over the people of the religion, because the rules of Islam mandate respect of religious opinions.294

For example, the demand for Islamic insurance products has increased lately because of the fatwa that allows Islamic insurance as an alternative to the conventional type. This raises the question of whether Islamic insurers can operate profitably under the constraints of Islamic law. Such a determination falls within the

• ‘’‡‘ˆ• Š‘Žƒ”•ǯ”‡˜‹‡™ƒ†ƒƒŽ›•‹•Ǥ

The Malaysian experience is enlightening in that the Malaysian central bank established a sharia advisory council as the highest sharia body for Islamic finance in the country, including for insurance-related matters. The council is responsible for reviewing any sharia matter, including sharia compliant instruments. 295

Moreover, as the board consists of Islamic scholars and experts on finance, economics and law,296 this combination of experts benefits the insurance industry in all aspects. Conversely, in Saudi Arabia, insurance companies depend on their individual sharia boards. Thus supervising these boards is necessary so as to

294 QURAN ͶǣͷͻǣDz›‘—™Š‘Šƒ˜‡„‡Ž‹‡˜‡†ǡ‘„‡›ŽŽƒŠƒ†‘„‡›–Š‡‡••‡‰‡”ƒ†–Š‘•‡‹authority among you. And if you disagree over anything, refer it to Allah and the Messenger, if you should believe in Allah and the Last Day. That is the best [way] and best in ”‡•—Ž–ǤdzUlema means authority, see Muhammad, Al-Atawneh, Religion and State in Contemporary Middle East: The Case of Saudi Arabia, 2 J. ISLAMIC ST. PRAC. INT'L L. 32 (2006); and see generally RALPH H. SALMI, CESAR ADIB MAJUL & GEORGE K. TANHA, ISLAM AND CONFLICT RESOLUTION: THEORIES AND PRACTICES (1998). 295 Shariah Advisory Council, CENTRAL BANK OF MALAYSIA, http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802. 296 Id.

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standardize the rules that govern insurance and to have a stable market, in the same

™ƒ›ƒ•ƒ•‡Ž ǯ•„ƒ‹‰”—Ž‡•Ǥ297

297 Dr. Amir Shaharuddin, Harmonizing Shariah Rulings in Islamic Finance: Issues, Way and Challenges, Fellow Seminar, Oxford Centre for Islamic Studies (presentation paper) 32 (2012-2010) (on file with author). Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management ‘ˆ–Š‡„ƒ‹‰•‡ –‘”ǤdzŽ–Š‘—‰Š–Š‡•‡”‡ ‘‡†ƒ–‹‘•ƒ”‡‘–ƒ†ƒ–‘”›ǡ ‘—–”‹‡•–”›–‘ implement them. See BANK FOR INTERNATIONAL SETTLEMENTS, INTERNATIONAL FRAMEWORK FOR BANKS (BASEL III), available at http://www.bis.org/bcbs/basel3.htm. The Sharia board will be discussed infra in chapters 4 and 5.

60

Chapter 4: The Insurance Industry in Saudi Arabia Introduction

The Saudi insurance law was recently enacted and is still under development, consequently it has been covered scarcely in legal scholarship. The treatment of

Saudi insurance law is treated as Islamic Law has generated significant debate as to whether the law is Islamic or not. Moreover, the insurance dispute committee, which hears insurance cases, has declared that the insurance business is not sharia compliant. This has resulted in the government having to amend the new law.

This chapter will introduce the controversy underlying the insurance sector in Saudi Arabia, and provide a background of the insurance landscape in general and summary of the role of insurance regulators in Saudi Arabia. I then analyze the Law on the Supervision of Cooperative Insurance Companies of 2004 298 (the

Dz‘‘’‡”ƒ–‹˜‡ •—”ƒ ‡ ƒ™dz ‘” –Š‡ Dz dzȌǡ –Š‡ ƒ‹ Žƒ™ ‰‘˜‡”‹‰ –Š‡ ‹•—”ƒ ‡ industry in Saudi ArabiaǤŠ‡ǡ ™‹ŽŽ†‹• —••–Š‡ƒ—†‹ •Žƒ‹ • Š‘Žƒ”ǯ•‘’‹‹‘•‘ the new insurance law, including an international view. I will also discuss the dispute resolution mechanism for insurance disputes. The chapter concludes with an evaluation of the Cooperative Insurance Law.

4.1 The Insurance Controversy in Saudi Arabia

Insurance in Saudi Arabia has overwhelmingly been discussed from a religious point of view. Generally speaking, Islamic scholars everywhere in the

298 Cooperative Insurance Law.

Chapter 4: The Insurance Industry in Saudi Arabia

world have long concluded that insurance is prohibited under Islamic law, mostly because of its uncertainty and the gambling aspects. As we have seen from some of

–Š‡ •Žƒ‹  • Š‘Žƒ”•ǯ ˜‹‡™• ‹ –Š‡ ’”‡˜‹‘—• Šƒ’–‡”ǡ ‹•—”ƒ ‡ ‹• •–‹ŽŽ ˜‹‡™‡† „› many Muslims in Saudi Arabia as an undesirable amenity.

The insurance controversy in Saudi Arabia started in the 1970s. In 1972 King

Faisal bin Abdul Aziz asked the Department of Religious Research and Ifta to provide a study regarding insurance.299 At the same time, the council of Senior

Ulema issued a fatwa that prohibited insurance and suggested that an alternative type of Islamic insurance be used instead, as mentioned in the previous chapter.300

More than forty years after this study and the resulting fatwa, the insurance debate continues still.

Today, the insurance debate concentrates more on the new Saudi insurance law. Some Saudi Islamic scholars have argued that the law is not sharia-compliant and that the insurance companies are operating on a conventional basis. They claim that the regulators do not properly apply the rules of the Ž‡ƒǯ• Fatwa.301 Other scholars have argued to the contrary, that insurance as a concept, whether named

Islamic or conventional, is permissible under Islamic law; making the CIL sharia- compliant.302

299 Fatwa no. 18047, 15 FATWAS OF THE PERMANENT COMMITTEE 286, available at: http://www.alifta.net/Default.aspx [hereinafter Fatwa no. 18047]. 300 Fatwa no. 55; and Fatwa no. 51. 301 See infra § 4.4. 302 Id.

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As a citizen of Islamic country, the Saudi people are concerned about any new contemporary matter that arises and challenges religious conservatism. In response to this, people in Saudi Arabia asked the Islamic scholars to provide their religious opinions regarding the type of insurance that exists today.303

4.1.1 Historical Background of Insurance under the Saudi Jurisdiction

The year 2003 was a turning point in the Saudi economy. It was the year that insurance companies became legal under the Cooperative Insurance Law. Before that, no regulations governing insurance existed, except for the laws relating to maritime activities,304 which were comprised only of minor regulations pertaining to marine insurance that existed as part of the Commercial Court Law issued in

1931.305

4.1.2 1932 (Establishment of Saudi Arabia) Ȃ 1985

Insurance practices are not new in the Saudi market. The history of insurance in Saudi Arabia goes back to the discovery of oil in the 1930s.306 The notion of insurance and insurance contracts was introduced to the country due to the massive oil projects that began at that time.307 Most of these projects were insured abroad until 1953 when foreign insurance companies developed an interest in the country.308 Since there was no law regulating the insurance business in Saudi Arabia

303 See infra § 4.3.3. 304 Andreas Haberbeck, Insurance under Saudi Arabian Law, 1986 LLOYDǯS MAR. & COM. L.Q 246 (1986). 305 Id. 306 WORLD INSURANCE THE EVALUATION OF A GLOBAL RISK NETWORK 365 (Peter Borscheid & Niels Viggo Haueter, eds. 2012). 307 Id. 308 Id.

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they were to be registered abroad.309 The absence of regulations in regards to insurance was due to the fact that insurance, in general, was prohibited. However, with the oil business flourishing in the 70s, the Saudi economy boomed. This created

ƒ ‡‡† –‘ ‹ ”‡ƒ•‡ –Š‡ ‘—–”›ǯ• ‹ˆ”ƒ•–”— –—”‡Ǥ310 To enable such an endeavor, insurance coverage needed to be put in place, as a requirement of foreign construction companies.311 By 1984 more than a hundred insurance organizations operated in Saudi Arabia.312

This practice concerned the government because in essence the insurance companies operated illegally despite the benefit that the insurance industry could offer. One of the problems facing the business at that time was the enforcement of contracts.313 –™ƒ•‹†‡‡††‹ˆˆ‹ —Ž––‘’”‘–‡ ––Š‡‹˜‘Ž˜‡†’ƒ”–‹‡•ǯ”‹‰Š–•ǡ‰‹˜‡n the fact that the underlying contract was invalid under Islamic law. Also, projects were insured through foreign companies, which prevented the government from benefiting from reinvestment of insurance revenue into its economy.314 As a result, the government established a semi-governmental insurance company with a capital of 500 million ƒ—†‹‹›ƒŽ•ȋDzdzȌ(approximately $143 million) to insure some of these projects.315

309 Id. 310 Id. at 366. 311 Id. at 366. 312 Id. at 366. 313 See infra § 4.5. 314 David J. Karl, Note, •Žƒ‹ ƒ™‹ƒ—†‹”ƒ„‹ƒǣŠƒ– ‘”‡‹‰––‘”‡›ǯ•Š‘—Ž†‘™, 25 GEORGE WASH. J. INT. LAW ECON. 131, 152 (1991). 315 KHORSHID, supra note 113, at 134.

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4.1.3 The National Cooperative Company for Insurance (NCCI - Tawuniya) 1985 - 2003

The increasing number of insurance companies in the country, despite the absence of governmental control and the lack of supervision of the insurance market, encouraged the government to establish its own insurance company. This major change was effected in 1985 when the government introduced its first cooperative insurance company called the National Cooperative Company for

•—”ƒ ‡ ȋDz ǡdz –‘†ƒ› ƒŽŽ‡† Tawuniya).316 The NCCI was incorporated as a public company subject to the Company Law.317 The NCCI charter declares that the company is a cooperative insurance company that complies with Islamic law.318 The

 ǯ•ƒ‹Ž›ˆ‘ —•‡•‘‹•—”ƒ ‡ƒ†”‡‹•—”ƒ ‡ƒ –‹˜‹–‹‡•Ǥ319 The NCCI was the first step in conceptualizing and documenting some form of legitimate insurance in

Saudi Arabia.

Today, the NCCI is considered to be the cornerstone of the law of insurance companies in Saudi Arabia. The NCCI was the only company operating legally in the

Saudi market for eighteen years, until the Cooperative Insurance Law was introduced.320 Having dominated the market for such a long time, the NCCI was able to build a name and a client base. With the new insurance law, other companies engaged in a commercial fight with the NCCI.

316 Council of Ministers Resolution No. 292, 22/12/1404H, Nizam Al-asasi llshrikh [Article of Association]; see also ‘›ƒŽ‡ ”‡‡‘ǤȀͷǡͳ͹ȀͶȀͳͶͲͷȋͳͻͺͷȌǡǯƒ•‹•Ž-shirkah Al-tuwania, [Establishment of the NCCI]. 317 Id. 318 Id. 319 Id. 320 KHORSHID, supra note 113, at 113.

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4.2 Role of the Insurance Regulator in Saudi Arabia and Cooperative Insurance Law

The first law that regulated the insurance industry in Saudi Arabia was the

Law on the Supervision of Cooperative Insurance Companies (Cooperative

Insurance Law or CIL).321 The government enacted the law in 2003 and started enforcing it in 2004. The Saudi modern insurance business was born with this law.

The CIL is one piece of legislation, which was enacted along with its implementing regulations (by-laws).322 The government also promulgated other regulations related to the CIL in an effort to deal with specific aspects of the insurance industry.323

4.2.1 Insurance Regulator (Saudi Arabian Monetary Agency)

The Saudi Arabian Monetary Agency (SAMA) plays an important role as a regulator of the Saudi financial sector in general, and insurance in particular. SAMA was established in 1952 as the Central Bank of Saudi Arabia and is responsible for

‹••—‹‰–Š‡ƒ–‹‘ƒŽ —””‡ ›ǡƒƒ‰‹‰–Š‡‹‰†‘ǯ•ˆ‘”‡‹‰‡š Šƒ‰‡”‡•‡”˜‡•ǡ conducting monetary policy and promoting price and exchange-rate stability.324

SAMA, essentially functions as a conventional Central Bank.325

321 Cooperative Insurance Law. 322 Ministry Resolution no. 1/596, 1/3/1425H (2004), Al-la'aha Altanfethiah ll Nizam muraqabat shirkat al-tamin al-tawuni [Implementing Regulations of the Law on Supervision of Cooperative Insurance Companies] [Hereafter Implementing Regulations]. 323 Such as the Risk Management Regulations (2008), Anti-Fraud Regulation (2008) and the Anti- Money Laundering & Combating Terrorism Financing Rules (2012), see SAMA INSURANCE REGULATIONS, http://www.sama.gov.sa/sites/samaen/Insurance/Pages/LawsandRegulations.aspx. 324 Royal Decree No. 323, 23/5/1377H (1957), Charter of the Saudi Arabian Monetary Agency Royal; see also SAUDI ARABIAN MONETARY AGENCY, http://www.sama.gov.sa. 325 Hussain Agil & Bruno Zeller, Foreign Investments in Saudi Arabia, 15 INT. TRADE BUS. LAW REV. 60, 75 (2012).

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ǯ•”‘Ž‡‹ Ž—†‡•–Š‡•—’‡”˜‹•‹‘‘ˆ–Š‡Žƒ”‰‡•–ˆ‹ƒ ‹ƒŽ•‡ –‘”•‹ƒ—†‹

Arabia: the banking industry, the insurance industry and the real estate financing companies.326 This legislation granted SAMA the task of regulating the legal aspects of the insurance sector. As such, initial SAMA responsibilities included supervision and control of the insurance industry. Accordingly, SAMA established an Insurance

Supervision Depar–‡–ƒˆ–‡”‡ƒ –‹‰–Š‡‹•—”ƒ ‡Žƒ™‹ʹͲͲ͵ǤŠ‡†‡’ƒ”–‡–ǯ• main function is to regulate and supervise the insurance industry. The process of enacting related insurance regulation is a humble one. It starts with proposing needed regulations which are then drafted and submitted to the public for comments.327 The final step occurs when SAMA reviews the regulation and issues it.328 The supervision process also includes monitoring the market, regulation

‘’Ž‹ƒ ‡ǡ ƒ† ‹•—”ƒ ‡ ‘’ƒ‹‡•ǯ ‡šƒ‹ƒ–‹‘ –ƒ‹‰ ‹nto account the risk profile of the companies.329

4.2.2 The Cooperative Insurance Law and Related Regulations

The CIL consists of twenty-five articles, and its by-laws consist of 84 articles.330 The main goal of the CIL is to define the scope of regulation of the insurance business and its requirements, as well as to specify the insurance activities subject to the Law.331 Moreover, the CIL regulates any profession related

326 SAUDI ARABIAN MONETARY AGENCY, http://www.sama.gov.sa. 327 Id. 328 Id. 329 Id 330 Cooperative Insurance Law; Implementing Regulations. 331 Cooperative Insurance Law.

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to insurance, such as brokers and actuaries.332The law also provides rules for statutory deposit, investments, technical provisions, asset valuation and solvency margin.333 Understanding how the law actually regulates the insurance business is important in order to recognize the ongoing insurance debate.

Š‡   •–ƒ–‡• ‹ ‹–• ˆ‹”•– ƒ”–‹ Ž‡ –Šƒ–ǣ Dzȏ‹Ȑ•—”ance in the Kingdom shall be undertaken through registered insurance companies operating in a cooperative manner as it is provided within the article establishment of the National Company for Cooperative Insurance promulgated by Royal Decree M/5 dated 17/5/1405 H, and ‹ƒ ‘”†ƒ ‡™‹–Š–Š‡’”‹ ‹’Ž‡•‘ˆ •Žƒ‹ Šƒ”‹ǯƒǤdz334 By its language, this article is clearly addressing Islamic insurance. The law defines insurance as a mechanism of contractually shifting the burden of pure risks by pooling them.335

The law specifies that the business of insurance should be undertaken by a registered company operating in a cooperative manner in accordance with the principles of Islamic Law.336 SAMA is responsible for receiving the applications from insurance companies and inspecting them to ensure that they meet SAMA rules before issuing a license.337 Every insurance company, therefore, is incorporated through a licence issued by royal decree after the issuance of a resolution by the

332 Cooperative Insurance Law. 333 Š‡‘‘’‡”ƒ–‹˜‡ •—”ƒ ‡ƒ™†‡ˆ‹‡•–Š‡•–ƒ–—–‘”›†‡’‘•‹–‘””‡•‡”˜‡•ƒ•ǣDzȏ’Ȑ‡” ‡–ƒ‰‡‘ˆ ’”‘ˆ‹––Šƒ–ƒ ‘’ƒ›—•–•‡–ƒ•‹†‡ƒ•’”‘˜‹†‡†—†‡””–‹ Ž‡ȋͳͷȌ‘ˆ–Š‡ƒ™ǤdzƒŽ•‘Ǣ•‘Ž˜‡ › ƒ”‰‹™Š‹ Š–Š‡DzȏȐ‹‹—•–ƒ†ƒ”†‘ˆˆ‹ƒ ‹ƒŽŠ‡ƒŽ–Šˆ‘”an insurance or reinsurance company, ™Š‡”‡ƒ••‡–•‡š ‡‡†Ž‹ƒ„‹Ž‹–‹‡•Ǥdz 334 Cooperative Insurance Law. 335 Implementing Regulations, art. 1. 336 Cooperative Insurance Law, art. 1. 337 Cooperative Insurance Law, art. 2 (1).

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Council of Ministers upon recommendation from the Minister of Commerce and

Industry.338

Š‡†‡ˆ‹‹–‹‘ ‘ˆƒDz‹•—”ƒ ‡ ‘’ƒ›dz‹• Ž‡ƒ”Ž›‡•–ƒ„Ž‹•Š‡†„›–Š‡ Žƒ™ǡ

•–ƒ–‹‰ Dzȏ–ȐŠ‡ ‹•—”‡” ‹• ƒ ‹•—”ƒ ‡ ‘’ƒ› –Šƒ– ƒ ‡’–• ƒ ‹•—”ƒ ‡ ‘–”ƒ –

†‹”‡ –Ž› ˆ”‘ –Š‡ ‹•—”‡†Ǥdz339 The CIL requires that three factors be in place to incorporate an insurance company: (i) the insurance business must be undertaken through a public joint stock company, owned by shareholders, (ii) the purpose of the company must be to engage in insurance or reinsurance activities, and (iii) the

‘’ƒ›ǯ• ƒ’‹–ƒŽ•Š‘—Ž†‘–„‡Ž‡••–ŠƒͳͲͲǡͲͲͲǡͲͲͲˆ‘”‹•—”ƒ ‡ ‘’ƒ‹‡• or SR 200,000,000 for reinsurance companies.340 The insurance company, therefore, is established as a business owned by shareholders. The law does not provide a room for other forms of insurance companies such as mutual insurance companies, which are owned by policyholders.

More importantly, the CIL requires insurance companies to create two accounts, one for the shareholders and another for the insured and insurance operations.341 ‘”‡‘˜‡”ǡ ‘’ƒ‹‡•—•–Dzȏ‡Ȑ•–ƒ„Ž‹•Šƒˆ‘”—Žƒˆ‘”–Š‡†‹•–”‹„—–‹‘

‘ˆ –Š‡ •—”’Ž—• „‡–™‡‡ –Š‡ ’‘Ž‹ ›Š‘Ž†‡”• ƒ† –Š‡ •Šƒ”‡Š‘Ž†‡”•Ǥdz342 The law stipulated the formula as 10% of the net surplus distributed to the policyholders

338 Cooperative Insurance Law, art. 3. 339 Implementing Regulations, art. 1. 340 Cooperative Insurance Law, art. 3. 341 Cooperative Insurance Law, art. 2. 342 Cooperative Insurance Law, art. 2.

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†‹”‡ –Ž› ‘”ǡ ‹•–‡ƒ†ǡ ƒ †‡ ”‡ƒ•‡ ‹ –Š‡ ‹•—”‡†•ǯ ’”‡‹— ˆ‘” –Š‡ ‡š– ›‡ƒ”Ǥ343 The

”‡ƒ‹‹‰ͻͲΨ‘ˆ–Š‡‡–•—”’Ž—•‰‘‡•–‘–Š‡•Šƒ”‡Š‘Ž†‡”•ǯƒ ‘—–Ǥ344

The Cooperative Insurance Law created a special insurance dispute

resolution mechanism providing for a specialized jurisdiction that is limited to

insurance related matters.345 Article 20 of the CIL provides a process for the

settlement of insurance disputes.346 The insurance business is finally able to hear

insurance cases and apply insurance law far from a judicial jurisdiction.347

There are additional regulations that also apply to the insurance. For

example, the Cooperative Health Insurance Law348 applies to health insurance

ƒ––‡”•Ǥ ’‘”–ƒ–Ž›ǡ –Š‡ ‘’ƒ›ǯ• ƒ™349 ‹• ‘•‹†‡”‡† –Š‡ Dz„ƒ  —’dz ’‹‡ ‡ of

Ž‡‰‹•Žƒ–‹‘—•‡†–‘ˆ‹ŽŽ‹–Š‡‰ƒ’•‹‹•—”ƒ ‡ ‘’ƒ‹‡•ǯ’”‹˜ƒ–‡”‡‰—Žƒ–‹‘•ǤŠ‹•

stems from the Cooperative Insurance Law, which states in article twenty-four that

Dz–Š‡ ‘’ƒ‹‡• ƒ™ •ŠƒŽŽ „‡ ƒ’’Ž‹ ƒ„Ž‡ ‹ ƒŽŽ ”‡Ž‡˜ƒ– ƒ––‡”• ‘– ‡š’”‡••Ž›

refere ‡†Š‡”‡‹‹–Š‡™ƒ›‹–‡‡–•–Š‡–›’‡‘ˆ–Š‡•‡ ‘’ƒ‹‡•Ǥdz350

4.2.3 The Impact and Analysis of the Law

There is no doubt that regulation of the Saudi insurance industry was a positive development. The Saudi insurace market has shown signficant growth, for

343 Implementing Regulations, art. 70. 344 Implementing Regulations, art. 70. 345 Cooperative Insurance Law, art. 20. 346 Cooperative Insurance Law, art.20. 347 See infra § 4.5. 348 Royal Decree No. M/10 1/5/1420H (1999), Nizam al-–ƒǯ‹ƒŽ-•ƒǯŠ‹ƒŽ-–—ƒ™ǯ‹ȏ‘‘’‡”ƒ–‹˜‡ Health Insurance Law] (Saudi Arabia). 349 Royal Decree No. M/6, 22/3/1385H (1965), Nizam Al-shirkat [Companies Law] (Saudi Arabia). 350 Cooperative Insurance Law, art. 24.

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the economy in general, but specifically in the financial sector. Today, the total underwriting premium is worth SR 21 billion, 351 compared to SR 6.9 billion in 2006, according to the first-ever issued insurance report.352 Such a large increase in only five years shows that the insurance market can be an effective tool for the health of the Saudi economy.

The Cooperative Insurance Law also provides an opportunity for formerly illegal insurance companies operating in the country to operate legally as part of the new regulated system. Indeed, right after enacting the law, SAMA reached out to all the existing insurance companies operating in the Saudi market and asked that they comply with the law within a specific time frame.353 In 2008, most of these

‘’ƒ‹‡•‡–‡”‡†–Š‡ƒ”‡–ƒˆ–‡”Šƒ˜‹‰ ‘’Ž‡–‡†ǯ•”‡“—‹”‡‡–•Ǥ354 This allowed for a greater number of insurance companies and added to the mix of insurance companies with long-term experience in the market.

Moreover, the CIL ’”‘˜‡† ƒ ‰”‡ƒ– ‘’’‘”–—‹–› –‘ •–”‡‰–Š‡ –Š‡ ‘—–”›ǯ• economy, as foreign investors can now safely insure given the reduced difficulties

351 SAUDI ARABIAN MONETARY AGENCY, INSURANCE SUPERVISION DEPT. , SAUDI INSURANCE MARKET SURVEY REPORT 6 (2012), available at http://www.sama.gov.sa/sites/samaen/Insurance/InssuranceLib/SUR_KSA%20Market%20Report_ 2012_English.pdf [hereinafter SAUDI INSURANCE MARKET REPORT 2012]. 352 SAUDI ARABIAN MONETARY AGENCY, INSURANCE SUPERVISION DEPT. , SAUDI INSURANCE MARKET SURVEY REPORT 1 (2007), available at http://www.sama.gov.sa/sites/samaen/Insurance/InssuranceLib/Sur_4600_R_InsuaMarketSurvey2 007_En_2008_06_04_V1.pdf [hereinafter SAUDI INSURANCE MARKET REPORT 2007]. 353 Royal Decree No. 3120, 4/3/1426H (2005) (Saudi Arabia) (requiring compliance by March 11, 2008). 354 EXIT PLAN TO BE FOLLOWED BY UNLICENSED INSURERS WORKING IN THE KINGDOM OF SAUDI ARABIA (2007), available at: http://www.sama.gov.sa/sites/samaen/Insurance/InssuranceLib/CC_4600_C_ExitStratigy_En_2007_ 12_24_V1.pdf.

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with insurance contract enforcement. The CIL provided an additional advantage in that it substantially aided the country in entering into the World Trade Organization

ȋDzdzȌ‹ʹͲͲͷǤ355 Lastly, the Cooperative Insurance Law enabled Saudi citizens to benefit from the option of having insurance coverage.356

The advantages provided by the Cooperative Insurance Law constitute a

research topic in and of itself. Yet, the legitimacy of the law raises serious issues.

Clearly, the Saudi insurance industry is affected by its Islamic underpinnings, most

notably because of the controversies related to insurance under Islamic law.

4.3 The Cooperative Insurance Law Debate and Issues From Non-profit to For-profit

Because the focus here is on insurance in Saudi Arabia, it is important to

explain the insurance model from the Saudi perspective. Saudi Arabia's Ulema

suggested the cooperative-ƒǯƒ™—‹ model,357 which is an alternative type to the

conventional insurance.358 As mentioned before, the ƒǯƒ™—‹ model consists of a

group of people that contribute into one pool with the intention that the donations

will protect members of the group against future risks that might befall any

participant. This means that the insured and the insurer are in some ways the same

person. The company, or the manager, manages this pool in exchange for a

management fee. Any surplus is distributed back to the contributors. The idea of the

355 Press Release, World Trade Organization, WTO General Council Successfully Adopts Saudi ”ƒ„‹ƒǯ•–‡”•‘ˆ ‡••‹‘ǡ‘˜ǤͳͳǡʹͲͲͷǡavailable at http://www.wto.org/english/news_e/pres05_e/pr420_e.htm. 356 Cooperative Insurance Law. 357 See Fatwa no. 55; and Fatwa ‘Ǥͷͳȋ•–ƒ–‹‰–Šƒ– •Žƒ‹ ‹•—”ƒ ‡„‡ƒ‡†ƒǯƒ™—‹ȌǤ 358 Id.

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donation must be included in the contract, because under Islamic law the intention of donating constitutes a payment without expecting any profit. Therefore, this type of insurance is intended only to insure risk and not to make a profit.

Over time, however, the idea of the ƒǯƒ™—‹ model has shifted from a non- profit approach to a more commercial one. The CIL establishes a new model that requires the insurance company to be a joint-stock company. The CIL chose the name ƒǯƒ™—‹ǡ Dz ‘‘’‡”ƒ–‹˜‡ǡdz ‹•—”ƒ ‡ –‘ †‡• ”‹„‡ –Š‡ ‹•—”ƒ ‡ „—•‹‡••Ǥ Š‹• name is similar to the name that the Ulema suggested. However, the CIL was enacted as a legally binding piece of legislation, not just an Islamic opinion. This transition has generated significant debate within Saudi society.

The main issue raised in the debate is that the first article of the CIL states that insurance shall be sharia-compliant. The CIL, however, did not provide any definitions or explanation of what constitutes Islamic insurance. Some Islamic scholars have interpreted this to mean that the CIL shall adopt the Ulema model or include Islamic rules.

4.3.1 ‘†‡”ƒ—†‹ •Žƒ‹  Š‘Žƒ”•ǯ‹‡™‘–Š‡ 

‡™ •Žƒ‹  • Š‘Žƒ”• Šƒ˜‡ ™”‹––‡ ƒ„‘—– –Š‡ ƒ—†‹ ”ƒ„‹ƒǯ• ‹•—”ƒce regulations in Saudi Arabia. Among the few scholars who have, Sheikh Abdulla Bin

Suleiman Al-ƒ‡ǯƒ and Dr. Yousef Abdullah Al Shubaily are the most prolific. Their views about insurance differ. Generally, Sheikh Al-Mane'e believes that Islamic

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insurance and conventional insurance should be allowed.359 Unlike Al-ƒ‡ǯ‡ǡ Al

Shubaily believes that conventional insurance should be prohibited and supports only Islamic insurance. Today, most of Islamic scholars in Saudi Arabia are in favor of one or the other of these opinions.

Some Islamic scholars conclude that the CIL and the practices of insurance companies are contradicting Islamic insurance. Sheikh Al Shubaily, Islamic law professor and a sharia member of a number of Islamic financial institutions, claims that CIL is not sharia-compliant.360 In particular, Al Shubaily argues that the CIL does not address Islamic insurance or its rules.361 He claims that the definitions contained in the CIL are basically definitions that apply to conventional insurance,362 since insurance ‹•†‡ˆ‹‡†ƒ•ƒDzȏȐ‡ Šƒ‹•‘ˆ ‘–”ƒ –—ƒŽŽ›•Š‹ˆ–‹‰

„—”†‡•‘ˆ’—”‡”‹••„›’‘‘Ž‹‰–Š‡ǡdz363 and an insurance policy is defined as a

DzȏŽȐ‡‰ƒŽ †‘ —‡–Ȁ ‘–”ƒ – ‹••—‡† –‘ –Š‡ ‹•—”‡† „› –Š‡ ‹•—”‡” •‡––‹‰ ‘—– –Š‡ terms of the contract to indemnify the insured for loss and damages covered by the

’‘Ž‹ › ƒ‰ƒ‹•– ƒ ’”‡‹— ’ƒ‹† „› –Š‡ ‹•—”‡†Ǥdz364 Also, the CIL defines the contribution (premium) ƒ• ƒ DzȏƒȐ‘—– offered by the insured to the insurer in

‡š Šƒ‰‡ ˆ‘” –Š‡ ‹•—”‡”ǯ• ƒ ‡’–ƒ ‡ –‘ ‹†‡‹ˆ› –Š‡ ‹•—”‡† ˆ‘” Ž‘•• †ƒƒ‰‡•

359 Both Commercial and Cooperative Insurance are Halal, supra note 231. 360 Sheikh Dr. Yousef Abdullah Al Shubaily is a faculty Member for the Comparative Jurisprudence Department at the High Institute of Judiciary. He also is a sharia expert in Islamic economy and sharia advisor to a number of Islamic financial institutions in Saudi Arabia and several countries. Al Shubaily has a website that includes his fatwas and research on Islamic law. See SHUBILY.COM, http://www.shubily.com/home.php. 361 Sheikh Dr. Yousef Abdullah Al Shubaily, Fatwa al'ast'thmar fie shirkat Alta'min [Fatwa on Investing in Insurance Company], SHUBILY, available at http://www.shubily.com/index.php?news=15. 362 Id. 363 Implementing Regulations, art.1. 364 Al Shubaily, supra note 361.

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”‡•—Ž–‹‰†‹”‡ –Ž›ˆ”‘ƒ ‘˜‡”‡†”‹•Ǥdz365 Al Shubaily considers these definitions as being unrelated to Islamic insurance.366 Definitions related to Islamic insurance, he argues, would be based on shared responsibility among the insured and the compensation of loss paid by them.367 Additionally, the insurance company should operate as a manager of the pool only in the context of Islamic insurance.368

However, according to the above definition, the insurer pays the compensation in return for the premium, which is considered to be conventional insurance.369 He

‡š’Žƒ‹•–Šƒ–‹ •Žƒ‹ ‹•—”ƒ ‡ǡ–Š‡ ‘’‡•ƒ–‹‘‹•’ƒ‹†„›–Š‡‹•—”‡†ǯ•ˆ—†ǡ which is owned by the insured.370 The company should only manage the insurance pool.371 The Ulema fatwa explain, under the Islamic insurance principle, that the company should not make a profit.372 This is not because profit is forbidden but because the contract becomes commutative and therefore, riba and gharar are present.

Al-Shubaily also points to the fact that the CIL allows for conventional life insurance.373  ‘”†‹‰–‘–Š‡ ǡDz”‘–‡ –‹‘ƒ†ƒ˜‹‰• •—”ƒ ‡dz is a product

–Šƒ–Dzȏ’Ȑ”‘˜‹†‡•‹†‹˜‹†—ƒŽ‘”‰”‘up coverage for death related consequences, and permanent and partial disability with a savings / retirement plan for an additional

365 Implementing Regulations, art.1. 366 Al Shubaily, supra note 361. 367 Id. 368 Id. 369 Id. 370 Id. 371 Id. 372 Fatwa no. 51. 373 Al Shubaily, supra note 361.

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’”‡‹—’ƒ‹†„›–Š‡‹•—”‡†Ǥdz374 Al-Shubaily considers this a form of riba, because the insured gives money and expects compensation in the future.375 Moreover, he believes that the CIL requires an insurance company to invest in government and foreigner bonds to meet its obligations.376 Also, this type of investment is based on a fixed interest rate, which is prohibited by Islamic law.

Al-Shubaily did not miss the opportunity to criticize the most controversial article in the law. Article 70 •–ƒ–‡•–Šƒ–ǣDzͳͲΨ‘ˆ–Š‡‡–•—”’Ž—••ŠƒŽŽ„‡†‹•–”‹„—–‡† to the policyholders directly, or in the form of a reduction in premiums for the next

›‡ƒ”ǤŠ‡”‡ƒ‹‹‰ͻͲΨ‘ˆ–Š‡‡–•—”’Ž—••ŠƒŽŽ„‡–”ƒ•ˆ‡””‡†–‘–Š‡•Šƒ”‡Š‘Ž†‡”•ǯ

‹ ‘‡•–ƒ–‡‡–Ǥdz377 He argues that, to make insurance Islamic-compliant, the net surplus must be reserved for the policyholders.378 He goes further to express his concern that the CIL does not adhere to Islamic law and to the first article requiring insurance to be Islamic.379 He believes that insurance as sold in Saudi Arabia is

ƒˆˆ‡ –‹‰—•Ž‹•ǯ„‡Ž‹‡ˆ•ǡƒ•–Š‡›„‡Ž‹‡˜‡‹•—”ƒ ‡‹•ˆ‘”„‹††‡Ǥ380

On the other hand, Sheikh Al-ƒ‡ǯ‡ does not criticize the CIL; instead he states that both Islamic insurance and conventional insurance are permissible. The opinion of Sheikh Al-ƒ‡ǯ‡ is very highly respected in Saudi society, as he is one of

374 Implementing Regulations, art.1. 375 Al Shubaily, supra note 361. 376 Id. 377 Implementing Regulations, art. 70. 378 Al Shubaily, supra note 361. 379 Id. 380 Id.

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the oldest members of the Council Senior Ulema.381 He is also a board member of several insurance companies,382 which indicates that such companies are in compliance with Islamic law.

Al-ƒ‡ǯ‡ǡ‹Š‹•‘’‹‹‘ǡƒ”‰—‡•–Šƒ– •Žƒ‹ ‹•—”ƒ ‡ǡƒ•‹–’”ƒ –‹ ‡†–‘†ƒ›ǡ is basically functions as conventional insurance.383 He believes that the cooperation component, which is said to be available in cooperative insurance and not in conventional insurance, is incorrect.384 Participants do not intend in fact to cooperate; the cooperation occurs unintentionally, which is identical to conventional insurance.385 He also claims that donation, as a fundamental principle of Islamic insurance, is not applicable. He explains that in donation setting, the donor has the right to refuse to donate at any time.386 However, under Islamic

‹•—”ƒ ‡ ‘’ƒ›ǯ’”ƒ –‹ ‡•ǡ‹ˆ–Š‡’ƒ”–‹ ‹’ƒ–ˆƒ‹Ž‡†–‘’ƒ›–Š‡†‘ƒ–‹‘-premium, his right to compensation ends.387 Moreover, Al-ƒ‡ǯ‡ƒ”‰—‡•–Šƒ––Š‡ƒ••—’–‹‘ that interest, uncertainty and gambling exist in conventional insurance implies that they are present in the Islamic insurance as well.388 For example, he explains that in

Islamic insurance the insured pays the premium, an amount less than what the

381 See His Eminence Shaykh `Abdullah Al-ƒ‡ǯƒ, SAUDI ARABIA GENERAL PRESIDENCY OF SCHOLARLY RESEARCH AND IFTA, http://www.alifta.net/Fatawa/MoftyDetails.aspx?ID=6 for more information about the scholar. 382 i.e., (NCCI-Tawuniya). 383 Al-Mane'e, supra note 269. 384 Id. 385 Id. 386 Id. 387 Id. 388 Id.

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insured would receive in the event of loss.389 The premium is paid in advance, and the compensation is due later, which is considered riba.390

Sheikh Abdul- Mohsen Al- Obeikan also believes that insurance in general is permissible.391 He explains that under Islamic law the norm in contracts and transaction is permissibility, unless rendered illegal by sharia.392 However, Al-

„‡‹ƒ†‹• —••‡•–Š‡ ǯ•Ž‡‰ƒŽ‹–›ˆ”‘ƒ†‹ˆˆ‡”‡–’‡”•’‡ –‹˜‡Ǥ ‡ƒ”‰—‡•–Šƒ–‹ˆ

Islamic scholars have disagree on a subject under Islamic law, which is the case in insurance,393 then the king or the ruler has the right to choose one of the opinions based on what is best for society.394 ‡‡š’Žƒ‹•–Šƒ–—†‡” •Žƒ‹ Žƒ™ǡ–Š‡”—Ž‡”ǯ• opinion would resolve the conflict.395 Therefore, the ruler depends on one of these opinions that insurance is permissible, which is also based on •Žƒ‹  • Š‘Žƒ”•ǯ views, to enact the CIL.396

•Žƒ‹ • Š‘Žƒ”•ǯ˜‹‡™•‘‹•—”ƒ ‡ƒ†™Š‡–Š‡”‹–‹•’‡”‹••‹„Ž‡Šƒ˜‡‘–

”‡ƒ Š‡† ‘•‡•—•Ǥ Š‡ ˜ƒ”‹‡–› ‘ˆ •Žƒ‹  • Š‘Žƒ”•ǯ fatwa has increased the confusion in the insurance industry. For example, Al-Shubaily is a sharia board member of the Al Jazira Takaful Company.397 Š‹•‹•—”ƒ ‡ ‘’ƒ›ǯ•activities are conducted under a protection and savings insurance scheme, which is the same type

389 Id. 390Id. 391 MARWAN ISMAIL, ALTA'MIN MN ALMSA'OULIAH A'LA HWADTH ALSYARAT FI ALMMLKAH ALA'RBIAH ALSA'OUDIAH, ALFATH LTABAHA Wǯ ALNSHER [INSURANCE CAR LIABILITIES IN SAUDI ARABIA] 153-156 (2006). 392 Id. 393 Id. 394 Id. 395 Id. 396Id. 397 Shariah Board, AL JAZIRA TAKAFUL, http://www.ajt.com.sa/sboard.html.

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that Al-Shubaily disagrees with, as it includes riba.398 This company distributes 90% of its surplus to the shareholders under Article 70 of the CIL bylaws, instead of distributing the surplus to the policyholders.399 One might wonder why Al-Shubaily is still a member on the sharia board if the company operates according to the CIL.

This means that either some board members believe that the Saudi law is sharia- compliant, or they are contradicting themselves. Claiming that the CIL, which regulates insurance companies, is not sharia compliant and then becoming a member of a non- ‘’Ž‹ƒ–‹•—”ƒ ‡ ‘’ƒ›ǯ•sharia board could be considered contradictory.

Islamic scholars are vitally important in the Islamic rule-making process.

However, it is important that Islamic scholars be educated in finance and other relative fields, to be able to understand the technical aspect of the rules and therefore issue a relevant fatwa. Random insurance fatwa could convince some

Muslims to forego buying compulsory insurance, for example, which might subject them to penalties for violating the law.

Most fatwa prohibits insurance generally without considering that insurance covers different types of risks and every risk has its characteristic. A couple of

Islamic scholars distinguished between compulsory insurance and voluntary insurance. Sheikh Al-Shathry allows compulsory auto insurance, if the ruler believes

398 PROSPECTUS OF JAZIRA TAKAFUL TAǯWUNI COMPANY, http://www.ajt.com.sa/freport.pdf. 399 Implementing Regulations, art 70.

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mandating such a policy will bring benefit to the society.400 Such a distinction give the people the assurance that these companies provide policies that are sharia- compliant.

Who should decide the rules of Islamic insurance? This next section discusses one of the international Islamic financial institutions that issued rules related to the

Islamic insurance business.

4.3.2 International Islamic Scholars Contribution to Islamic Insurance

Recently there has been an increase interest in developing principles and structures for Islamic insurance. The insight of the Malaysian Takaful Law and the demand on Islamic insurance products around the world increase Islamic scholars interest in adopting Islamic insurance rules. Worldwide, international Islamic financial institutions have been expressing interest in developing a set of principles for Islamic insurance. One of these institutions is the Accounting and Auditing

Organization for Islamic Financial Institutions (AAOIFI).401

The AAOIFI aims to standardize the international Islamic finance rules,

‹ Ž—†‹‰ ”—Ž‡• ”‡Žƒ–‹‰ –‘ ‹•—”ƒ ‡Ǥ Š‡  ǯ• sharia board consists of a number of Islamic scholars from different countries.402 This makes their decisions

400 Sheikh Al-Shathry, la yajoz Al-–ƒŠǯ”‘„Ž-–ƒǯ‹Ž-ilzami [Compulsory Insurance Evasion is Forbidden], ISLAM FEQH, http://www.islamfeqh.com/News/NewsItem.aspx?NewsItemID=4590. 401 ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS (AAOIFI), http://www.aaoifi.com/aaoifi/. 402 Id.

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and perspectives more diverse. The AAOIFI has issued Sharia Standards for Islamic insurance institutions403 that have been adopted around the world.404

The standards cover insurance from different aspects and suggest rules that insurance companies should follow. The AAOIFIǯ•Sharia Standards articulate nine principles that Islamic insurance businesses should follow. These principles must be

•–ƒ–‡†‹–Š‡‹•—”ƒ ‡ ‘’ƒ›ǯ• Šƒ”–‡”‘”‹–Š‡‹•—”ƒ ‡’‘Ž‹ ‹‡•in order to be classified as Islamic insurance.405 These principles are the following: (1) donation commitment, whereby the insured pays the premium as a donation to the insurance fund for the purpose of compensation and also is liable in case of a deficit;406 (2) two separate accounts must be created, one for the company and the other for the policyholder (the insurance account);407 (3) the company must act as an agent in terms of managing the insurance company and as an agent or entrepreneur in investing the company assets;408 ȋͶȌ Dz–Š‡ ‹•—”ƒ ‡ ƒ ‘—– ‹• ‡–‹–Ž‡† –‘ –Š‡ insurance assets and their returns on investment, and should bear the liabilities

”‡Žƒ–‹‰ –‘ –Š‡•‡ ƒ••‡–•ǡdz409(5) the underwriting surplus can be used for the advantage of the policyholders such as to reduce the insurance premium or to increase the insurance fund, however, the company does not share any surplus;410

403ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS, SHARIǯA STANDARDS 365 (2010) [hereinafter AAOIFI SHARIǯA STANDARDS]. 404 NORIPAH KAMSO, INVESTING IN ISLAMIC FUNDS: A PRACTITIONER'S PERSPECTIVE 192 (2013). 405 AAOIFI SHARIA STANDARDS, supra note 403, at 466-67. 406 Id. 407 Id. 408 Id. 409 Id. 410 Id.

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(6) in case of liquidation of a company, the insurance assets and underwriting surplus must be spent on charity;411 (7) policyholders might participate in the insurance operations management as a supervisor or as a representative on the board of directors;412 (8) all insurance activities and investments must comply with

Islamic law;413 and (9) the company must appoint a sharia advisory board and

”‡•’‡ ––Š‡„‘ƒ”†ǯ•fatwa.414

The AAOIFI considers the principles the fundamental disparity between

Islamic insurance and conventional insurance. Therefore, insurance companies must articulate them in order for the premium to be considered a donation and thus the policy to be Islamic.415

The AAOIFI standards are a sort of codification of the Islamic insurance rules approved by globally well-known religious and insurance scholars. Some Saudi

Islamic scholars, including Al-Shubaily, are members of the AAOIFI. Such codification is useful for consumers interested in identifying Islamic insurance.

4.4 Insurance Dispute Resolution

Until recently, there was no proper mechanism to dispute an insurance case.

There The Sharia Court, authorized to hear any contract matter, has refused in many instances to enforce insurance contracts. In such disputes, the judges referred to the

411 Id. 412 Id. 413 Id. 414 Id. 415 AAOIFI SHARIA STANDARDS, supra note 403, at 477-87.

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fatwa that prohibits insurance (as it defines it to be contrary to Islamic law) and therefore considered the insurance contract invalid.416

Subsequently, insurance disputes were resolved through the Ministry of

Commerce. In 1978, the Saudi regulator authorized the Ministry of Commerce to hear insurance disputes.417 However, when the government enacted the arbitration law in 1983, some cases were referred to arbitration, as that seemed to be the only viable conflict resolution arena. However, this changed with the 2005 announcement of the creation of the Committee for the Settlement of Insurance

Disputes (the Dz‘‹––‡‡dzȌǤ

The establishment of an independent insurance committee was the solution reached by the Saudi legislators to provide a mechanism to hear insurance disputes outside of the traditional judicial system. However, this action improved the insurance industry for only a short time; that is, until the question of legality of insurance appeared again within the new committee.

4.4.1 The Insurance Dispute Resolution Committee

The General Secretariat for Insurance Disputes was established in 2006 under SAMA supervision.418 The Secretariat is responsible to undertake all technical and administration roles regarding insurance cases.419 Š‡ ‡ ”‡–ƒ”‹ƒ–ǯ• ƒ‹

416 See infra § 4.5.2. 417 Andreas Haberbeck, Risk Sharing in an Islamic Society, 2 ARAB L.Q. 138, 145 (1987). 418 Ministry Resolution No. 1/1233, 3/2/1426H (2006), art. 4, AL-amanha Al-a'amah ll-jent Al-fasel ala Al-muokalfat we Al-muonaza'at Al-tam'iniah [The General Secretariat of the Committee of Insurance Disputes and Violation, Bylaws]. 419 Id. at art. 5.

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function is to receive insurance complains, study them, and provide legal opinions to the Committee.420

The Insurance Committee was initially established as a dispute resolution forum, able to hear all insurance matters.421 The Committee was comprised of three specialized members, at least one of them a lawyer.422 It consists of three branches in Riyadh, Jeddah and Dammam423, the most populous cities in Saudi Arabia.

The main functions of the Committee are: 1) to resolve disputes between the insurance companies and their customers or between the companies and other companies when these are subrogated in the rights of the insured person; and 2) to settle the violation of regulatory and supervisory instructions issued to insurance companies, reinsurance companies and other individuals practicing insurance.424

On the other hand, the CIL gave the Board of Grievances the power to review any decision of the Committee on appeal. As I mentioned in chapter one, the Board of Grievances is an administrative court, the superior court of the second branch of the Saudi judiciary system (the first being the General Court for all civil matters).

Both are intended to apply and enforce Islamic law. This means that similar outcomes have resulted from actions of the Board, which in some cases, have

420 Id. 421 ‘— ‹Ž‘ˆ‹‹•–‡”•ǡ‡•‘Ž—–‹‘‘Ǥ͹ͳǡͳ͸Ȁ͵ȀͳͶʹ͸ ȋʹͲͲͷȌǡ‡•Šǯ‹ŽŽŽǯŒ‹––ƒ•™‹‡–Ž‹œƒǯƒ– Ž–ƒǯ‹‹ƒȏ”‡ƒ–‹‘‘ˆ–Š‡ •—”ƒ ‡‹•’—–‡‘‹––‡‡ȐǤ 422 Id 423 Id. 424 ‘›ƒŽ‡ ”‡‡‘ǤȀ͵Ͳǡʹ͹ȀͷȀͳ͵Ͷ͵ ȋʹͲͳ͵Ȍǡ–ƒǯƒ†‡Žƒ†–ǯ‹‹‹œƒŽ–ƒǯ‹ǡʹͲǡʹʹ [Cooperative Insurance Law Amendment art 20, art 22] [Hereinafter Cooperative Insurance Law Amendment art 20, art 22].

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†‡ ‹†‡† –Šƒ– –Š‡ ‘‹––‡‡ǯ• †‡ ‹•‹‘• ™‡”‡ ‹˜ƒŽ‹† †—‡ –‘ –Š‡ ˆƒ – –Šƒ– –Š‘•‡ insurance companies violated Islamic rules and that the fatwa prohibits conventional insurance. Therefore, the regulator decided to exempt the Committee from being subjected to the judiciary system.425

4.4.2 Insurance Case (Bahri v. Al-Ahlia for Cooperative Insurance Company)

Bahri v. Al-Ahlia for Cooperative Insurance Company is one of the cases that influenced the regulator to amend the new law. The case is a simple auto insurance case, which was brought to the committee.426 In this case the insurance company did not want to pay out the damages of approximately USD $6,000 after a car accident involving the insured.427 The insurance company argued that they were not responsible for paying this amount by any law or contract because of the negligence of the insured in that he was driving over the speed limit.428 However, the

Committee found that the prime cause of the accident was not speed but rather the inadvertent and accidental collision due to crossing over onto the other side of the road, which is actually covered by the insurance policy.429 In the end, the committee decided that the insurance company must pay the damages from the car accident.430

The insurance company appealed to the Board of Grievances, hoping to argue

425 ‘›ƒŽ”†‡”‘ȀͳͶͺǡ͵ȀͳʹȀͳͶ͵ͳ ȋʹͲͳͲȌǡ•ǯ–ǯ–ŠǯƒŽŽǯŒ‹ƒ–Ž-–ƒǯ‹ȏ •—”ƒ ‡‘‹––‡‡ Exemption]. 426 Bahri v. Al-Ahlia for Cooperative Insurance Company, The Committee for the Settlement of Insurance Disputes, Case No. 261016, decision No. 44/R/1428H (2007) [hereinafter Bahri]. 427 Bahri at 2. 428 Id. at 2. 429 Id. at 4. 430 Id. at 5.

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against the initial judgment of the committee. On appeal, the car insurance company argued that when a driver is found negligent they should not be responsible for paying damages.431

Surprisingly, on appeal the Board of Grievances started asking unrelated questions. They demanded to know what percentage of profits was distributed from the assets of the insurance company, and in what way.432 The Board felt that the insurance company was not operating cooperatively because the percentage of profits distributed to the shareholders was 90% and the percentage of profits distributed to the policyholders was 10%.433 The Board of Grievances reviewed the case and the insurance policy and concluded that the insurance company did not adhere to the Cooperative Insurance Law because of the distribution of the surplus.434 The Board ruled that this was a violation because the insurance company should be managing only the insurance pool and should not seek such high profits.435 The Board believed that the insurance contract was a commutative contract instead of a donation into the pool or a contract of mutual gifting.436

The Board ruled that the insurance company engaged in conventional insurance activity that did not comply with Sharia law. Thus, the insurance contract

431 Al-Ahlia for Cooperative Insurance Company v. The Committee for the Settlement of Insurance Disputes, Diwan al-mazalim [Board of Grievances], Circle Seven, Decision No. 157/D/A/7, Case No. K/1/35 (2008) [hereinafter Al-Ahlia]. 432 Al-Ahlia at 6-7. 433 Id. 6-7. 434 Id. 6-7. 435 Id. at 7. 436 Id. at 7.

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in this case was ruled unlawful and thus void.437 The judges, in supporting their judgment, referred to the Ulema fatwa that was issued by the Senior Ulema regarding cooperative insurance and another fatwa issued by the Permanent

Committee on Fatwas. Finally, the Board cited resolution number 9 of the

International Council of Fiqh Academy. 438 According to the resolution the

Dz ‘˜‡–‹‘ƒŽ ‹•—”ƒ ‡ ‘–”ƒ – –Šƒ– ‹ Ž—†‡• ˆ‹š‡† ’”‡‹—• ‹• —Žƒ™ˆ—Ž —†‡”

Islamic law, because the contract has uncertainty gharar which invalidates the contract. Instead, the contract should be according to Islamic rules, which requires a

‘‘’‡”ƒ–‹˜‡‹•—”ƒ ‡ ‘–”ƒ –„ƒ•‡†‘†‘ƒ–‹‘ƒ†—–—ƒŽ ‘‘’‡”ƒ–‹‘Ǥdz439

Š‡‘ƒ”†ǯ• ‘ Ž—•‹‘™ƒ•–Šƒ––Š‡‹•—”ƒ ‡ ‘–”ƒ –„‡–™‡‡–he insured and the insurance company was void and thus could not be enforced.440 The

‘‹––‡‡ǯ• ’”‡˜‹‘—• †‡ ‹•‹‘ ™ƒ• ‘˜‡”–—”‡† ƒ• ƒ ˜‹‘Žƒ–‹‘ ‘ˆ ”–‹ Ž‡ ͳ ‘ˆ –Š‡

Cooperative Insurance Law, which states that insurance must be cooperative and sharia-compliant.441 Therefore, based only on these percentages of the financial statements and how the profit was accrued versus shared, the Board felt the insurance company was acting more like a profit-making corporation and less like the mutual aid society intended by a cooperative. As a result they reversed the decision of the committee, but on completely unexpected grounds.442 Since the insurance company was not sharia-compliant they now actually would not need to

437 Id. at 7-9. 438 Al-Ahlia at 7. 439 Id. at 7. 440 Id. at 9. 441 Cooperative Insurance Law, art. 1. 442 Al-Ahlia at 9.

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pay. This decision disregarded the nature of the accident and had no regard for

™Š‡–Š‡”‹–™ƒ•–Š‡†”‹˜‡”ǯ•ˆƒ—Ž–ǤŠ‡‘ƒ”†Šƒ•ƒŽ•‘–”‡ƒ–‡†‘–Š‡”‹•—”ƒ ‡ ƒ•‡• similarly.443

This interesting insurance case explains how strong is fatwa can be. In this case, the Board ruled according to the fatwa that prohibited conventional insurance practices, ignoring the fact that the insurance company was operating legally according to the CIL. Moreover, fatwa is not considered law, but when it comes to the traditional judiciary system, only Islamic law based on the interpretation of

Islamic scholars is applied.

As a result, In April of 2013, amendments to Article 20 and 22 of the

Insurance Cooperative Law reorganized the Committee into two levels.444 A first- instance committee would now have the power to hear any dispute arising out of an insurance contract, with the same functions mentioned above.445 An appellate committee was created to hear all decisions from the first-instance committee.446

This appellate committee also consists of three members specializing in Islamic law and insurance.447 Its decisions are final and thus not subject to any further appeal, including that of the Board of Grievances.448

443 See Diwan Al-mazalim [Board of Grievances], Circle Seven, Decision No. 58/D/A/7, Case No. k/1/761. 444 Cooperative Insurance Law Amendment, art. 20, art. 22. 445 Id. 446 Id. 447 Id. 448 Id.

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4.4.3 Issues within the Insurance Dispute

This recent development might finally solve the insurance dispute dilemma.

However, the Committee will face other problems. First, the insurance industry has issues with access to the Committee. The regulator has created only three committees, in three locations, meaning that anyone with an insurance dispute has to travel to one of these three Committees to seek resolution. As a practical matter, this causes the insured or even the insurer to vacate their claim; in the case such a claim is too minor to make traveling long distances worthwhile. For this reason, the regulator should make the insurance committee more easily reachable by anyone.

Second, the neutrality of the Committee Secretariat is questionable given that the person holding this position functions under SAMA supervision. This supervision might introduce bias as the Secretariat studies insurance cases and provides legal opinions. This is because SAMA also regulating the insurance companies, therefore, it takes into consideration the insurance industry which make the insured feels that the committee favoring the insurance companies.

Third, the appellate committee is not yet up and running. The appellate committee members have yet to be appointed; therefore, the cases that have been appealed are on hold, creating a delay in resolving insurance dispute.

4.5 An Evaluation of the Cooperative Insurance Law

The nature of the CIL is not purely conventional, as it is practiced worldwide, nor is it Islamic, as claimed by Islamic scholars. The CIL contains rules distinguishing it from conventional insurance law, which lean rules lean more

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toward Islamic insurance principles. For example, the CIL requires insurance companies to have two accounts, one for the shareholders, and another for policyholders and insurance operations.449 The CIL also undertakes the principle of surplus distribution, which is that up to 10% of the net surplus goes to the policyholders.450 These factors supposedly allow a form of semi-Islamic insurance, or at least insurance distinct from conventional insurance. Underwriting surplus distribution is one of the key differences between conventional insurance and

•Žƒ‹ ‹•—”ƒ ‡Ǥ  ‘˜‡–‹‘ƒŽ‹•—”ƒ ‡ǡ–Š‡ ‘’ƒ›ȋƒ†–Š—•–Š‡ ‘’ƒ›ǯ• shareholders) owns the surplus.451 In Islamic insurance, the policyholders own the surplus if it is based on the wakala model, or such a surplus is shared with the company if it based on mudarabah rules.452 In addition, a separation between the

’‘Ž‹ ›Š‘Ž†‡”•ǯƒ†•Šƒ”‡Š‘Ž†‡”•ǯˆ—†•‹•required, in order to be able to distribute the surplus. Therefore, assuming the insurance company is based on mudarabah, the surplus is to be shared.453 Moreover, Insurance companies are to insure only risk that complies with Islamic law. Article 55 of the CIL states, generally, that insurance must not violate any rules or regulations.454 This generally means an insurance company cannot insure something that is violating the Saudi laws and thus Islamic law such as alcohol products.

Ž•‘ǡ ƒ”–‹ Ž‡ ͵Ͷ ”‡“—‹”‡• ‘’ƒ‹‡• –‘ Dz‡•–ƒ„Ž‹•Š ”‡‰—Žƒ–‘”› ‘’Ž‹ƒ ‡

449 Cooperative Insurance Law, art. 2 (2/a). 450 KHORSHID, supra note 113; Implementing Regulations, art. 70. 451 NETHERCOTT & EISENBERG, supra note 280, at 288. 452 Id. at 284-85; see also § 3.6. 453 Id. 454 Implementing Regulations, art. 54.

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department or appoint regulatory officers whose duty is to verify compliance with

ƒŽŽ ”‡‰—Žƒ–‹‘• ƒ† ”—Ž‡•Ǥdz455 This department should supervise all insurance activities to ensure that they comply with all related laws. The duty of the department seems to be similar to the role of sharia board in term of complying the company operation with regulations.

The role of a sharia advisory board is an important factor in establishing either an Islamic insurance company or any other Islamic financial institution. It is

‘•‹†‡”‡† –Š‡ „ƒ•‹  ‹•–”—‡– ˆ‘” –Š‡ ˜ƒŽ‹†ƒ–‹‘ ‘ˆ ƒ ‹•—”ƒ ‡ ‘’ƒ›ǯ• activities. Generally, the CIL does not include any specific rules about the sharia boards. However, in practice some of the Saudi insurance companies have established such rules.456 The sharia „‘ƒ”†ǯ• ˆ— –‹‘ ˆ‘ —•‡† ‘ •—’‡”˜‹•‹‰ –Š‡ insurance operations, investments, and approving insurance products. Solidarity

Takaful, which is a Saudi insurance company, claims that their sharia boards supervise all the insurance company activities.457 But there is not much room for the

Sharia board to exercise its responsibility because the CIL requires insurance companies to adhere to its rules and any other related laws

455 Implementing Regulations, art. 34. 456 Shariah Committee, NCCI-TAWUNIYA, http://www.tawuniya.com.sa/en/Home/AboutUs/ShariaCommittee/tabid/578/Default.aspx; see also Shariah Committee, SAAB TAKAFUL COMPANY. http://www.sabbtakaful.com/1/2/takaful-en/about- us/shariah-committee; see also Shariah Board, ALJAZIRA TAKAFUL TAǯWUNI COMPANY, http://www.ajt.com.sa/arabic/sboard.html. 457 About Solidarity Takaful Company, SOLIDARITY TAKAFUL COMPANY, http://www.sstc.com.sa/t/AboutUs.

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Conclusion

The financial system in Saudi Arabia is rather conventional. SAMA supervision and risk management are based on the international financial standards.458 For example, the banking sector does not distinguish between a commercial bank and an Islamic bank.459 In fact, SAMA has not issued any regulations or rules regarding Islamic finance. In contrast, the CIL adopts views leaning toward Islamic insurance. As has been illustrated here, the CIL adheres to the Islamic law and its principles.

The case of the CIL is somewhat different from any other country that applies some form of Islamic insurance law, or even conventional insurance law, in that it arguably is intended to apply to both systems. For instance, Malaysia has two insurance regulations: one Islamic and the other conventional.460 In this case, one can distinguish the rules between the two systems. The CIL generally does not specify whether it applies to conventional or Islamic insurance (and there are obviously no specific rules on Islamic insurance because the regulator did not enact such rules). However, the CIL is still considered by some Islamic scholars as Islamic.

This is reinforced by the argument that enacting specific regulations on Islamic insurance is necessary, because companies themselves can generate Islamic insurance rules by establishing within themselves a Sharia Advisory Board.

458 Mohamed A. Ramady, Evolving Banking Regulation and Supervision a Case Study of the Saudi Arabian Monetary, 2 INT'L J. OF ISLAMIC & MIDDLE E. FIN. & MGMT. 235, 237 (2009). 459 See infra ch. 5. 460 CENTRAL BANK OF MALAYSIA, LAW, POLICY AND GUIDELINE, http://www.bnm.gov.my/.

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Islamic insurance, from its name, has become a religious matter. The association of insurance with religion requires an interpretation to define insurance rules consistent with Islamic law. The risk that Islamic scholars face of prohibiting insurance is truly problematic, since Muslims believe that Islamic law is living law.461 Failure to submit to the Islamic law ‡ƒ•–Šƒ–›‘—ƒ”‡ ‘–”ƒ†‹ –‹‰ ‘†ǯ• law, and hence you are a sinner. Muslims maintain this concern throughout everyday life. In regard to insurance, Muslims are concerned with determining which of the various opinions issued by Islamic scholars they should follow.

The Council of Senior Ulema is responsible for researching any topic submitted to them according to Islamic law.462 However, the Council is not willing to draft an Islamic financial law or insurance law because their members believe only in Go†ǯ•Žƒ™ǤŠ‡”‡ˆ‘”‡ǡ–Š‡›–›’‹ ƒŽŽ›†‹• —••ƒ–‘’‹ ˆ”‘ƒ”‡Ž‹‰‹‘—•’‡”•’‡ –‹˜‡ only. The fatwa issued by the Ulema on insurance prohibited conventional insurance and suggested a simple structure of Islamic insurance.

It is important, therefore, to have a committee that includes different Islamic scholars and insurance lawyers to establish a mutually agreed upon, Islamic insurance. This committee would be able to look at insurance from different perspectives, religious and legal. The fatwa that prohibited insurance was issued 40 years ago. Today, insurance exists in Saudi Arabia as a practice and the industry is

461 E. ANN BLACK, HOSSEIN ESMAEILI & NADIRSYAH HOSEN, MODERN PERSPECTIVES ON ISLAMIC LAW XIV (2013). 462 See supra Ch.1.

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growing rapidly, and it is necessary to have comprehensive Islamic insurance framework that will regulate the growing insurance industry.

94

Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia

During the last decade, the Saudi economy, in general, and the insurance industry, in particular, have witnessed strong growth. The insurance market plays a vital role in Saudi economic growth. The insurance industry started growing shortly after the enactment of the Cooperative Insurance Law (CIL) in 2004,463 and has since become one of the largest in the Middle East. While different factors have played a role in this growth, the market still faces unusual challenges because the insurance products must comply with Islamic law. Moreover, the ambiguity and insufficient number of existing Islamic insurance rules have resulted in big challenges.

Some Islamic scholars have criticized the legality of the Saudi insurance industry under Islamic law, which has discouraged some from purchasing insurance policies. Some insurance companies have taken advantage of this situation and created Islamic sharia boards. On the other hand, Saudi society might have benefited from the introduction of insurance despite the fatwa prohibiting insurance.

Implementation of the Islamic insurance model is the main issue facing the Islamic

‹•—”ƒ ‡ ‹†—•–”›Ǥ ƒ‹ƒŽ ƒ••‹ •–ƒ–‡•–Šƒ–ǡ DzTakaful [the cooperative insurance scheme] was born into a world driven by regulations. These regulations contain onerous capital requirements, as they are designed to ensure that the insurer meets its obligations to the insured. Thus, the evolution of takaful has been affected by the

463 Cooperative Insurance Law.

Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia regulations within which it operates. In order for takaful to succeed, its implementation must be on a holistic basis, and, in particular, regulations must cater

–‘‹–•—‹“—‡ˆ‡ƒ–—”‡•Ǥdz464

This chapter analyzes the Saudi insurance market looking at the issue of sharia compliance to determine whether the Saudi insurance industry needs to be regulated to be more Islamic. This chapter is divided into five sections. The first section provides an overview of global insurance offerings. The second section focuses on the development of the Saudi Arabian market, covering both sides of the insurance business: insurance companies and the insured/customers. The third section discusses the challenges that face the Saudi insurance industry, focusing on sharia compliance and related issues that the Islamic insurance market is attempting to address. The fourth section deals with other Islamic insurance jurisdictionsȄMalaysia and BahrainȄto flesh out the differences among Islamic insurance systems and to pinpoint the lessons that can be learned from their experience. Finally, I will discuss the current situation in Saudi Arabia by comparing the insurance industry to the banking industry, both of which share similar characteristics and have also gone through sharia compliance issues. The conclusion synthesizes the main problems with suggestions on how they can be solved.

5.1 Overview of Islamic Insurance Industry

Islamic insurance products have spread all over the world, and Islamic insurance is now seen as a legitimate alternative to conventional insurance. The

464 Zainal Abidin Mohd Kassim, Principal-Agent Issues in Takaful, in TAKAFUL AND MUTUAL INSURANCE: ALTERNATIVE APPROACHES TO MANAGING RISKS 99 (Serap O. Gonulal, eds., 2013).

96 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia increasing number of Islamic insurance companies that have managed to compete with conventional insurance companies draws attention to the Islamic insurance model. The Islamic insurance model has gained attention due to a large number of

Islamic insurance companies that have emerged to compete with conventional companies thus causing more Muslim countries to adopt systems based solely on

Islamic insurance. For example, in 1979, Sudan was the first country to establish

Islamic insurance companies.465 Sudan, Iran and Saudi Arabia are the only countries that claim to have adopted an Islamic insurance system to date. Other countries, such as Pakistan, Bahrain, and Malaysia, have decided to adopt dual systems.466 This means that these countries have two different sets of insurance regulations. In 1984,

ƒŽƒ›•‹ƒ ‡ƒ –‡† –Š‡ ˆ‹”•– DzTakaful  –ǡdz467 which was the first step toward translating the idea of Islamic insurance into real law. These moves encouraged

Saudi Arabia to pronounce the fatwa that allowed Islamic insurance companies to operate.468 Thus, Saudi Arabia established the first government-owned insurance company, the National Cooperative Company for Insurance (NCCI - Tawuniya) in

1985.469

Despite the fact that the Malaysian insurance law was enacted 30 years ago, the establishment of Islamic insurance companies in the Muslim world has taken time. The Islamic insurance market grew slowly at first; the real boom occurred in

465 CIZAKCA, supra note 217, at 203. 466 See infra § 5.4. 467 Malaysia Takaful Act 1984. 468 Fatwa No. 55; see Fatwa No 51. 469 Establishment of the NCCI, supra note 316.

97 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia the mid-2000s.470 This resulted in an effort in recent years toward the development of Islamic insurance regulations. Several countries followed the Malaysian step, with

Saudi Arabia, Pakistan, Bahrain, United Arab Emirates, Brunei Darussalam, and

Qatar enacting either laws or rules related to Islamic insurance.471 Today, the

Islamic insurance market has spread to more than 34 jurisdictions.472

The growth of Islamic insurance has proliferated non-Muslim countries. For example, the United Kingdom believes it is benefiting from Islamic finance by providing more choices of financial services and fulfilling the needs of Muslims there.473 Islamic insurance has, in fact, been utilized by non-Muslims as well. The

United Kingdom, France and the Netherlands are competing to be the biggest

Islamic financial center in the world.474 Today, the United Kingdom is considered the biggest provider of Islamic financial products in non-Muslim countries.475Recently, conventional insurance companies have also been considering providing Islamic insurance products. A number of insurance companies have established an Islamic insurance business to attract Muslim customers. Large insurance companies, such as AIG, Zurich and AXA, are offering Islamic insurance products.476 AIG was the first

470 JAFFER, surpa note 209, at 4. 471 Takaful Laws, INTERNATIONAL COOPERATIVE AND MUTUAL INSURANCE FEDERATION, http://www.takaful.coop/index.php?option=com_content&view=article&id=71&Itemid=51. 472 TAKAFUL RE LIMITED, 6TH ANNUAL REPORT (2011), available at http://www.takaful- re.ae/process.php?file=doc/takaful+re+annual+report+2012+-+english.pdf. 473 HM TREASURY, THE DEVELOPMENT OF ISLAMIC FINANCE IN THE UK: THE GOVERNMENT'S PERSPECTIVE 12 (Dec. 2008), available at http://www.kantakji.com/media/7529/c61.pdf. 474 SCHOON, supra note 178, at 9. 475 Id. at 9. 476 AJMAL BHATTY, THE GROWING IMPORTANCE OF TAKAFUL INSURANCE 3 (Sept. 23, 2010), http://www.oecd.org/daf/fin/46116115.pdf.

98 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia insurance company to introduce Islamic insurance products in the U.S.477 This interest in providing Islamic insurance in non-Muslim countries indicates a strong demand for this type of product. Despite this, the consulting firm Ernst & Young reported that Islamic insurance constitutes only one percent of the global insurance market.478 The Islamic insurance market is considered very young globally, but in some Muslim countries it is either the largest or the only existing market, such as is the case in Saudi Arabia.

The rapid growth of the Islamic insurance market has created various challenges, which stem mainly from the regulations and the sharia compliance process. Also, differing rules across jurisdictions have caused some countries to hesitate in participating in the Islamic insurance market.

5.2 Development of the Saudi Insurance Market (Insurance Companies)

The global Islamic insurance industry is growing at an increasing rate, and

Saudi Arabia has played a major role. The development of the Saudi insurance market in a relatively short period of time deserves recognition. Until 2004, NCCI was the only insurance company registered in Saudi Arabia. However, the CIL laid out the steps needed for more insurance companies to join the market. By the end of

477 AIG Offers First Takaful Homeowners Insurance Product for U.S., INSURANCE JOURNAL, (Dec. 2, 2008), http://www.insurancejournal.com/news/national/2008/12/02/95930.htm. 478 News Release, Ernst & Young, Global Takaful market to reach US$25 Bn in 2015: EY (July 2011), http://www.ey.com/EM/en/Newsroom/News-releases/MENA-_Global-Takaful-market-to-reach- _US-25-Bn-in-2015--Ernst---Young.

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2012, Saudi Arabia had registered thirty-five insurance companies. 479 These companies are required to be listed publicly on the stock exchange market.480

According to a 2013 report published by Ernst & Young, the global gross Islamic insurance contributions were USD 11 billion by the end of 2012.481 Fifty-one percent of the global contributions were from the Saudi insurance market.482 In 2012, the

Saudi insurance market gross written premiums (GWP) reached SR 21.2 billion,483 over three times the amount reached in 2006, SR 6.9 billion.484 The average annual growth of total GWP was 21.5% over the four years preceding 2011.485

5.2.1 Types of Insurance Available in Saudi Arabia

Islamic insurance products cover types of risk similar to traditional insurance. There are minor differences in some Islamic insurance products, such as different names and policy features. The Cooperative Insurance Law classifies insurance into three types: (1) general insurance that includes accident and liability insurance,486 motor vehicle, property, marine, aviation, energy, and engineering;487

479 SAUDI STOCK EXCHANGE (TADAWUL) ANNUAL STATISTICAL REPORT (2012), http://www.tadawul.com.sa/static/pages/en/Publication/PDF/Annual_Report_2012_EN.pdf. 480 Cooperative Insurance Law, art 3. 481 ERNST & YOUNG, GLOBAL TAKAFUL INSIGHTS 2013 16, http://www.ey.com/Publication/vwLUAssets/ET_Global_Takaful_Insights_2013/$FILE/EY-global- takaful-insights-2013.pdf [hereinafter GLOBAL TAKAFUL INSIGHTS 2013]. 482 Id. at 16. 483 THE SAUDI INSURANCE MARKET REPORT 2012, supra note 351; Convert United States Dollar to Saudi Riyal | USD to SAR, THE MONEY CONVERTOR, http://themoneyconverter.com/USD/SAR.aspx (last visited March 9, 2014) (converting 1 USD to 3.75000 SAR). 484 THE SAUDI INSURANCE MARKET REPORT 2007, supra note 352. 485 CAPITAL STANDARDS, SAUDI ARABIAN INSURANCE INDUSTRY REPORT 1 (May 2013), http://www.capstandards.com/PDF/Saudi%20Insurance%20Industry%20Report-20-05-2013.pdf. 486 Implementing Regulations of the Law on Supervision of Cooperative Insurance Companies, art. 3 •–ƒ–‡•Dz ‹†‡–ƒ†Ž‹ƒ„‹Ž‹–›‹•—”ƒ ‡‹ Ž—†‹‰–Š‡ˆ‘ŽŽ‘™‹‰ǣͳȌ‡”•‘ƒŽ ‹†‡– •—”ƒ ‡ǡʹȌ ‘”‡Žƒ–‡† •—”ƒ ‡ǡ͵Ȍ’Ž‘›‡”ǯ•‹ƒ„‹Ž‹–› •—”ƒ ‡ǡͶȌŠ‹”†ƒ”–›‹ƒ„‹Ž‹–› •—”ƒ ‡ǡͷȌ General Liability Insurance, 6) Product Liability Insurance, 7) Medical liability Insurance, 8)

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(2) health insurance; and (3) protection and savings insurance.488 The latter includes life insurance, which is also known in Malaysia as family takaful.

The Saudi insurance market is made up of only a few types of insurance. Car and health insurance are the most common types of insurance purchased in Saudi

Arabia. Other types of insurance, such as home insurance or life insurance, seem to be nonexistent. Saudis are under the impression that insurance is forbidden under

Islamic Law so many are unaware of the importance of insurance, which will be explained shortly.

5.2.2 Features of the Saudi Insurance Market

Two major factors have contributed to the growth of the Saudi Arabian insurance market. First is the stringent regulation of the Saudi Arabian insurance industry.489 Despite this regulatory framework, insurance businesses have been attracted to the adoption of international insurance standards.490 Saudi Arabia is a member of the International Association of Insurance Supervisors (IAIS) to ensure

Professional Liability Insurance, 9) Theft and Burglary Insurance, 10) Fidelity Insurance, 11) Safe —”‰Žƒ”› •—”ƒ ‡‹•‹†‡–Š‡’”‡‹•‡•ƒ†‹–”ƒ•‹–ǡͳʹȌ›‘–Š‡”‹ƒ„‹Ž‹–› •—”ƒ ‡Ǥdz 487 Id. 488 Id. 489 See Saudi Arabian Monetary Agency, SAMA Laws, Implementing Regulations (2005), Risk Management Regulations (2008), Anti-Fraud Regulation (2008), Insurance Market Code of conduct Regulations (2008), Regulations for Supervision and Inspection Costs (2009), The Regulation of Reinsurance Activities (2010), Insurance Intermediaries Regulation (2011), Anti Money Laundering & Combating Terrorism Financing Rules (2012), Outsourcing Regulation for Insurance and Reinsurance Companies and Insurance Service Providers (2012), Investment Regulations (2012), Online Insurance Activities Regulation (2012), The Unified Compulsory Motor Insurance Policy (2012), available at http://www.sama.gov.sa/sites/samaen/Insurance/Pages/LawsandRegulations.aspx. 490 Rym Ayadi & Willem Pieter de Groen, Banking and Insurance in the GCC Countries: Is There Regulatory Convergence with the EU? 52 (Sharaka Research Papers, no. 4, 2013).

101 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia insurance companies function within the international standards. 491 Existing insurance companies, considered illegal, now have an opportunity to be a part of the new system and new insurance companies have also begun to emerge. Moreover, businesses that used to purchase insurance abroad are now able to insure themselves domestically.

Second, after enacting the CIL, the government made some types of insurance compulsory. These types of insurance included health insurance, auto insurance, and professional liability insurance.492 Premiums for health and auto insurance constituted 75.4% of total GWP in 2012.493 The only required auto insurance is vehicle liability insurance.494 Auto insurance is the second largest line in the insurance market, representing a 22.1% share of total GWP in 2012.495 Health insurance is the largest line, comprising 53.3% of total GWP in 2012. However, health insurance has been only partially mandated.496 Companies in the private sector are required to provide health insurance to their employees.497 Also, employers are required to insure their foreigner worker in Saudi Arabia. However,

491 Id at 52. 492 CAPITAL STANDARDS, supra note 485, at 1. 493 INSURANCE MARKET REPORT 2012, supra note 351, at 10 (Professional liability insurance info is not available). 494 Council of Ministers' Resolution No.222, 13/08/1422 H (2003), Al-–ƒǯ‹ƒŽǯƒŽœƒ‹ƒŽƒƒŽ-•›ƒǯ”ƒ–ǡ [Compulsory Motor Insurance]. 495 Id. 496 COLLIERS, KINGDOM OF SAUDI ARABIA HEALTHCARE OVERVIEW, HEALTH CARE REPORT (First Quarter 2012), http://www.colliers.com/~/media/files/emea/uae/research/market- overview/ksahealthcareoverviewcihq12012.ashx. 497 M. Almalki, G. Fitzgerald, & M. Clark, Health Care System in Saudi Arabia: An Overview, 17 EASTERN MEDITERRANEAN HEALTH J. 784, no. 10, at 790 (2011), available at http://applications.emro.who.int/emhj/v17/10/17_10_2011_0784_0793.pdf.

102 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia government employees and the self-employed are not required to carry health insurance.

The massive growth of the Saudi insurance market and expansion of Islamic insurance in other countries have been interpreted as successes of Islamic insurance. Furthermore, some argue that the Islamic insurance system is better than the conventional one and thus can compete as an alternative system.498 Others are calling to ban conventional insurance companies in Saudi Arabia and adopt the

Islamic insurance system.499 However, more than 75% of the GWP in Saudi Arabia is derived from compulsory insurance. What about other types of insurance, such as home and life insurance? What if the mandatory types were not mandatory? The purchase of non-compulsory insurance seems non-existent. Empirical research done

„›ƒ‹†•ƒ”‹‹–Š‡ ‹–›‘ˆ ‡††ƒŠ‹ƒ—†‹”ƒ„‹ƒˆ‘—†–Šƒ––Š‡Dzƒ‹‘–‹˜ƒ–‹‰ factor in purchasing insurance is the fact that insurance in Saudi Arabia is legally

‘’—Ž•‘”›Ǥdz500

The reason may be that people in Saudi Arabia still fear that insurance is prohibited under sharia or that Islamic insurance does not really comport with

Islamic principles even though Islamic scholars have found that Islamic insurance is not prohibited under sharia and have sanctioned it as an alternative to traditional

498 See supra Ch. 4; Al Shubaily, supra note 361. 499 Fatwa Sheikh Muhammad al-'Usaymi, Hukm Al-iktatab fie shirkt Malze ll'tam'in, [Buying Shares in Malath Insurance Company], HALAL 2, available at http://www.halal2.com/ftawaDetail.asp?id=12328. 500 Zaid Ahmad Ansari, An Empirical Analysis of Risk Perception, Remedial Measures and Behaviour of People in Saudi Arabia Towards Insurance, 6 AFRICAN J. BUS. MGMT. 3733 (2012).

103 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia insurance.501 Further, some insurance companies have sharia boards that include well-known Islamic scholars. Insurance companies lacking sharia boards have been questioned as being sharia noncompliant. Unifying the insurance practices can help people make decisions about insurance and not require that particular companies have sharia boards.

Interestingly, some people find that compulsory insurance violates their religious rights because they believe that insurance is prohibited under Islamic

Law.502 Therefore, some Islamic scholars have attempted to address this concern by issuing a fatwa to the effect that compulsory insurance is a law enacted by the government, and, as such, Saudi Arabians have no choice but to comply and buy insurance. 503 Sheikh Kurdi offers an interesting alternative by considering compulsory insurance not as insurance but rather as a type of tax. As such, he claims that Saudi Arabians should not be concerned with purchasing insurance.504

5.2.3 Policyholders and Community

The Islamic insurance business is at the whim of individual viewpoints about insurance. As previously mentioned, insurance is still generally problematic for

Muslims. The availability of Islamic insurance has partially solved this concern because it seemingly complies with Muslim beliefs. However, the insurance culture is still not pervasive in Muslim society. This is mostly because conventional

501 Fatwa No. 51; Fatwa No. 55. 502 Al-Suthery, supra note 400. 503 Id. 504 A.D. Hajj Ahmed Kurd, Fatwa No. 50725, Compulsory Insurance, July 2011, ISLAMIC FATWA, http://www.islamic-fatwa.com/fatawa/index.php?module=fatwa&id=50725.

104 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia insurance was introduced in Muslim countries only a century ago.505 Moreover, the insurance prohibition creates a lack of awareness on the part of Muslim society. A survey conducted by the Saudi Credit Bureau (SIMAH) found that 74% of participants could not distinguish the concepts of credit and insurance.506 According to this survey, Saudi society lacks an insurance culture, suggesting that SAMA needs the public to be more educated and aware of insurance.507

Muslims constitute nearly one fifth of the world's current population.508

However, the insurance penetration among Muslims around the world is very low.509 In Saudi Arabia, with a population of 28 million, the penetration rate was only 0.81% in 2011, which is considered very low.510 Also in 2011, life insurance penetration was 0.05%.511 Saudi society still perceives insurance as unattractive.

The sharia compliance issue is one of the factors that have created this reluctance.

The Saudi Arabian people are still not sure if insurance in general is allowed under

Islamic law. Moreover, some people are still not convinced that cooperative insurance is Islamic to begin with. Ansari found that the reasons for purchasing auto and/or health insurance include fear that insurance is not sharia-compliant.512

505 Bekkin, supra note 149, at 16. 506 Al-–Šǯƒǯ“ƒˆŠŽ-–ƒǯ‹‹Š [Insurance Culture], THE CREDIT, no. 14, Mar. 2013, at 54-44, http://www.simah.com/Magazine/2013/Q14x/English/magazine.html. 507 Id. 508 Syed Umar Farooq , Tariq Saeed Chaudhry Fakhr-e-Alam & Ghayur Ahmad, An Analytical Study of the Potential of Takaful Companies, 54 EUROPEAN J. ECON. FIN. & ADMIN. SCI., no. 20, 2010, at 54, 60. 509 Id. at 70. 510 INSURANCE MARKET REPORT 2012, supra note 351. Insurance penetration of total Gross Domestic Product (GDP) is defined as Gross Written Premiums divided by total GDP. 511 Ayadi & Pieter de Groen, supra note 490, at 46. 512 Ansari, supra note 500, at 3733, 3740. When asked to report their reasons for purchasing motor and/or health insurance, 43% of survey participants highly disagreed and 1.4% disagreed that they buy insurance because they are convinced that insurance is sharia compliant. On the other hand,

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However, Ansari concluded that the main reason people buy insurance is because it is mandatory.513

Interestingly the survey was conducted in Jeddah, which is considered more liberal than other cities in Saudi Arabia.514 The capital city of Riyadh is well known for its conservative people,515 yet even relatively liberal people have expressed concern about insurance. This could indicate that people living in conservative cities would be even more concerned about insurance. It would be interesting to conduct additional research in more conservative cities, such as Riyadh. Few empirical studies have been conducted in regard to insurance companies and insurance customers in Saudi Arabia, and more research is needed to better understand why people are reluctant to purchase insurance.

An additional factor makes insurance unattractive in the eyes of Saudi society. Islamic law urges Muslims to cooperate and support each other, especially in the case of loss.516 In Saudi Arabia, most people belong to a large tribe, and the

Saudi custom is to support the members of the tribe in the event of loss.517

–‡”‡•–‹‰Ž›ǡ–Š‡ˆƒ‹Ž›ǯ••—’’‘”– ‘˜‡”•”‹•–Šƒ–‹•—”ƒ ‡ ‘’ƒ‹‡•—•—ƒŽŽ›†‘ not cover. For example, if a member of a particular tribe has been convicted of

43.7% highly agree and 4.7% agree that they purchase motor and/or health insurance because they are convinced that insurance is sharia compliant. 513 Id. 514 WAYNE H. BOWEN, THE HISTORY OF SAUDI ARABIA 76 (2008). 515 IBP USA, SAUDI ARABIA INVESTMENT AND BUSINESS GUIDE 114 (2011). 516 MUHAMMAD AYUB, supra note 208, at 417. 517 Haberbeck, supra note 417, at 141; see generally Hossein Esmaeili, On a Slow Boat Towards the Rule of Law: The Nature of Law in the Saudi Arabia Legal System, 26 ARIZ. J. INT'L & COMP. L. 2 (2009).

106 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia murder, under Islamic law the punishment is the death penalty.518 However, the

˜‹ –‹ǯ•ˆƒ‹Ž›Šƒ•–Š‡”‹‰Š––‘ˆ‘”‰‹˜‡–Š‡’‡”’‡–”ƒ–‘”‘””‡“—‡•–„Ž‘‘†‘‡›Ǥ519

•—ƒŽŽ›ǡ –Š‡ ˜‹ –‹ǯ• ˆƒ‹Ž› ƒ‡• •— Š ƒ ”‡“—‡•–Ǥ ‘‡ ˜‹ –‹•ǯ ˆƒ‹Ž‹‡• ƒ• ˆ‘” millions of dollars in exchange for abandoning the lawsuit and usually receive large sums of money from the tribe.520 This illustrates the importance of family in Saudi

Arabia, and why people sometimes refuse to consider insurance.

5.3 Challenges Facing the Islamic Insurance Industry

Fatwa plays a very important role in Muslim life.521 In Saudi Arabia, Islamic law in general and fatwa in particular affect the daily activities of the government and the people.522 ƒ„‡”„‡ ƒ†¡Žœ‡š’Žƒ‹ǣDzŠ‹•‹•‘–Œ—•–ƒ’‹‘—••‡–‹‡–‘” a‹†‡‘Ž‘‰›‹’‘•‡†ˆ”‘ƒ„‘˜‡ǡ„—–ƒ˜‹‡™•Šƒ”‡†„›˜‹”–—ƒŽŽ›ƒŽŽ‘ˆƒ—†‹”ƒ„‹ƒǯ• citizens, whether they are Harvard-educated PhDs or Beduin herding camels in the

†‡•‡”–Ǥdz523 Today, fatwa relating to financial transactions, including insurance, has been one of the most commonly discussed topics.524

Š‡ –‡” Dz •Žƒ‹ dz ‹• ƒ– –Š‡ ”‘‘– ‘ˆ –Š‡ †‡„ƒ–‡ ‘˜‡” ™Š‡–Š‡” ‹•—”ƒ ‡ ‹• inherently Islamic or not. Today, the term Islamic is linked not only to religious

518 Hossein Esmaeili and Jeremy Gans, Islamic Law across Cultural Borders: The Involvement of Western Nationals in Saudi Murder Trials, 28 DENV. J. INT'L L. & POL'Y 145, 162 (1999-2000). 519 VOGEL, supra note 6, at 156. 520 MST News, Saudi Govt Pays 'Blood Money' to Save Jailed Pinoy, MANILA STANDARD TODAY, Feb. 02, 2013, 12:01 AM, http://manilastandardtoday.com/2013/02/02/saudi-govt-pays-blood-money-to- save-jailed-pinoy/. 521 ANN BLACK, HOSSEIN ESMAEILI & NADIRSYAH HOSEN, MODERN PERSPECTIVES ON ISLAMIC LAW 83 (2013); and see generally ‘Š†ƒǯ•—‹ŽŽƒŠǡQuantum of Damages in Takaful (Islamic Insurance): A Reappraisal of the Possibility of Adopting the Doctrines of Al-Diyah and Al-Daman, 14 ARAB L.Q. 339 (1999). 522 BLACK, supra note 521, at 94. 523 Andreas Haberbeck & Dr. Kilian Bälz, Regulating the Saudi Arabian Insurance Industry, IBA SECTION ON BUSINESS LAW INSURANCE, Aug. 2000, at 13. 524 BLACK, supra note 521, at 89.

107 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia activities but also to everything else. The term Dz •Žƒ‹ dz ‹• –‹‡† –‘ Ž‘–Šǡ ˆ‘‘†ǡ transactions, etc. When we describe something as Islamic, does it mean its principle comes from the Islamic law? And is the thing considered purely Islamic or is only part of it Islamic-like? To illustrate this, Islamic scholars allow Islamic insurance companies to reinsure with conventional reinsurance companies if needed. This is due to the fact that Islamic reinsurance companies are in short supply. Islamic scholars rely on the Islamic principle of necessity or dire need to justify this solution.525 As reinsurance is vital for insurance companies, complying with the fatwa that prohibited dealing with reinsurance companies would mean that Islamic insurance could not function. This raises the question: can Islamic insurance companies who reinsure through conventional reinsurance companies be Islamic?

The development of Islamic insurance began thirty years ago.526 Like any other new product, Islamic insurance faced challenges that affected its development.

These challenges stem primarily from converting traditional insurance into an

•Žƒ‹  ‘†‡ŽǤ Š‡ •‹‹Žƒ”‹–› „‡–™‡‡ ƒ •Žƒ‹  ‹•—”ƒ ‡ ‘’ƒ›ǯ• ˆ— –‹‘• and those of conventional insurers has raised these problems. Fahad Al Anzi, an insurance expert and professor, has summarized the insurance problem in Saudi

Arabia from two viewpoints.527 He describes the Islamic controversy related to insurance as one of the obstacles to a thriving insurance industry.528 He calls for

525 NETHERCOTT & EISENBERG, supra note 280, at 292. 526 CIZAKCA, supra note 217, at 203. 527 Fahd Bin Hamoud Al Anzi, Cooperative Insurance Industry Impediments, THE CREDIT, no. 14, 2013, at 26-27, http://www.simah.com/Magazine/2013/Q14x/English/magazine.html. 528 Id.

108 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia resolving the disagreement among Islamic scholars regarding insurance.529 The other obstacle is that insurance as a business is lacking in expertise and professionals.530

5.3.1 Sharia Compliance

The sharia compliance process is the key factor that distinguishes Islamic insurance from conventional insurance.531 This process depends essentially on the

Islamic jurists to identify the insurance issues under Islamic law so that insurance products comply with Muslim beliefs.532 However, the process of sharia compliance

”‡Ž‹‡•‘ •Žƒ‹ • Š‘Žƒ”•ǯ˜‹‡™•ƒ†• Š‘‘Ž•‘ˆ–Š‘—‰Š–Ǥ533 The diversity of Islamic

• Š‘Žƒ”•ǯ ‘’‹‹‘• ”‡ƒ–‡• ‹•–ƒ„‹Ž‹–› ‹ –Š‡ ‹•—”ƒ ‡ „—•‹‡••Ǥ ‘– ‘Ž› –Šƒ–ǡ insurance companies are required in some jurisdictions to establish a sharia board.

This action increases the challenges due to the different practices used by Islamic insurance companies. This will result in confusion over whether a practice or model is in fact sharia-compliant, such as in the case of the formula used to determine surplus distribution.534

In addition, the large number of Islamic insurance companies today has raised new challenges, one of which is a lack of qualified Islamic scholars working in the insurance industry. For example, one study found that there are forty-four

529 Id. 530 Id. 531 Waheed Akhter, Takaful Models and Global Practices 1 (MPRA Paper no. 40010, 2010), http://mpra.ub.uni-muenchen.de/40010/. 532 Nooraslinda Abdul Aris & Roszana Tapsir, Risk and Risk Management of Takaful Industry, 4 J. GLOBAL BUS. & ECON., no. 1, 2012 at 29, 33. 533 Id. at 14. 534 See infra § 5.3.1.2.

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Islamic scholars contributing to the Islamic financial institutions in Saudi Arabia.535

Ten scholars hold 70% of the 142 positions.536 The future of the Islamic insurance industry is affected by this paucity, which has the potential to influence insurance policies. Insurance companies cooperate with well known Islamic scholars, which helps the companies develop a particular reputation.

Islamic scholars are the lawmakers for these companies. In Saudi Arabia, the

CIL does not require insurance companies to have a sharia board. However, some insurance companies chose to establish one. Seventeen companies out of thirty-five claim to have a sharia board.537 The rest of the companies apply only the rules issued by SAMA. None of these rules are related to Islamic insurance.

Another problem in the Saudi insurance market is the absence of rules governing these sharia boards. The insurance market is divided into an Islamic market and a conventional market. Some companies, such as solidarity insurance companies, have created their own rules, which are different from those of the

CIL.538 Al Anzi suggests that some insurance companies established sharia boards to

535 MURAT ÜNAL, THE SMALL WORLD OF ISLAMIC FINANCE SHARIAH SCHOLARS AND GOVERNANCE - A NETWORK ANALYTIC PERSPECTIVE, vol. 6.0 (Jan. 19, 2011), http://www.funds-at- work.com/uploads/media/Sharia-Network_by_Funds_at_Work_AG.pdf.pdf. 536 Id. at 18, Sheikh Mohammed Ali Elgari holds 28 positions and Sheikh abdullah Sulaiman Al Manee'a 27. 537 All the Saudi insurance companies have a website. They include all the information related to the company. More importantly, they include in these information if they have sharia board. Visiting insurance company websites reveals that 17 insurance companies claim to have a sharia board. 538 Solidarity Takaful is a Saudi Insurance Company. The company has created sharia board bylaws, which include different rules than those included in the CIL. The company named its insurance model Dz•‘Ž‹†ƒ”‹–›ǤdzŠ‡ ‘’ƒ›ǯ•™‡„•‹–‡†‡• ”‹„‡•‹–•‘†‡Žƒ•ˆ‘ŽŽ‘™•ǣDzŠ‡‘’ƒ›ǡƒ•–Š‡‹•—”ƒ ‡ administrator, will manage the insurance operations in favor of the policyholders. In case of net surplus in the insurance operations' account, it will be distributed in the following way: Ten percent (10%) of the annual net surplus shall be distributed to the policyholders directly or in the form of reduction in premiums for the next year. From the remainder, if any, an amount equal to (05%) of

110 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia attract customers.539 According to him, even though these companies claim to be

Islamic, a large number of people are still not buying their insurance products because they are not convinced such insurance is Islamic.540

One solution would be to agree on a general framework of Islamic insurance.541 A uniform framework would assist companies in complying with the principles of Islamic insurance law rather than being at the whim of conflicting opinions from individual company sharia boards. This framework could be formed through cooperation among insurance companies interested in providing Islamic insurance products. However, the controversy among Islamic scholars goes to the very framework of Islamic insurance. For example, underwriting surplus under some views belongs to the contributors.542 Bin Baz, the former grand mufti of Saudi

Arabia, believes that insurance funds are not owned by anyone and that insurance participants should not receive any surplus because the insurance contract is based

the total written premiums shall be carried forward to the shareholders' account as a fee against the Company's management of the insurance operations and investment in favor of the policyholders. This management fee shall not exceed 90% of the net surplus. From the remainder, if any, following the distribution referenced (a) and (b) above, company shall carry forward (10%) of the net surplus to the shareholders' account as performance incentive. The Company may maintain the remainder of net surplus, if any, in the policyholders' account or distribute it wholly or partially to the policyholders following approval by the Saudi Arabian Monetary Agency and the Company's General ••‡„Ž›dzǡsee Sharia Affairs, SOLIDARITY TAKAFUL, http://www.sstc.com.sa/t/ShariaAffairs. 539 Al Anzi, supra note 527, at 26-27. 540 Id. 541 Id. 542 SHEILA NU NU HTAY & HANNA RABITTAH ZAHARIN, CRITICAL ANALYSIS ON THE CHOICE OF TAKAFUL (ISLAMIC INSURANCE) OPERATING MODELS IN MALAYSIA 4 (2011), available at http://irep.iium.edu.my/2280/ (last visited Mar. 14, 2014).

111 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia on donation.543 However, in accordance with other views, the surplus should be shared with the shareholders.544

In fact, distinguishing between Islamic insurance of the form suggested by

Islamic scholars and fatwas and conventional insurance is essential. But even identifying differences between Islamic insurance in Muslim countries such as Saudi

Arabia and Malaysia or Pakistan is difficult. In some cases, identifying differences between two insurance companies in one jurisdiction is difficult due to the different models that were approved by their respective sharia boards. This seems confusing, but this is the reality. Islamic jurisprudence depends on its interpretation.

The following subsections describe various issues and different opinions of

Islamic Scholars about them.

5.3.1.1 •—”ƒ ‡‘–”ƒ –‘ƒ–‹‘ȋDzƒ„ƒ””—dzȌ

Islamic law prohibits conventional insurance because the nature of the insurance contract includes uncertainty, or gharar.545 The majority of the recent

Islamic scholarship has concluded that uncertainty is found in insurance. As mentioned previously, the majority of Islamic scholars prohibit uncertainty in insurance. However, those Islamic scholars have agreed that the principle of donation is the only way to avoid the uncertainty in insurance.546 By adopting this

543 KALID ALDOIJY, RO'AIHA SHARIHIA FIE SHIRKAT AL-TAMIN AL-TAWUNI, [COOPERATIVE INSURANCE COMPANIES: ISLAMIC PERSPECTIVE] (2004), http://elibrary.mediu.edu.my/books/MAL06556.pdf. 544 Htay & Zaharin, supra note 542, at 4. 545 Oliver Agha, Tabarru in Takaful: Helpful Innovation or Unnecessary Complication?, 9 UCLA J. ISLAMIC & NEAR E.L. 69, 83 (2009). 546 Fatwa no. 51; Fatwa no. 55.

112 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia feature, the insurance contract becomes a unilateral donation instead of a commutative contract.547 Other Islamic scholars believe that gharar exists in insurance contracts whether they are Islamic or conventional.548

Fahad Abdurrahman, an Islamic scholar, explains that the justification for adopting the tabarru principle is to forgive gharar using a donation contract.549 So, adoption of tabarru implies that uncertainty exists in Islamic insurance. He goes further to argue that he does not think it is possible to apply the donation principle to insurance contracts as they are sold by insurance companies. However, Al Anzi asks the question: in a situation when an insurance company refuses to pay the claims because the insured pays the premiums as donations, does the insured have a right to sue the company?550 And, what about the case of compulsory insurance?

How is it possible to obligate people to buy insurance and consider the premiums a donation?

The donation principle raises a lot of questions, and yet it is considered the basis of Islamic insurance. In Saudi Arabia, under the religious theory, according to the senior Ulema fatwa, donation Tabarru, is one of the requirements for sharia-

547 Agha, supra note 545, at 83. 548 See infra § 5.6. 549 Fath Al Rahman Yusuf, ”ƒ•ŠǢ •ŠǯƒŽ‹–Ž-–ƒǯ‹ǯ–ƒ•‹Žˆ‹‡‘ǯ•‡r Al-gharar we Al-mauadha, [Study: Insurance Issue Comprised of Gharar and Commutative], ASHARQ AL-AWSAT, Dec. 13, 3011, http://www.aawsat.com/details.asp?section=58&article=654139&issueno=12068#.Ur15Uii-PBw. 550 Fahd Al Anzi, Hil ‘Œƒ‡†ƒǯ‹ƒ—™ƒ‹Šƒ”ƒi we aker Nizami? [Do We Have Two Type of Insurance, Islamic and Secular?], AL QTISADIAH [THE ECONOMIST], Feb. 15, 2010, http://www.aleqt.com/2010/02/15/article_349884.html.

113 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia compliant insurance. However, the CIL does not mention insurance premiums paid as a Tabarru, unlike the Malaysian Takaful Act.551

5.3.1.2 Takaful Fund: and the distribution

The separation of the insurance pool or the Takaful fund on the one hand and the company or shareholder fund on the other hand is one of the characteristics of

Islamic insurance. The relationship between the insured and the company depends

‘ –Š‡ Š‘‹ ‡ ‘ˆ –Š‡ ‹•—”ƒ ‡ ‘†‡Žǡ ’”‹ƒ”‹Ž› ƒ‰‡ › DzWakalaǡdz ’ƒ”–‡”•Š‹’

DzMudarabahdz ‘” ƒ› ‘–Š‡” ‘†‡Ž• –Šƒ– ƒ”‡ ƒ’’”‘˜‡† by a sharia board.552 The choice of the model will determine the surplus distribution ratio, which is used to allocate the surplus to the insured, the shareholders and the company. The AAOIFI

•–ƒ†ƒ”†• †‡ˆ‹‡ –Š‡ •—”’Ž—• ƒ• –Š‡ Dz”‡•‹†—ƒŽ ’”‡‹—• ‘ˆ –Š‡ ’ƒ”ticipants (the insured) in addition to the reserves and profits, after deducting all expenses and

‹†‡‹–›ƒ‘—–•ȋ’ƒ‹†‘”’ƒ›ƒ„Ž‡†—”‹‰–Š‡•ƒ‡›‡ƒ”ȌǤdz553

One of the issues facing Islamic insurance is the issue of the surplus distribution ratio. In conventional insurance the underwriting surplus is considered profit for the company. However, some Islamic scholars believe that the insured own the pool and that the insurance company operates the pool only on behalf of the insured, thus giving the insured the right to the entire surplus.554 According to this theory, an insured-owned pool also attributes to the insured the risk of a deficit,

551 See infra § 5.4.1. 552 See supra ch. 3. 553 AAOIFI SHARIA STANDARDS, supra note 403, at 481. 554 Akhter, supra note 531, at 15

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Dz‘”–Š‡‹˜‡•–‡–”‹•ƒ†‘–Š‡”ƒ••‘ ‹ƒ–‡†”‹••Ǥdz555 For example, in the case of a deficit, the insured must contribute to the pool again so that the company can cover claims. However, in practice, it is difficult to collect the deficit from the insured, because technically the insured are not part of the company and only customers. In this instance, Islamic scholars have allowed insurance companies to finance the pool through interest-ˆ”‡‡ Ž‘ƒ• DzQard Hasandz556 that cover the deficit and allow the company to deduct from the insurance surplus. On the other hand, some scholars agree that the insurance funds are not owned by the insured as they donate the premium to the fund,557 similar to aforementioned bin Baz fatwa.558 Here the surplus can be distributed for charity purposes.

Islamic scholars have differing views on the issue of who owns the insurance pool, 559 but deciding who actually owns the insurance pool will define the rules of the surplus distribution ratio. Identifying the process of surplus distribution for all the insurance companies in specific jurisdictions is important. The insurance company or sharia board cannot be the ones to decide the ratio. If that were the case, companies might offer the insured a high ratio to attract customers or may

‘•‹†‡” Šƒ”‰‹‰ Š‹‰Š ƒƒ‰‡‡– ˆ‡‡•Ǥ ‹–Š‡” ƒ –‹‘ ƒ› ƒˆˆ‡ – –Š‡ ‘’ƒ›ǯ• ability to operate efficiently (i.e., pay insurance claims) if such action proceeds

555 ISLAMIC FINANCIAL SERVICES BOARD, GUIDING PRINCIPLES ON GOVERNANCE FOR TAKAFUL (ISLAMIC INSURANCE) UNDERTAKINGS 23(Dec. 2009), http://www.ifsb.org/standard/ED8Takaful%20Governance%20Standard.pdf. 556 Abdul Rahim Abdul Wahab, Mervyn K. Lewis & M. Kabir Hassan, Islamictakaful: Business models, Shariah Concerns, and Proposed Solutions, 49 THUNDERBIRD INTǯL BUS. REV. 371 (2007). 557 Akhter, supra note 531, at 15. 558 See ALDOIJY, supra note 543. 559 Akhter, supra note 531, at 15.

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™‹–Š‘—–†—‡ ‘•‹†‡”ƒ–‹‘ˆ‘”–Š‡ ‘’ƒ›ǯ•‘˜‡”Š‡ƒ† ‘•–•ǤŠ‡ƒ‹’—”’‘•‡‘ˆ regulating the surplus distribution ratio is to protect the interest of the insured as the insurance pool must be sufficient to pay the insured in the event of loss.

In 2012, SAMA banned companies from using Islamic insurance models other than the CIL model.560 Companies are required to apply only the cooperative model, which requires companies to distribute only 10% of the surplus to the insured every year.561 According to Mr. Papp, the Head of Swiss Retakafulǡ Dzȏ–ȐŠ‹• †‡ ‹•‹‘ ™ƒ• taken by SAMA to protect the interests of policyholders as they felt that takaful operators were misusing the takaful model (for example, by charging themselves

‡š ‡••‹˜‡ƒƒ‰‡‡–ˆ‡‡•Ȍƒ†’—––‹‰–Š‡’‘Ž‹ ›Š‘Ž†‡”ǯ•ˆ—†‹–‘Œ‡‘’ƒ”†›Ǥdz562

A Malaysian author describing the Saudi CIL, which requires distributing the surplus on the basis of a 10:90 insured-to-company ratio, said that it constitutes an

Dzƒ”„‹–”ƒ”› •—”’Ž—• ”‡†‹•–”‹„—–‹‘dz ƒ† ”ƒ‹•‡• †‘—„–• ‘˜‡” sharia compliance.563

However, the CIL does not attribute to the insured any risk or deficit arising from the insurance pool. It is true that the insured receive 10% of the surplus, but on the other hand, the insured is not responsible for any deficit the occurs in the insurance pool, with 10% being considered to be a fair deal. Therefore, the CIL requires companies to pay the insured in the event of loss irrespective of whether a deficit

560 Marcel Omar Papp, Takaful Review 2012: Easing Inherent Tensions in the Takaful Model Takaful, MENA INSURANCE CEO CLUB, http://www.menainsuranceceoclub.com/Article.aspx?id=33110. 561 Implementing Regulations, art 70. 562 Papp, supra note 560. 563 Younes Soualhi, Šƒ”‹ǯƒŠ •’‡ –‹‘‹—”’Ž—•‹•–”‹„—–‹‘ǣŠƒ”‹ǯƒŠ‹‡™•ƒ†–Š‡‹”Current Implementation, presented at the ISRA Islamic Finance Seminar (IIFS), Nov. 11, 2008, available at http://www.kantakji.com/fiqh/Files/Insurance/W305.

116 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia occurs in the insurance account. For example, article 47 of the CIL bylaws requires

‘’ƒ‹‡•–‘—•‡–Š‡‹‹— ƒ’‹–ƒŽ–‘ ‘˜‡”–Š‡‹•—”‡†•ǯ Žƒ‹•‹–Š‡ ƒ•‡–Š‡ technical reserves (the revenue set aside to cover insurance claims) are deficient to meet the compa›ǯ• ‘„Ž‹‰ƒ–‹‘•Ǥ564 Also, the insured do not pay wakala fees that

Islamic insurance companies charge for managing the insurance fund. Another example is the Bahraini Takaful Rules, which do not allow an insurance company to distribute any surplus to the insured if the company does not meet the capital and the solvency requirements.565 Therefore, the regulations have to consider the main purpose of insurance, guaranteed coverage of losses.

5.3.2 Standardization of the Law and Interpretation of Islamic Law

The relation between sharia compliance and the standardization of Islamic financial law is correlated. The sharia „‘ƒ”†ǯ• †—–› ‹• –‘ ƒ’’”‘˜‡ ˆ‹ƒ ‹ƒŽ transactions by issuing fatwa. This fatwa is considered a type of codification that the sharia board gives to a company. Thus, the company should follow these fatwas, acknowledging them as a standard. However, different companies have different sharia boards, which might result in different fatwa. This is one of the issues that the

Islamic insurance industry faces wo”Ž†™‹†‡Ǥ  ƒ—–Š‘” •—‰‰‡•–‡† Dz ‘•‡•—• ‹• needed among sharia scholars in each country as to how takaful should be

‹’Ž‡‡–‡†Ǥdz566

564 Implementing Regulations, art. 47. 565 Central Bank of Bahrain, 3 Rulebook (2005), pt. A, CA-8.5.5. 566 Serap O. Gonulal, Regulatory framework, in TAKAFUL AND MUTUAL INSURANCE: ALTERNATIVE APPROACHES TO MANAGING RISKS 203 (Serap O. Gonulal, eds., 2013).

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The issue of standardizing the Islamic law in general and Islamic finance, including insurance, in particular, has been discussed for a long time. Some Islamic scholars stand up for standardizing the Islamic insurance rules. In a broader context, Sheikh Abdullah bin Suleiman Al-ƒ‡ǯƒ •—‰‰‡•–•ƒ ‘†‹ˆ‹ ƒ–‹‘ „ƒ•‡†‘ the four Islamic schools.567 He believes such a move would be considered a reform

‘ˆƒ—†‹”ƒ„‹ƒǯ•Œ—†‹ ‹ƒ”›Ǥ568 Similar to the various Islamic schools of thought, the differing views of Saudi scholars regarding insurance would be solved through codification. Al Anzi suggests that a distinction is needed between the rules that govern Islamic insurance and those that govern conventional insurance.569 Also, these Islamic rules should be based on moderate views and applicable to the insurance market.570

Islamic scholars are calling for a standardization of Islamic insurance principles.571 For this reason, a few Islamic financial institutions have been established for the purpose of standardizing the Islamic finance rules and fatwa. The

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) are the most active institutions developing such rules. However, there are other institutions that provide fatwa and rules for the Islamic financial industry. For example, the Global Takaful Group was

567 Interview by Asharq Al-Aswat with Sheikh Abdullah Al Manee, Member of the Saudi Council of Senior Ulama Member Sheikh Abdullah Al Manee, in Riyadh, Saudi Arabia (Mar. 23, 2006), available at http://www.aawsat.net/2006/03/article55267381. 568 Id. 569 Al Anzi, supra note 527, at 26-27. 570 Id. 571 ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS (AAOIFI), http://www.aaoifi.com/aaoifi/.

118 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia created in 2007. It consists of 35 Muslim countries, and its main goal is to promote cooperation among all its members in exchanging information on takaful business, training, and, most importantly, creating a database related to Islamic insurance business, including sharia rulings, statistics and research.572 In addition, the

Organization of the Islamic Conference (OIC) is based in Saudi Arabia and represents all 57 Islamic countries. The OIC has established the International

Islamic Fiqh Academy (IIFA) as a subsidiary body, whose main goal is to produce studies related to contemporary topics from a sharia perspective.573 Most of the

Islamic countries that have not enacted Islamic insurance regulations have adopted

•‘‡ ‘ˆ –Š‡•‡ ‘”‰ƒ‹œƒ–‹‘•ǯ ”—Ž‡•Ǥ ‘™‡˜‡”ǡ ‘•– ‘—–”‹‡• Šƒ˜‡ ƒ†‘’–‡† –Š‡

AAOIFI and IFSB standards. Interestingly, as these bodies are meant to standardize rules of the Islamic financial industries, it would be useful if they worked together to promote one standard.574

AAOIFI and IFSB are the most effective institutions. They have issued Islamic insurance standards that cover different aspects, including accounting, auditing, governance and sharia standards.575 In fact, the AAOIFI insurance standards seem to contradict the concept of standardization. For example, the AAOIFI has given four different options on how an insurance company should distribute the underwriting

572 SAFDER JAFFER, FARZANA ISMAIL, JABRAN NOOR & LINDSAY UNWIN, MILLIMAN RESEARCH REPORT, TAKAFUL (ISLAMIC INSURANCE): CONCEPT, CHALLENGES, AND OPPORTUNITIES 29 (Nov. 2010), available at http://publications.milliman.com/research/life-rr/pdfs/takaful-islamic-insurance-concept.pdf. 573 Id. 574 Farooq, supra note 508, at 74. 575 IQBAL, supra note 239, at 223.

119 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia surplus.576 Interestingly, the fourth option suggests that the sharia board of an

Islamic insurance company has the right to set any distribution formula.577

‘˜‡”•‡Ž›ǡ‘–Š‡”•„‡Ž‹‡˜‡–Šƒ––Š‡†‹˜‡”•‹–›‘ˆ •Žƒ‹ • Š‘Žƒ”•ǯ‘’‹‹‘•‹• religiously appreciated.578 Accordingly, the Quran states, DzAnd if your Lord had willed, He could have made mankind one community; but they will not cease to differǤdz579 This has resulted in the fact that a few legal fields are still not codified.580

This might be one of the reasons SAMA has not issued Islamic insurance rules or even Islamic banking rules.

5.3.3 Three Minor Challenges

One minor challenge the industry faces is the insufficient number of Islamic reinsurance companies that exist to sustain the large number of Islamic insurance companies around the world (more than 500 companies).581 Because Islamic insurance is a new concept, the availability of reinsurance companies is scarce. In fact, only a few companies are providing reinsurance in Saudi Arabia.582 Moreover, the existing reinsurance companies are not rated or operating in the domestic

576 SHARIA STANDARDS, ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS, ARABIC VERSION 367 (2010). 577 Id. 578 Rahli Ali and Mustafa Kamal, Standardising Islamic Financing: Possibility or Pipe Dream?, 10 BUS. L. INT'L 19, 21 (2009). 579 QURAN 11:118. 580 See supra ch. 1. 581 MOHD. IZHAR AHMAD, TARIQ MASOOD & MOHD SAEED KHAN, PROBLEMS AND PROSPECTS OF ISLAMIC BANKING: A CASE STUDY OF TAKAFUL 9 (MPRA Paper No. 22232, Jan. 10, 2010), available at http://mpra.ub.uni- muenchen.de/22232/1/. 582 A.M. BEST TAKAFUL REVIEW, supra note 256, at 14.

120 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia market.583 Saudi insurance companies are required to insure 30% of their total premium with domestic reinsurance companies.584 Also, companies are not allowed to cede more than 40% of their premiums to cross border reinsurance providers without SAMA approval.585 SAMA approval has been criticized as not sharia compliant. 586

A second minor challenge facing Islamic insurance is the shortage of sharia compliant investment instruments. According to Al Baker, Executive Director of the

‡–”ƒŽ ƒ ‘ˆ ƒŠ”ƒ‹ǡ Dz‡ ‘ˆ –Š‡ ‘•– ”‹–‹ ƒŽ ŠƒŽŽ‡‰‡• ˆƒ ‹‰ –Š‡ takaful industry is the issue related to the limited availability of Islamic instruments like

Sukuk, which are the most suitable type of investment for takaful ‘’ƒ‹‡•Ǥdz587

Insurance companies have to invest in different conventional investment tools such as bonds and mutual funds.588 The principles of Islamic law prohibit insurance companies from investing in tools that involve paying interest, which is considered sharia noncompliant.589 This creates another challenge because it puts limitations on the investment tools that can be used by insurance companies.

583 HYMAYON A. DAR & UMAR F. MOGHUL, THE CHANCELLOR GUIDE TO THE LEGAL AND SHARIǯA ASPECTS OF ISLAMIC FINANCE 309 (2009). 584 Implementing Regulations, art 40. 585 Peter Hodgins, The Ongoing Regulation of the Saudi Insurance Market, CLYDE & CO., Nov. 23, 2010, http://www.clydeco.com/insight/articles/the-ongoing-regulation-of-the-saudi-insurance-market. 586 Al Shubaily, supra note 361. 587 Mr. Abdul Rahman Al Baker, Exec. Dir., Financial Institutions Supervision, Central Bank of Bahrain, MEFT2013: Reforming the Regulatory Regime; Key Initiatives to Ensure the Long Term Profitability of the Takaful Industry in the Middle East, Reforming the Regulatory Regime - Key Initiatives to Ensure the Long Term Profitability of the Takaful Industry in the Middle East, Manama, Bahrain (Oct. 7, 2013), available at http://www.cbb.gov.bh/page-p-meft2013_- _reforming_the_regulatory_regime_Ȃ _key_initiatives_to_ensure_the_long_term_profitability_of_the_takaful_industry_in_the_middle_east.ht m. 588 AAOIFI SHARIA STANDARDS, supra note 403, at 466-67. 589 See supra ch. 2.

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A third minor challenge is a general lack of education and awareness among

Saudi society of the concept of insurance and its benefits.590 Moreover, the existence of two types of insurance (Islamic insurance and conventional insurance) creates confusion. Some people do not trust those companies that claim to be Islamic.

According to Mohammad Al Sabi, Chief Executive Officer of Al Sagr Cooperative

Insurance Company in Saudi Arabia, the lack of Saudi-qualified insurance professionals and the lack of insurance awareness in society are affecting the insurance industry.591 He suggests that universities should provide insurance courses and programs as part of their curriculum.592 According to him, only one

Saudi university offers courses on insurance, and this is not enough.593 This is because the CIL requires insurance companies to hire a certain number of Saudi citizens.594 Companies are affected by this rule due to the lack of Saudi-qualified professionals, which results in hiring unqualified people to fill this gap. This is definitely affecting the quality of the insurance industry. In conducting empirical research aimed at finding the issues and challenges confronting the insurance

‹†—•–”›‘ˆƒ—†‹”ƒ„‹ƒˆ”‘‡’Ž‘›‡‡•ǯ’‡”•’‡ –‹˜‡ǡ595 Abdalelah Saaty found that insurance companies lack qualified and experienced employees, especially in the

590Mohamed Al Al Sabi, ͺ—™ƒ“ƒ––™ƒŒ‹Š—–ƒǯƒŽ-–ƒǯ‹Ž-saudi Abrzoha Qeyab Al-kwader Al- moahila [Four Challenges Face the Saudi Insurance Industry Particularly the Lack of Insurance Professions], AL QTISADIAH [THE ECONOMIST], Apr. 23, 2010, http://www.aleqt.com/2013/04/23/article_749809.html. 591 Id. 592 Id. 593 Id. 594 ’Ž‡‡–‹‰‡‰—Žƒ–‹‘•ǡƒ”–Ǥ͹ͻǡDzhe percentage of Saudi Employees shall not be less than 30% at the end of the first year, and this percentage shall increase annually according to a Saudization ’Žƒ•—„‹––‡†–‘–Š‡‰‡ ›Ǥdz 595 Abdalelah S. Saaty, Empirical Analysis of the Problems and Challenges Confronting Insurance ‘’ƒ‹‡•‹ƒ—†‹”ƒ„‹ƒǣš‡ —–‹˜‡•ǯ‡”•’‡ –‹˜‡, 6 AFRICAN J. BUS. MGMT. 5047 (2012).

122 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia insurance field.596 Moreover, the study showed that most of the employees did not earn any certificate or diploma or do any training in insurance programs.597 Suliman

‹ ƒ›‘—ˆǡ ƒ ‹•—”ƒ ‡ ‡š’‡”–ǡ •—‰‰‡•–• Dz–Šƒ– ‘’ƒ‹‡• ‘—Ž† ‹˜‡•t in Saudi human resources through developing training and a program of national

”‡Šƒ„‹Ž‹–ƒ–‹‘Ǥdz598

5.4 Assessment of the Effectiveness of Islamic Insurance in other Jurisdictions

As we have seen, the actual content of Islamic law depends mainly on the interpretation process. Different models and systems have also affected Islamic insurance principles. Most authors have classified the Islamic insurance system globally into two categories:599 the gulf countries and the southeast countries.

However, this classification leads to confusion in that the gulf countries and the southeast countries share the same systems and, sometimes, even the same views toward insurance. Even though the systems are similar, the actual practice varies amongst Muslim countries. Some countries, like Kuwait, have not enacted Islamic insurance laws.600 Also, Saudi cooperative law is totally different from the takaful rules in Bahrain, as we will see shortly.

This section provides a background of the two Islamic insurance systems that are considered very well regulated, those of Malaysia and Bahrain. The purpose of

596 Id. 597 Id, at 5006. 598 Š‡‹•‡‹‡Š‹ Ž‡•ǯ •—”ƒ ‡ –‡•‹ˆ‹‡•‘’‡–‹–‹‘•, THE CREDIT, no. 14, Mar. 2013, at 20-21, available at http://www.simah.com/Magazine/2013/Q14x/English/magazine.html. 599 Rihab Grassa, Šƒ”‹ஞƒŠ ‘˜‡”ƒ ‡›•–‡‹ •Žƒ‹  ‹ƒ ‹ƒŽ, 27 ARAB. L.Q. 171, 181 (2013). 600 A.M. BEST TAKAFUL REVIEW, supra note 256, at 7.

123 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia this section is to flesh out the differences between the Islamic insurance systems.

Worldwide, Saudi Arabia, Malaysia and Bahrain are the main countries that contribute to Islamic finance and Islamic insurance. 601 However, there are enormous differences between and among their respective systems, especially from the regulatory perspective. Malaysia and Bahrain have a dual insurance system:

Islamic and conventional. Generally speaking, Islamic insurance principles in theory are well defined; most Islamic scholars in the Muslim world have agreed on these general principles. However, Islamic insurance in practice has different models and its application depends on the particular jurisdictions.

5.4.1 The Malaysian Experience

Malaysia is one of the few countries that have comprehensive Islamic insurance laws. Malaysia is the first country to have enacted a law governing the

Islamic insurance industry, the Takaful Act of 1984, when the country adopted dual insurance systems. 602 The Insurance Act of 1996 governs the conventional insurance industry.603 This action has placed Malaysia as the second largest takaful market in the world.604 Further, Malaysia has become the largest family takaful industry today.605 Even still, life insurance, or family takaful, is not very popular in the Muslim world.

601 M. Fahim, supra note 199, at 301. 602 CIZAKCA, supra note 217, at 203. 603 Id. 604 GLOBAL TAKAFUL INSIGHTS 2013, supra note 481. 605 Id.

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The central bank of Malaysia, Bank Negara Malaysia (BNM), is responsible for supervising and regulating the takaful industry. With the rapid growth that the

Malaysian market has experienced, in June 2013, the country enacted the Islamic

Financial Services Act (IFSA).606 All takaful companies are required to comply with the new Act. The IFSA put the Islamic banking act of 1983 and the Takaful act of

1984 into one legislative place. The new law is more focused on sharia compliance

”ƒ–Š‡”–ŠƒDz’”‘˜‹†‹‰ƒ ‘’”‡Š‡•‹˜‡Ž‡‰ƒŽˆ”ƒ‡™‘”dz‹ƒŽŽƒ•’‡ –•‘ˆ •Žƒ‹  law.607

One of the characteristics of the Malaysian takaful industry is the creation of a supreme sharia „‘ƒ”†Ǥ  ͳͻͻ͹ǡ –Š‡  ‡•–ƒ„Ž‹•Š‡† –Š‡ DzShariah Advisory

‘— ‹Ždz ȋȌǤ608 The council is not limited to Islamic scholars, but it consists of experts from different fields, such as Islamic law, economics, and finance.609 The SAC is the highest sharia authority in Islamic finance, including Islamic insurance, in

ƒŽƒ›•‹ƒǤŠ‡ ‘— ‹Žǯ•”‘Ž‡‹•–‘ƒ†˜‹•‡–Š‡™‹–Š”‡‰ƒ”†–‘ •Žƒ‹ ƒ––‡”•ƒ† to ensure that all Islamic financial transactions are sharia compliant.610 Rules issued by SAC are binding over any other religious bodies, and even courts must apply their rules in deciding cases concerning Islamic financial businesses.

606 Islamic Financial Services Act, Act 759, (Mar. 18, 2013) (Malaysia) [hereinafter IFSA]. 607 Financial Services Act 2013 and Islamic Financial Services Act 2013 Come Into Force, BANK NEGARA MALAYSIA, July 1, 2013, http://www.bnm.gov.my/index.php?ch=en_press&pg=en_press_all&ac=2837&tpl_id=395. 608 Šƒ”‹ǯƒŠ†˜‹•‘”›‘— ‹Ž, BANK NEGARA MALAYSIA, http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802. 609 Id. 610 Id.

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In addition to the SAC, the FSIA requires each company to establish a sharia board to ensure that the takaful companies are operating according to sharia.611 The

‡™ –’”‘˜‹†‡•’‡ƒŽ–‹‡•‹–Š‡ ƒ•‡–Šƒ–ƒ ‘’ƒ›ǯ•‘’‡”ƒ–‹‘•ƒ”‡‘– sharia compliant. The law holds sharia advisers liable for the advice they provide that

‘–”ƒ†‹ –• –Š‡ ǯ• ”—Ž‡• „› ‹’‘•‹‰ Dz‹’”‹sonment for a term not exceeding eight years or to a fine not exceeding twenty-ˆ‹˜‡‹ŽŽ‹‘”‹‰‰‹–‘”–‘„‘–Šdz612 Such rules give the Islamic insurance market stability in terms of issuing fatwa that regulate Islamic insurance.613

The law classifies takaful businesses into family takaful (life insurance), general takaful (non-life insurance) and retakaful (reinsurance).614 Just recently, the law started to require insurance companies to separate life and general insurance business. Also, the law does not require companies to follow a certain Islamic insurance model. However, it requires companies to establish insurance contracts in accordance with the donation principle.615 Wakala, Mudarabah or hybrid models are the most common models used by takaful companies.616 A study conducted by interviewing representatives from takaful operators found that most Malaysian

611 IFSA, pt. IV, div. 2 (1). 612 IFSA, pt. IV, div. 1, art. ʹͺ•—„•‡ –‹‘ȋͳȌ‘”ȋ͵ȌǤDz—–›‘ˆ‹•–‹–—–‹‘–‘‡•—”‡ ‘’Ž‹ƒ ‡™‹–Š Šƒ”‹ƒŠǤ—„•‡ –‹‘ȋͷȌDz›’‡”•‘™Š‘ ‘–”ƒ˜‡‡••—„•‡ –‹‘ȋͳȌ‘”ȋ͵Ȍ ‘‹–•ƒ‘ˆˆ‡ ‡ƒ† shall, on conviction, be liable to imprisonment for a term not exceeding eight years or to a fine not exceeding twenty-ˆ‹˜‡‹ŽŽ‹‘”‹‰‰‹–‘”–‘„‘–ŠdzǢsee also Malaysia Legislates Jail for Shariah Scholars Over Insurer, Bank Breaches, INSURANCE JOURNAL, (Aug. 23, 2013), http://www.insurancejournal.com/news/international/2013/08/23/302671.htm. 613 Bekkin, supra note 149, at 132. 614 IFSA, art. 5 (Classification of, and construction of references to, takaful business). 615 DR. AZMAN MOHD NOOR, A SHARIAH COMPLIANCE ASSESSMENT ON TAKAFUL INVESTMENT LINK 7, http://drazman.net/wp-content/uploads/2013/03/Dr.Azman-Takaful-investment-link-assesment- final-0305091.pdf. 616 Id. at 6.

126 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia takaful companies prefer the use of the wakala-based model rather than the mudarabah model, due to the former being more profitable than the latter.617

Another interesting requirement of the law is that it restricts the use of some words for the purpose of protecting customers. The FSIA prohibited the use of the

™‘”†• Dztakafulǡdz Dz •Žƒ‹  ‹•—”ƒ ‡dz ‘” Dz •Žƒ‹  ƒ••—”ƒ ‡dz —Ž‡•• –Š‡ ’‡”•‘ providing such service•‹• ƒ—–Š‘”‹œ‡†—†‡”–Š‡ – –‘ Dz ƒ””›‘ takaful business, takaful „”‘‹‰„—•‹‡••‘” •Žƒ‹ ˆ‹ƒ ‹ƒŽƒ†˜‹•‘”›„—•‹‡••Ǥdz618 Any use of such words is only possible with the prior written approval of the BNM.619 This cuts down on the risk of dealing with companies that claim to be sharia compliant from the use of that language.

The Malaysian effort to provide a complete set of Islamic financial regulations including regulations of insurance seems a successful move. Islamic scholars have adopted a moderate religious view that has paved the way for the application of Islamic insurance in practice.620 Malaysian Islamic scholars interpret the law more flexibly, resulting in doubts over whether insurance is sharia compliance.

A Malaysian scholar and professor at the Islamic Science University of

Malaysia, Dr. Amir Shaharuddin, sees Islamic financial institutions in the Gulf region

617 Htay & Zaharin, supra note 542, at 1. 618 IFSA § 151(1) (ii). 619 IFSA § 139/151. 620 Shaharuddin, supra note 297, at 8.

127 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia as more sharia compliant than they are in Malaysia.621 Generally speaking, Islamic scholars in Saudi Arabia are more conservative in adopting or accepting opinions based on minority views, while Malaysian scholars have no problem adopting such rules.

Consider the example of Bay' al Inah, on which the Malaysian takaful market depends but the majority of Islamic scholars prohibit. 622 The buy-back arrangement

Dzƒ›̵ƒŽ ƒŠdz‹•†‡ˆ‹‡†ƒ•Dzƒ•ƒŽ‡‘ˆƒƒ••‡–ˆ‘ŽŽ‘™‡†„›ƒ„—›-back at an increased

’”‹ ‡‘ˆ–Šƒ–•ƒ‡ƒ••‡–ǤdzŠ‡ƒŒ‘”‹–›‘ˆ •Žƒ‹ • Š‘Žƒ”•”‡‰ƒ”†–Š‹•ƒ””ƒ‰‡‡–

ƒ•Dzƒ†‹•‰—‹•‡†Ž‘ƒǤdz623 This may be viewed as a method of avoiding interest riba, which is prohibited under Islamic law. This method is widely used in Malaysia.624 In fact, Malaysian Islamic scholars have approved it.625 However, Saudi Islamic scholars forbid the use of this tool because it includes interest riba.626 As a further example, sales of debt are allowed in the Malaysian financial market.627 The majority of Islamic scholars prohibit such sales or otherwise dealing with debt.628 Middle

621 ‘ǯ—ƒǯƒ‘Š—”ƒŠŒƒǯƒŽƒŽƒ›œ‹ƒƒ‹”—Žǯ–œ‹ƒŠ„ŽŠƒ”‹ƒˆ‹‡ƒ†”Ž-kelegin, [Prohibited Deals Affect the Sharia Compliant in Malaysia], AL-JAZIRAH, no. 14649, Nov. 6, 2012, http://www.al- jazirah.com/2012/20121106/bf1.htm. 622 Amir Shaharuddin, The Bay' al-Inah Controversy in Malaysian Islamic Banking, 26 ARAB. L. Q 499, 500 (2012). 623 Linklaters, Šƒ”‹ǯƒ-compliant Securities (Sukuk), LINKLATERS, (Sep. 2012), http://www.linklaters.com/.../161211_Sharia_Compliant_Securities_Sukuk_Flyer.pdf. 624 HASSAN & LEWIS, supra note 197, at 135. 625 Shaharuddin, supra note 622, at 511. 626 Yousef Al Shubaily, Hukm Al-twarq fie Al-„‘ǯ‘‘ȏ ƒ–™ƒ‘–Š‡ƒ›ƒ ””ƒ‰‡‡–Ȑ, SHUBILY, http://www.shubily.com/index.php?news=55. 627 Saiful Azhar Rosly & Mahmood M. Sanusi, TŠ‡’’Ž‹ ƒ–‹‘‘ˆƒ›ǯŽ-Ǯ ƒŠƒ†ƒ›ǯŽ-Dayn in Malaysian Islamic Bonds: An Islamic Analysis, 1 INTǯL J. ISLAMIC FIN. SERVICES, no. 2, § 5.2.1, available at http://www.ukm.my/hairun/kertas%20kerja%20assignment/saiful%20azhar.pdf. 628 Id.

128 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia

Eastern Islamic scholars prohibit Malaysian Islamic bonds; therefore, dealing with such bonds is forbidden.629

This leniency on the part of Malaysian scholars might exist because of the lack of expertise in Islamic law in Malaysia, particularly, the lack of Islamic scholars specializing in Islamic finance and insurance.630 This is in contrast to Saudi Arabia, where a large number of Islamic scholars reside in comparison to the number of insurance professionals. Cooperation between these countries could support the

Islamic insurance industry on both fronts. Malaysian Islamic scholars are expert in insurance while Saudi scholars are well versed in sharia; collaboration would allow them to develop Islamic rules to support Islamic insurance.

5.4.2 The Bahraini Experience

The insurance industry in Bahrain is one of the most developed insurance markets in the Gulf. The Islamic insurance market was established when the first insurance company started operations in 1989.631 Because the AAOIFI is based in

Bahrain, it has enabled Bahrain to develop its insurance market and to be the

Islamic financial center of the Middle East. The Central Bank of Bahrain (CBB)

629 Id. at § 7.1. 630 Mohammed Akram Aldean & Saeed Boharwa, Malaysian Takaful Industry: Success Factors and Development Potentials, 10 JIA 19 (2013). 631 IMF MONETARY & FINANCIAL SYSTEMS & MIDDLE EAST & ASIA DIVISIONS, KINGDOM OF BAHRAIN: FINANCIAL SYSTEM STABILITY ASSESSMENT, INCLUDING REPORTS ON THE OBSERVANCE OF STANDARDS AND CODES ON THE FOLLOWING TOPICS, BANKING SUPERVISION, INSURANCE SUPERVISION, SECURITIES REGULATION, AND ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF TERRORISM 31 (IMF Country Report no. 06/91, 2006), available at http://www.imf.org/external/pubs/ft/scr/2006/cr0691.pdf. Today the locally incorporated insurance firms consist of 14 Conventional Insurance Firms, 7 Takaful Firms, 2 Reinsurance Firms, 2 Retakaful Firms and 1 Captive, while Overseas Insurance Firms consist of 8 Conventional Insurance Firms and 3 Reinsurance Firms, see Press Release, Central Bank of Bahrain, Bahrain Insurance Sector Continues its Growth in 2012 (Nov. 25, 2013), http://www.cbb.gov.bh/page-p-bahrain_insurance_sector_continue_its_growth_in_2012.htm.

129 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia governs the insurance industry in Bahrain. The CBB has not enacted Islamic insurance law but instead has issued some rules related to the Islamic insurance business, which are contained in volume three of the CBB rulebook.632 However,

Islamic insurance rules cannot contradict the Central Bank of Bahrain and Financial

Institutions Law.633 Therefore, the CBB ensures that takaful ‘’ƒ‹‡•ǯ‘’‡”ƒ–‹‘• do not affect the stability of the financial system.634 Unlike Malaysia, the CCB has created the National Šƒ”‹ஞƒŠ Advisory (NSA); however, the NSA has no power over the takaful companies or their products.635

The takaful rules set the standards for Islamic insurance products. According to these rules, takaful companies must establish a Sharia Supervisory Board

(SSB).636 The SSB has the power to establish the takaful products.637 These products have to be of equal quality as those provided by conventional insurance companies.638 The rules also require companies to apply the AAOIFI Governance

Standard for Islamic Financial Institutions. Moreover, the takaful rules require all companies to adopt the takaful model that is a hybrid between the wakala model and the Mudarabah model. The wakala model allows the company to underwrite and manage the insurance fund for a prefixed fee. On the other hand, the mudarabah

632 RODNEY WILSON, LEGAL, REGULATORY AND GOVERNANCE ISSUES IN ISLAMIC FINANCE 158 (2012). 633 The Central Bank of Bahrain and Financial Institutions Law, art. 4; see also A. M. BEST TAKAFUL REVIEW, supra note 256, at 6. 634 Central Bank of Bahrain Volume 3ȄInsurance rules, TA-1.1.8. 635 Rihab Grassa, supra note 599, at 184. 636 3 Rulebook, Insurance rules, HC-9.2.1. 637 3 Rulebook, Insurance rules, TA-1.1.8. 638 3 Rulebook, Insurance rules, TA-1.1.8.

130 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia model is more of an investment product for insurance funds. Unlike in Malaysia, all of the takaful models are acceptable after being approved by the SAC.639

The Bahrain model is focused on developing a sharia-related structure that can be relevant for global application.640 This approach has attracted investors and takaful companies to establish insurance companies in Bahrain.641 Moreover, the

CBB is working on revising the existing takaful model so that Bahrain becomes the

DzŒ—”‹•†‹ –‹‘ ‘ˆ Š‘‹ ‡ ˆ‘”ƒŽŽ–Š‡ takaful and retakaful ‘’ƒ‹‡•‰Ž‘„ƒŽŽ›Ǥdz642 The attractiveness of Bahrain has definitely been developed through the use of a very moderate view on Islamic law.

Financial and insurance institutions can function only under flexible rules.

These kinds of companies are primarily interested in generating the most profit in the shortest amount of time. The varying models of Islamic insurance and varying opinions of Islamic scholars are confusing to companies offering Islamic insurance and to their consumers. Based on a review of the systems in place, it seems that CBB has been successful in finding a way to employ Islamic insurance law. The CBB chose one model and adopted the AAOIFI rules, agreed upon and issued by members from all over the world thus avoiding the controversy that arises from

639 ƒ••ƒ ‘––†‹‡”‘ǡƒ‹ƒŽ„‹†‹‘Š†ƒ••‹Ƭ‡”ƒ’Ǥ ‘Dž—DžŽƒŽǡChallenges for Takaful to go Forward, in TAKAFUL AND MUTUAL INSURANCE: ALTERNATIVE APPROACHES TO MANAGING RISKS 150 (Serap O. Gonulal, eds. 2013). 640 Fahim Khan, supra note 199, at 298. 641 DELOITTE, THE GLOBAL TAKAFUL INSURANCE MARKET CHARTING THE ROAD TO MASS MARKETS 12 (2013), http://www.deloitte.com/assets/Dcom- MiddleEast/Local%20Assets/Documents/Centers/Islamic%20finance/me_fsi_insurance_takaful_061 3.pdf. 642 Bahrain, supra note 587.

131 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia varying opinions. So it seems that starting with one Islamic insurance model has the potential to give the market stability by making it easy to adopt its rules.

5.4.3 Points of View on Islamic Insurance Regulations

The difference between the Saudi Arabian, Malaysian and Bahraini systems lies in the way the countries have enacted specific rules governing Islamic insurance. Rodney Wilson describes the enactment of the Saudi CIL as a disappointment from the takaful perspective.643 ‡‰‘‡•ˆƒ”–Š‡”–‘•ƒ›ǡDzŠ‡Žƒ™‹• very general, and contains no reference to takaful. There seems to be confusion in the title, although it is supposed to cover in•—”ƒ ‡ ‘’ƒ‹‡• Dz‘’‡”ƒ–‹‰ ‹ cooperative organisations[,] [t]he regulations issued which accompanied the law are more comprehensive, defining different types of insurance, the conditions for licenses being granted, corporate governance and regulatory and supervisory

’”‘ ‡†—”‡•Ǥdz644 Many others have criticized the Saudi CIL for not being sharia compliant. However, those who have criticized the law still do not agree on what

Islamic insurance is, exactly. Within Islamic insurance, there are different views, models and approaches. The Malaysian approach is based on strong sharia governance by giving the SAC the power to be the final authority in sharia-related matters, but at the same time allowing diversity in the application of sharia.645 On the other hand, Bahrain takes a different approach by issuing rules that work as guidance for all insurance companies, therefore standardizing the takaful model and giving the SSB of each company the power to govern. The Malaysian and the

643 Wilson, supra note 632, at 159. 644 Id. 645 Fahim Khan, supra note 199, at 300.

132 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia

Bahraini experiences in enacting regulations related to the Islamic insurance industry help to identify the differences between Islamic insurance and conventional insurance frameworks.

5.5 Relevance of Enacting Further Regulations on Islamic Insurance in Saudi Arabia

In Saudi Arabia, the absence of Islamic financial regulation including that of the insurance industry has created anarchy within the industry. The banking regulations and the CIL generally require financial entities to comply with Islamic law. However, no rules have been enacted to specify what constitutes Islamic financial rules. As a result some entities established sharia boards to supervise the operation of financial entities. This has resulted in confusion in the market because each sharia board has its own interpretation of Islamic law, which has generated different industry practices. As a result, it is unclear which entities are sharia- compliant and which standard the sharia boards apply. The following sections discuss these issues.

5.5.1 Comparison with the Saudi Banking Sector

The insurance industry in Saudi Arabia is seemingly similar to the banking industry. This similarity creates problems for the insurance industry since the banking industry has been criticized from a religious point of view. Generally,

Islamic scholars have criticized conventional banking services that create profit from dealing in interest-based products. As mentioned previously, interest riba is

133 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia forbidden by shariaǤ •Žƒ‹ Žƒ™’”‘Š‹„‹–•‹–‡”‡•–„‡ ƒ—•‡‹–‹••‹’Ž›Dzƒ”‡™ƒ”†ˆ‘” renti‰‘‡›ƒ†Š‘ƒ”†‹‰™‡ƒŽ–ŠǤdz646

SAMA generally prohibits dealing with interest ribaǤ ǯ• Šƒ”–‡” prohibits the agency from dealing with interest. More specifically, Article 2 of the charter states that SAMA cannot pay out interest or receive interest. The fees

Šƒ”‰‡†—•–„‡ˆ‘”ƒ –—ƒŽ•‡”˜‹ ‡•”‡†‡”‡†‘”–‘ ‘˜‡”–Š‡‰‡ ›ǯ•‡š’‡•‡•Ǥ647

ƒ› ƒ”‰—‡ –Šƒ– –Š‡ Šƒ‰‡ ˆ”‘ Dz‹–‡”‡•–dz –‘ Dzˆ‡‡dz ‘‡• †‹”‡ –Ž› ˆ”‘ –Š‡ pressure imposed by religious scholars. Article 6 of the charter emphasizes the interest prohibition and requires SAMA to act in accordance with Islamic law.648

These rules have created a major challenge for SAMA and the banking industry. Many banks in Saudi Arabia were indeed not sharia-compliant when the

SAMA charter was written.649 Islamic nations found it quite challenging to create banking law to govern western-style instruments and to deal with interest riba.

Many Islamic scholars declared fatwa prohibiting dealing with, working with and

646 Rahli Ali & Mustafa Kamal, Standardising Islamic Financing: Possibility or Pipe Dream?, 10 BUS. L. INT'L 19 (2009). 647 ‘›ƒŽ‡ ”‡‡‘Ǥʹ͵ȋͳͷȀͳʹȀͳͻͷ͹Ȍǡ‹œƒ‘ǯ—•ǯ•ƒ•–Ž-ƒ“†Žǯƒ”‹„‹Ž-sauadi [Charter of the Saudi Arabian Monetary Agency]ǡƒ”–ǤʹǡDzŠ‡ƒ—†‹”ƒ„‹ƒ‘‡–ƒ”›‰ency shall not pay nor receive interest, but it shall only charge certain fees on services rendered to the public and to the Government, in order to cover the Agency's expenditures. Such fees shall be charged in accordance with a regulation passed by the B‘ƒ”†‘ˆ‹”‡ –‘”•ƒ†ƒ’’”‘˜‡†„›–Š‡‹‹•–‡”‘ˆ ‹ƒ ‡Ǥdz 648 Šƒ”–‡”‘ˆ–Š‡ƒ—†‹”ƒ„‹ƒ‘‡–ƒ”›‰‡ ›ǡƒ”–ǤͶ•–ƒ–‡•ǣDzȏ–ȐŠ‡‰‡ ›•ŠƒŽŽ‘–—†‡”–ƒ‡ƒ› of the following functions: a. Acting in any manner which conflicts with the teachings of the Islamic Law. The Agency shall not charge any interest on its receipts and payments; b. Receiving private deposits; c. Making advances to the Government or private parties; d. Engaging in trade or having an interest in any commercial, industrial, or agricultural enterprise; e. Buying or holding fixed property ‡š ‡’–™Šƒ––Š‡‰‡ ›”‡ƒ•‘ƒ„Ž›‡‡†•ˆ‘”‹–•‘’‡”ƒ–‹‘•Ǥdz 649 SAEED ABDULLAH, ISLAMIC BANKING AND INTEREST: A STUDY OF THE PROHIBITION OF RIBA AND ITS CONTEMPORARY INTERPRETATION 12 (1996).

134 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia investing in banks.650 Moreover, they have called for adopting an entirely Islamic banking system.651 However, in 1952 when SAMA was created, it was quite challenging to create an Islamic bank because the birth of Islamic banks did not occur until the 1960s.

As time went on the criticism of the banking industry began to wane as

Islamic banks became more prominent. In 1987, Alrajhi Bank was the only Islamic bank operating.652 Today twenty-one banks operate in Saudi Arabia, including foreign banks.653 These banks are divided into three types: (1) Conventional Banks,

ȋʹȌ ‘˜‡–‹‘ƒŽ ƒ• ™‹–Š •Žƒ‹  ˆ‹ƒ ‡ •‡”˜‹ ‡•ǡ ƒ‡† Dz •Žƒ‹  ™‹†‘™•ǡdz and (2) Islamic Banks.654 This classification is not based on any regulatory rules; banks are subject to the Banking Control Law, 655 which does not specify any rules

”‡Žƒ–‡† –‘ •Žƒ‹  „ƒ‹‰Ǥ ‘™‡˜‡”ǡ •Žƒ‹  „ƒ• ‹ ƒ—†‹ ”ƒ„‹ƒ ƒ”‡ Dz•‡Žˆ-

”‡‰—Žƒ–‡†Ǥdz656 Banks decide to be Islamic by establishing a sharia board responsible for recognizing the sharia standards.657

650 Ibn Baz, A Response to the Article of Dr. Ibrahim ibn `Abdullah Al-Nasir Concerning the Stance of Islamic Shari`ah Towards Banks, in 19 BOOK ON AL-BUYU` (SALES) 215, available at http://www.alifta.net/fatawa/fatawaDetails.aspx?languagename=en&BookID=14&View=Page&Page No=1&PageID=3704. 651 Shaykh Muhammed Al Munjjaid, Fatwa 26671, Working in Banks in an Islamic Country, ISLAM QUESTION AND ANSWER, http://islamqa.info/en/26771. 652 Alrajhi Bank was the only Islamic bank operating since 1987. 653 Commercial banks with Islamic finance windows are: The national commercial bank, Saudi Investment Bank, Riyadh Bank, Banque Saudi Fransi, The Arab National Bank, Saudi British Bank, Samba Financial group and Saudi Hollandi Bank. Islamic Banks are: Bank Al-Jazira, Al-Rajhi Bank Albilad and Alinma Bank; Foreign banks are: J.P Morgan Chase, Bank Muscat, National Bank of Pakistan, Emirates NBD, Gulf International Bank, Deutsche Bank, BNP Paribas, National Bank of Bahrain and National Bank of Kuwait. 654 THE REPORT: SAUDI ARABIA, 2010 102 (Oxford Business Group 2011). 655 ‘›ƒŽ‡ ”‡‡‘ǤȀͷǡ‘˜Ǥ͸ǡͳͻ͸͸ǡ‹œƒ—”ƒ“„ƒ–Žǯ„‘‘‘ȏƒ‹‰‘–”‘Žƒ™]. 656 Grassa, supra note 599, at 185. 657 REEM M. ASAAD, THE REGULATORY FRAMEWORK OF ISLAMIC BANKING IN SAUDI ARABIA 6 (2007), http://www.cibafi.org/ControlPanel/Documents/Library/Pdf/A85.pdf.

135 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia

Demand for Islamic banking products has been rapidly growing. Four Islamic banks currently operate in Saudi Arabia.658 This demand pushed conventional banks

–‘ ‹ ”‡ƒ•‡ –Š‡‹” —„‡” ‘ˆ Dz •Žƒ‹  ™‹†‘™•Ǥdz ‘” ‡šƒ’Ž‡ǡ Ž”ajhi Bank is the largest bank in Saudi Arabia in terms of retail sales and branches.659 A study on the performance ‘ˆ ƒ—†‹ „ƒ‹‰ ˆ‘—† Dz–Šƒ– Žrajhi Bank is the best bank in Saudi

Arabia by applying a key number of financial ratios: profitability, liquidity, capital

•–”— –—”‡ǡ ƒ† ‡ˆˆ‹ ‹‡ ›Ǥdz660 Moreover, Alrajhi and the other Islamic banks raised the market share of Islamic banking assets to over 50%, according to Ernst &

Young.661 The Islamic banking industry still continues to grow.

Saudi Arabia has the smallest number of Islamic banks and banking regulations when compared to other Muslim countries or even non-Muslim countries, for that matter. For example, the six largest Islamic banks in Europe are all located in the United Kingdom.662 Islamic banking rules are virtually non- existent, and SAMA allows Islamic banks to be self-regulated. Given that Saudi

Arabia is considered a very conservative country when it comes to Islamic law,663 it is unclear why Islamic banks are so thinly regulated and underdeveloped. Besides,

658 Bank Al-Jazira, Al-Rajhi Bank Albilad and Alinma Bank. 659 AL RAJHI BANK, ALBILAD CAPITAL REPORT, Sept. 25, 2013, http://www.bankalbilad.com/SiteAssets/Pages/News/Δϛήη -ΩϼΒ ϟ΍-Δϴ ϟΎϤ ϟ΍-έΪμ Η-ή ϳήϘ Η-Ϧϋ-ϑήμ ϣ- ϲΤΟ΍ή ϟ΍/Rajhi%20Bank%20report.pdf. 660 Samar Saud S. Bintawim, Performance Analysis of Islamic Banking: Some Evidence from Saudi Arabian Banking Sector 95 (2011) (unpublished M.B.A. Thesis, Ritsumeikan Asia Pacific University) (on file with author). 661 WORLD ISLAMIC BANKING COMPETITIVENESS REPORT 7 (Dec. 2012), http://www.mifc.com/index.php?rp=ey_world_islamic_banking_competi. 662 Diana Sadoveanu, Islamic Banking in European Union Countries: Challenges and Opportunities 595 (CES Working Paper III(4), 2011), available at http://www.ceswp.uaic.ro/articles/CESWP2011_III4_SAD.pdf. 663 See generally VOGEL, supra note 6.

136 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia

Saudi Arabia is one of the largest contributors to the development of Islamic finance worldwide.664

Conventional banks and Islamic banks operate side by side and the two types are identical from the regulatory perspective. A primary goal of SAMA is to sustain the Saudi financial system with strong regulations, with due regard given to international standards such as Basel III and the standards issued by the IAIS. The

Saudi financial system has been active in liberalizing the sector.665 Islamic banks have been allowed to operate within the whole system but still lack certain rules.

Since Islamic scholars continue to disagree about these rules, the Islamic banking legal framework is still lacking.

Commentators have reacted to the lacking framework and the reasons behind it. For example, Abdul Karim Aldohni has argued that Saudi Arabia refrains

ˆ”‘ ‹†‡–‹ˆ›‹‰ •Žƒ‹  „ƒ• Dz„‡ ƒ—•‡ ‘ ‡ –Š‡ †‹•–‹ –‹‘ Šƒ• „‡‡ ƒ†‡ between Islamic and non-Islamic, many of the influential conventional banks will be at risk. Further, such a distinction would mount more pressure, by fundamentalist groups, on the government to Islamicize the system, which goes against the financial interests of Saudi, especially since the banking system consists mainly of contemporary Western institutions and depends largely on W‡•–‡”‡š’‡”–‹•‡Ǥdz666

Another author, Amr Marar, points to the legal tension between the overall Islamic

664 RODNEY WILSON, ECONOMIC DEVELOPMENT IN SAUDI ARABIA 61-62 (2004). 665 GLOBAL INVESTMENT HOUSE, SAUDI ARABIA BANKING SECTOR REPORT 8 (Sep. 2006), available at http://www.globalinv.net/research/SaudiBanking-092006.pdf. 666 ABDUL KARIM KARIM ALDOHNI, THE LEGAL AND REGULATORY ASPECTS OF ISLAMIC BANKING: A COMPARATIVE LOOK AT THE UNITED KINGDOM AND MALAYSIA § 8.2 (2011).

137 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia law and the financial laws, which create a system within the system.667 He suggests that the government should distinguish between the two systems and enact regulations for conventional and Islamic banks, capital markets and insurance.668

Although Islamic banks have received similar criticism to that of insurance, scholars seem to accept the coexistence of conventional and Islamic banks more so than conventional and Islamic insurance companies.669 Insurance is considered to be less sharia-compliant than banking because it involves not only the concept of interest but also is characterized by the concepts of uncertainty and gambling.670 As a result, some Islamic scholars have declared that the Cooperative Insurance Law is not sharia-compliant and have forbidden insurance, which has caused some insurance companies to establish sharia boards.671

The Insurance industry and the banking industry share common features:

–Š‡› ƒ”‡ „‘–Š •—„Œ‡ – –‘ ǯ• •—’‡”˜‹•‹‘ ƒ† ”‡‰—Žƒ–‹‘• ƒ† „‘–Š ‹†—•–”‹‡• have faced the same debate over whether they are sharia-compliant. The debate related to the banking industry is due to the existence of conventional banks that deal with interest. The banking law is silent on the issue of interest, even though the

SAMA charter announced clearly the general prohibition on dealing in interest. The insurance law remains silent as to the definition of Islamic insurance or its rules

667 Marar, supra note 91, 93, 122-123. 668 Id. at 122-123. 669 With appearance of Islamic banking and competing with conventional banks, it seems that Islamic scholars are satisfying with the existence and the availability of Islamic bank in Saudi Arabia. However, because insurance has not yet matured as the banking system, Islamic scholars seem to object the idea of conventional insurance. 670 Al-Thaniyaan, supra note 211. 671 Id.

138 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia despite language in the Cooperative Insurance Law requiring compliance with

Islamic Law. According to the A.M. Best review, the CIL is applicable to both Islamic and conventional insurance companies,672 unlike in Malaysia and Bahrain, for example, where the two systems are separated by two different sets of regulations.

The fact that the CIL is silent on Islamic insurance rules has resulted in the formation of two types of insurance companies. Some insurance companies have established sharia boards and claim that they are operating according to Islamic law. Others have not implemented sharia boards (or claimed that they are Islamic), instead complying with the CIL. It should be noted that both the CIL and SAMA rules require all companies to function according to the CIL, and the CIL does not mention any requirement about sharia boards. The following section explores this absence of rules and how it affects the industry.

5.5.2 Sharia boards: from solution to problem

Sharia boards are able to influence the policies of insurers through the structure of legal rules. Are these companies in fact sharia-compliant? What is the duty of the sharia board given the legal requirements? What is the status of the companies that have not established a sharia board? As we have seen, the sharia

„‘ƒ”†ǯ• ”‡•’‘•‹„‹Ž‹–› ‹• –‘ ƒ’’”‘˜‡ –Š‡ ‹•—”ƒ ‡ ‘†‡Žǡ •—”’Ž—• †‹•–”‹„—–‹‘ formula, insurance products, insurance policy and investment tools, etc. The CIL, however, establishes most of these rules. For example, the CIL requires insurance companies to apply the ratio of the surplus distribution by giving the policyholders

672 M. BEST TAKAFUL REVIEW, supra note 256, at 4.

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10% of the underwriting surplus. Moreover, SAMA requires insurance companies to issue their policies according to the unified standard that SAMA issues.673 None of these standards mentions that the insurance policy should be based on a donation principle. Besides, companies are not allowed to adopt any other Islamic insurance model, such as wakala or mudarabah. Then what is the sharia „‘ƒ”†ǯ•†—–›ǫ

Š‡ ‘Ž› †—–› Ž‡ˆ– ‹• –Š‡ ‘’ƒ›ǯ• ‹˜‡•–‡– ’‘Ž‹ ›Ǥ674 Saudi insurance companies invest in different investment tools, mostly stocks, bonds, and real estate.

SAMA has issued an investment regulation for the insurance companies, which specifies the principles and standards that all companies should meet in order to achieve high standards of investment practices.675 Sharia boards can decide what type of investments the company can make, for example in real estate, Islamic bonds or any sharia-compliant investment tools. Islamic scholars, however, do not agree on whether the use of these tools is sharia-compliant.

Š‹•Žƒ ‘ˆƒ‰”‡‡‡–”ƒ‹•‡•ƒ‘–Š‡”‹••—‡”‡‰ƒ”†‹‰‹•—”ƒ ‡ ‘’ƒ‹‡•ǯ credibility and thus that of its sharia boards. Some insurance companies have claimed that their investments are sharia compliant. At the same time, even though some of these companies maintain sharia boards, some Islamic scholars have issued fatwas prohibiting dealing or buying from specific companies because they invest in interest-based securities.

673 Implementing Regulations, art. 51, art. 52. 674 KHORSHID, supra note 113, at 135. 675 SAUDI ARABIAN MONETARY AGENCY, INSURANCE INVESTMENT REGULATION, http://www.sama.gov.sa/sites/samaen/Insurance/InssuranceLib/IIR_4600_Investment_Regulations .pdf

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Despite pronouncements by insurance companies that they are in compliance with sharia law, very few insurance companies have been deemed sharia-compliant by at least some Islamic scholars. It is very common in Saudi

Arabia for Islamic scholars to issue so- ƒŽŽ‡† Dzsharia guidelines for trading and

‹˜‡•–‡–dzˆ‘” ‘’ƒ‹‡•–Šƒ–ƒ”‡Ž‹•–‡†‹–Š‡•–‘ ƒ”‡–ǤŠ‡’—”’‘•‡‘ˆ•— Š guidelines is to identify companies that investors are permitted to invest in.676 For example, Sheikh Muhammad al-'Usaymi, Abdulaziz Alfawzan and Yousef Al Shubaily have issued a list of companies that are deemed to be sharia-compliant.677

Žˆƒ™œƒǯ• Ž‹•– ‘–ƒ‹• ͹Ͳ sharia-compliant companies, but only seven insurance companies were found to be sharia-compliant.678

Islamic scholars, though, have different views about which business transactions are prohibited under Islamic law.679 Some of these scholars provide guidelines only when people seek a fatwa about a specific company, thus comprehensive guidelines are rare.680 In addition, the usual classification that scholars employ is a simple split between companies that are deemed sharia-

676 Saudi Arabia: Conflicting Fatwas Confusing Investors, ASHARQ AL-AWSAT (Sept. 7, 2008), http://www.aawsat.net/2008/09/article55257700. 677 Sharia Guidelines for Trading and Investment Lists: Sheikh Muhammad al-'Usaymi, Al-shirkat Žǯ„ƒ—ŠƒŽƒǯƒͷͺ͹͸ȏŠƒ”‹ƒ‘’Ž‹ƒ–‘’ƒ‹‡•‹•–͸Ͷͷͷ], AL-RBAH ALHULAL [HALAL 2], available at http://www.halal2.com/main.asp?id=75 [hereinafter 2011 list]; Sheikh Abdulaziz Alfawzan, ƒǯ‹ƒ–ǡŽ-•Š‹”ƒ–Žǯ„ƒ—ŠƒŽƒǯƒͷͺ͹͹ȏŠƒ”‹ƒ‘’Ž‹ƒ–‘’ƒ‹‡•‹•–͸Ͷͷ͸Ȑ, RESALT AL-ISLAM [ISLAM MESSAGE], available at http://main.islammessage.com/newspage.aspx?id=9663 [hereinafter 2012 list], Sheikh Yousef Al Shubaily, Al-•Š‹”ƒ–Žǯ„ƒ—ŠƒŽƒǯƒ͸ͶͷͷȏŠƒ”‹ƒ‘’Ž‹ƒ–‘’ƒ‹‡• List 2011], SHUBILY.COM, available at http://www.shubily.com/index.php?news=348. 678 2012 list, supra note 677. 679 Id. 680 Random Fatwas Confounding Markets, Slowing Economy, ARAB NEWS, Aug. 17, 2005, http://www.arabnews.com/node/271577.

141 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia compliant and those that are not.681 This classification is quite basic, and the criteria used to determine it varies from one scholar to another.682

Financial institutions rarely publish guidelines. The Sharia Board of Alrajhi

Capital, however, did release its sharia guidelines for trading and investment in stock companies and an accompanying list of public companies, including insurance.

Alrajhi Capital provided this service to help its customers determine whether companies they might invest in are indeed sharia-compliant.683 This list includes more c‘’ƒ‹‡•–Šƒƒ›‘–Š‡” •Žƒ‹ • Š‘Žƒ”•ǯŽ‹•–‡–‹‘‡†ƒ„‘˜‡ǤŠ‡Ž”ƒŒŠ‹ board considers 125 companies to be sharia-compliant.684 Among these, the board declared that 14 insurance companies are sharia-compliant and 21 insurance companies are not.685

These fatwas and lists affect financial markets, including insurance markets.686 Given the conflicting information, consumers and investors are confused as to where to invest and from which companies to buy their products.687 This is due

681 Others classify the stocks into three types; pure Islamic stocks, combination stocks that contains interest elements and non-sharia stocks. See Reem, supra note 657, at 9-10. 682 Sharia Guidelines for Trading and Investment Lists, supra note 677. 683 The Sharia Board of Alrajhi Capital has issued resolution No. (485), a legal rule (sharia opinion) on the investment and trading in the stocks of joint stock companies, see Shariah Guidelines for Trading and Investing in Capital, AL RAJHI CAPITAL, http://www.alrajhi- capital.com/en/Pages/shariahguide.aspx [hereinafter Alrajhi list]. 684 Id. The Saudi stock exchange lists 158 companies; see also SAUDI STOCK EXCHANGE (TADAWUL), ANNUAL STATISTICAL REPORT (2012), http://www.tadawul.com.sa/wps/portal/!ut/p/c0/04_SB8K8xLLM9MSSzPy8xBz9CP0os3g_A- ewIE8TIwN_tzAnA09vQ7cwYzcDQwNnY_3g1Dz9gmxHRQDIfuKO/ [hereinafter 2012 TADAWUL ANNUAL REPORT]. 685 List of Sharia Compliant and Non-Compliant companies-Q3 2013, AL RAJHI CAPITAL, http://www.alrajhi-capital.com/en/Pages/shariahguide.aspx. 686 Random Fatwas Confounding Market, Slowing Economy, supra note 680. 687 Reem, supra note 657, at 9.

142 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia in part to the fact that some insurance companies such as NCCI have sharia boards and claim that they are sharia-compliant.

The lack of rules governing sharia boards also affect the insurance industry.

The rules related to sharia „‘ƒ”†•ǯ ”‡•’‘•‹„‹Ž‹–‹‡• ’‘–‡–‹ƒŽŽ› ƒˆˆ‡ – ‹•—”ƒ e companies that have not implemented a sharia board. More specifically, companies without sharia boards might appear not to comply with sharia law even though these companies comply with CIL. Also these companies that claim to be Islamic might be doing so just to attract customers. In any case, do these companies attract more customers because they have a sharia board? I believe not, because even some of these companies who have a sharia „‘ƒ”†ƒ”‡ ‘•‹†‡”‡†ǡƒ ‘”†‹‰–‘Ž”ƒŒŠ‹ǯ• list and the Islamic scholars fatwas, to be non-sharia-compliant companies. At least some consumers depend on the fatwas ‘ˆ •Žƒ‹ • Š‘Žƒ”•ǯƒ†–Š‡‹”Ž‹•–•‘ˆƒŽŽ‘™‡† entities when making consumption decisions.688

••—‹‰–Šƒ––Š‡Ž”ƒŒŠ‹ǯŽ‹•–‹•ƒ —”ƒ–‡ǡ–Š‡ ‘’ƒ‹‡•listed as non-sharia compliant constitute 56.8% of the market share, while companies considered to be sharia-compliant constitute the rest.689 This means that both types of companies are close to equal in their presence in the market, but the question remains whether the market share of sharia-compliant companies is increasing.

688 Random Fatwas Confounding Market, Slowing Economy, supra note 680. 689 SAUDI INSURANCE SECTOR 2013, ALBILAD CAPITAL REPORT, Mar. 27, 2013, at 5, http://www.albilad- capital.com/En/Research/Pages/CorporateResults.aspx. The report provides the market share of each insurance company under review. AlŒƒŠ‹ǯ•Ž‹•–™ƒ• ‘’ƒ”‡†™‹–ŠŽ„‹Žƒ†ǯ•”‡’‘”––‘ determine the total market share of non-sharia compliant companies and then assessed their percentage relative to the entirety of the insurance market was assessed.

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Between 2012 and 2013, the market share for Islamic insurance changed slightly.690 Two of the largest companies, NCCI and Bupa Arabia, comprised 37% of the market share. Many fatwa consider NCCI, the first insurance company to be listed on the stock market in 2003, as being non-sharia compliant. The above-

‡–‹‘‡†Ž‹•–•Šƒ˜‡ƒŽŽ†‡–‡”‹‡†–Šƒ– ǯ•ƒ –‹˜‹–‹‡•ƒ”‡‘–sharia-compliant mainly because they are based on interest-based security investments.691 Others

Šƒ˜‡ ’—„Ž‹•Š‡† ’ƒ’‡”• †‡• ”‹„‹‰ –Š‡  ǯ• ƒŽŽ‡‰‡† ™”‘‰†‘‹‰•692 and claiming that the company violates sharia Žƒ™Ǥ ǯ•ƒ”‡–•Šƒ”‡†‡ ”‡ƒ•‡†ˆ”‘ʹ͹Ψ‹

2012 to 22.3% in 2013.693 Bupa, which is listed on the stock market in 2008 and classified as Islamic on the Alrajhi list, experienced a market share increase from

10.5% in 2012 to 12.6% in 2013.694 This change might be attributable to the effects of these fatwa. However, only the future can tell whether the market share of sharia- compliant insurance companies will continue to increase.

Historically these lists and fatwas affected the insurance stock market and still worry investors, but the insurance stock market is beginning to recover from the effects. The Capital Market Exchange reports that insurance company stock was the most actively traded in 2012 with 13.04 million trades (30% of the total trades).695 Ž•‘ǡ–Š‡‹†—•–”›ǯ•˜ƒŽ—‡‘ˆ•Šƒ”‡•–”ƒ†‡†”‡’”‡•‡–•ʹ͵Ǥ͵ͺΨ‘ˆ–Š‡–‘–ƒŽ

690 Id. 691 Sharia Guidelines for Trading and Investment Lists, supra note 677. 692 ALDOIJY, supra note 543. 693 ALBILAD CAPITAL REPORT 2013, supra note 689, at 5. 694 Id. 695 2012 TADAWUL ANNUAL REPORT, supra note 684.

144 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia value traded, for a total amount of SR 451.04 billion, or US 120.2 billion.696 This number includes the stocks of all insurance companies. This reflects the strong demand for equity interests in insurance companies, more than any other industry, despite the prohibitions from Islamic scholars. This by no means reflects the choice of all Saudi people, but it clearly indicates that at least a non-negligible portion of the Saudi people does not worry generally whether insurance is sharia-compliant.

The existence of both Islamic and conventional insurance gives people and businesses options to choose from, more diversity in the financial products they can invest in and creates competition between the two systems. It should also be noted that, although most people believe in the value of fatwas, they still invest and deal with conventional banks and insurance companies, even though some of these fatwas prohibit dealing with such entities.

5.6 Reaching a Middle Ground: Modernizing Islamic Offerings

Interpretation of Islamic Law varies amongst Islamic scholars; therefore, countries adopting Islamic law schemes apply laws differently. This is only exacerbated by the lack of consistency in the interpretation of the concept of insurance. The question whether and how to constitute Islamic insurance schemes remains unanswered.

The Islamic authority in Saudi Arabia, the Senior Council of Ulema,697 has found an insurance scheme based on Islamic principles that consist of non-profit

696 Id. 697 See supra § 1.4. Council of Senior Ulema.

145 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia insurance entities based on donation contracts. The purpose of these is to establish cooperation between participants who contribute money into a pool so as to share risk that might affect each and every one of the participants. This idea was introduced by a 1977 fatwa that prohibited dealings with conventional insurance while encouraging the use of Islamic insurance.698

Insurance schemes have virtually gone without consideration by Islamic scholars, thus causing difficulty in adopting a cohesive model of Islamic insurance. It was not until the beginning of the 1970s that Islamic scholars, particularly Saudi scholars began looking into establishing Islamic insurance schemes. Since that time, scholars have continued to disagree on the main principles of Islamic insurance. It is clear that a strong legal framework must first be established before a scheme of

Islamic insurance can be adopted.

As described previously, Islam prohibits riba, a concept akin to usury. Islamic scholars have analyzed riba for more than 1,000 years, and have concluded that it is forbidden. This concept has weighed heavily on the financial industry in Islamic countries. When conventional banking emerged in the Muslim world Islamic scholars prohibited loan agreements because such transactions constituted riba. On the other hand, during the last few decades insurance schemes have emerged in the

Muslim world, and Islamic scholars have not been analyzed them as much as they

698 Fatwa no. 51.

146 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia have analyzed riba agreements. Despite this thin analysis, some Islamic scholars have forbidden insurance.699

Although many insurance schemes are sharia-compliant in terms of their nature of cooperation and risk sharing, more research is needed on the character and benefit of Islamic insurance in order to solidify their acquiescence with Islamic principles. At least some insurance principles seem to be in line with Islamic law.

One of the primary insurance principles is utmost good faith, meaning that insurance parties must act in good faith and disclose accurate information upon making a contract.700 This principle is in fact an Islamic principle.701 Sharia requires honesty and prohibits being misleading both in business and in general.702

Therefore, if both insurance parties provide accurate information the elements of uncertainty will be reduced, thus allowing the insurer carefully to decide on the terms of the contract and to estimate the exact risk and cost of coverage using information provided by the insured. If the insured fails to provide such information, the contract will be deemed invalid.

Some Islamic scholars allow Islamic insurance because it is based on the concept of donation, which eliminates uncertainty in the insurance contracts.

However, Mohammed Al Sheikh, an Islamic professor, argues that the commutative

699 Fatwa no. 51. 700 Torki A. Alshubaiki, Developing the Legal Environment for Business in the Kingdom of Saudi Arabia: Comments and Suggestions, 27 ARAB L.Q. 371 (2013). 701 Id. 702 Dr. Renat I. Bekkin, supra note 613, at 112-113.

147 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia element cannot be avoided in any insurance contract.703 In Islamic insurance, the

‰‘ƒŽ ‘ˆ „—›‹‰ǡ ‘” Dz ‘–”‹„—–‹‰ǡdz ƒ• –Š‡ slamic scholars prefer to put it, is to be insured against a particular risk.704 If the contributor does not believe he will gain an advantage from participating in the pool, he will simply not participate.705 Al

Sheikh also suggests that, from an economic standpoint, the commutative element of conventional insurance is more efficient than the donation element that Islamic insurance adopts.706 Thus, insurance markets would benefit from a regulatory framework that allows for a form of insurance that adopts the Islamic insurance principles rather than settling for an attempt to convert commutative contracts to donation contracts with an impossible goal of eliminating uncertainty.

Based on certain interpretations, Islamic insurance cannot always be considered sharia-compliant. Islamic scholars, when they are interpreting Islamic law, seek the best ijtihad to make them honest before God. Timur Kuran explains

–Šƒ–Dz‘ƒ––‡”™Šƒ–Š‹•‡ ‘‘‹  Š‘‹ ‡•ǡŠ‡™‹ŽŽˆ‹†Š‹•‡Žˆ™‘†‡”‹‰™Š‡–Š‡” at least some of them conflict with the spirit, if not the letter, of Islamic law.

‘•‡“—‡–Ž›ǡŠ‡™‹ŽŽˆƒ‹Ž–‘‡• ƒ’‡‰—‹Ž–Ǥdz707

Despite the low likelihood that Islamic scholars will reach a consensus and deem insurance sharia-compliant, insurance is an important industry that can

703 D. Mohammed Al-Sheikh, Al-tamin Al-–—ǯŒƒ”‹–Š”ǯƒƒŽƒˆƒ”“„‹Š™‘Ž-tawani [Conventional Insurance is More Assurance and it is Similar to Islamic Insurance, Al Eqtisadiah], AL QTISADIAH [THE ECONOMIST], Aug. 21, 2011, http://www.aleqt.com/2011/08/21/article_571650.html. 704 Id. 705 Id. 706 Id. 707 Timur Kuran, The Discontents of Islamic Economic Morality, 86 AM. ECON. REV. 441 (1996).

148 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia bolster the economy. Separating religious values from economic choices is important.708 Religious values can surely influence people to lean towards religious products. Muslims are concerned about breaking Islamic rules. In these instances complying the fatwa seems more important than establishing an insurance scheme.

Because of a fatwa prohibiting insurance, people were unable to benefit from insurance in Saudi Arabia. Today, Islamic scholars and consumers have differing views on insurance. The government of Saudi Arabia needs to find a balance between modernization and compliance with Islamic law.709

5.7 Pathways to the Successful Development of Insurance Law in Saudi Arabia

Dr. Mohammed Al Sheikh, who does not prohibit conventional insurance, argues that those who allow Islamic insurance and prohibit conventional insurance are in fact contradicting themselves.710 Indeed, all the prohibited elements that exist in conventional insuranceȄinterest riba, uncertainty gharar and gambling miserȄ are encompassed in Islamic insurance.711 Like conventional insurance, the insured sometimes receives more than the premium he paid. Also, compensation is due in case of loss. Yet, these situations constitute the main reasons why conventional insurance is prohibited.712

708 See generally DAVID THROSBY, ECONOMIC AND CULTURE (2011). 709 Bryant W. Seaman, Comment: Islamic Law and Modern Government: Saudi Arabia Supplements the Shari'a to Regulate Development, 18 COLUM. J. TRANSNAT'L L. 413, 439 (1980). 710 Al-Sheikh, supra note 703. 711 Id. 712 Id.

149 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia

Moreover, Sheikh Al-ƒ‡ǯƒ ƒ”‰—‡•ǡ Dz„‘–Š –›’‡• ‘ˆ ‹•—”ƒ ‡ ƒ”‡ ƒŽ‹‡ ‹

–‡”• ‘ˆ ƒ’’Ž‹ ƒ–‹‘ǡ ƒ† ƒŽŽ ’ƒ”–‹‡• ‹˜‘Ž˜‡† ƒ „‡‡ˆ‹– ˆ”‘ –Š‡Ǥdz713 He goes

ˆ—”–Š‡”ƒ†•–ƒ–‡•ǡDzŠ‡‘’‹‹‘•‘ˆ‘–Š‡”•ƒ”‡‘–†‹˜‹‡”‡˜‡Žƒ–‹‘Ǥ –”‡’”‡•‡–•

–Š‡‹” ‘™ Ǯ Œ–‹Šƒ†ǯǡ ‘” ’‡”•‘ƒŽ ”‡Ž‹‰‹‘—• ‘’‹‹‘Ǥdz714 Quite a number of Islamic scholars share the same view as Al-ƒ‡ǯƒ –Šƒ– ‘˜‡–‹‘ƒŽ ‹•—”ƒ ‡ ‹• permissible under Islamic law.

The CIL gains legitimacy from the belief that some Islamic scholars do not prohibit conventional insurance. Some Islamic scholars, including Al Shubaily,

‹–‡”’”‡–‹‰ •Žƒ‹ Žƒ™ƒ•’”‘Š‹„‹–‹‰–Š‡ Šƒ˜‡ƒŽŽ‘™‡†‹˜‡•–‡–‹Dzsharia

‘’Ž‹ƒ–dz‹•—”ƒ ‡ ‘’ƒ‹‡•ǤŠ‹•‹• ‘–”ƒ†‹ –‘”› ‘•‹†‡”‹‰–Š‡ˆƒ ––Šƒ–ƒŽŽ insurance companies are subject to the Cooperative Insurance Law, which uses one model, the cooperative.

At the moment, Saudi Arabia does not seem to have any intention to enact regulations related to the Islamic financial industry, including insurance. The country failed to regulate Islamic banks despite having operated since 1987 so it is unlikely any action will be taken to regulate the insurance industry. This failure is due to the inconsistency of the Islamic financial rules and the fact that Islamic scholars cannot seem to agree on what constitutes Islamic insurance. Insurance needs to be governed by a set of comprehensive regulations.

713 Both Commercial and Cooperative Insurance are Halal, supra note 231. 714 Id.

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The Cooperative Insurance Law does seem to be based loosely on Islamic principles, but not all of its provisions have been deemed sharia-compliant. Islamic scholars still need to address various issues including the question of who actually owns the fund, surplus distribution formulas, investment in fixed rate tools and the donation component. Despite these shortcomings in the current interpretation of insurance in Saudi Arabia, nothing prevents SAMA from enacting regulations to address these issues.

An interesting, and as of yet unnoted, aspect of the definitions section of the

CIL might help to simplify the debate over Islamic insurance. This section defines

–Š‡ ‘ ‡’– ‘ˆ Dz”‡ ‹’”‘ ƒŽ ‡š Šƒ‰‡dz ƒ• ƒ Dz—‹ ‘”’‘”ƒ–‡† ƒ••‘ ‹ƒ–‹‘ ™‹–Š ‡ƒ Š insured insuring the other insured within the association. Each participant in this pool is both an insurer and an insured. An attorney in-fact administers the exchange, to include paying losses, investing premium, recruiting new members, underwriting new and renewal business, receiving premium, and exchanging reinsurance

‘–”ƒ –•Ǥ‡„‡”••Šƒ”‡’”‘ˆ‹–•ƒ†Ž‘••‡•‹–Š‡•ƒ‡’”‘’‘”–‹‘Ǥdz715 The Council of Ulema has suggested a similar insurance scheme, but it has yet to be established.

”–‹ Ž‡ͺͳ‘ˆ–Š‡‘‘’‡”ƒ–‹˜‡ •—”ƒ ‡ƒ™•–ƒ–‡•ǣDzȏȐ‘‡”•‘•ŠƒŽŽ‹–”‘†— ‡ƒ pension plan, or a reciprocal exchange, or a self-Insurance scheme without the prior written approval of the Agency.dz716 The CIL, however, dos not mention further rules related to the Reciprocal Exchange. Establishment of this kind of exchange has the potential to better comply with Islamic insurance standards than other models. The

715 Implementing Regulations, art 1. 716 Cooperative Insurance Law, art 81.

151 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia model of the Reciprocal Exchange can be used to generate an Islamic insurance scheme.717 It is similar to the wakala model, as the insurance company acts as a manager of the insurance pool on behalf of the participants for a pre-fixed fee specified in the contract.718

Any insurance company could implement a Reciprocal Exchange Fund.

Currently, insurance companies have two accounts, one for shareholders and another for policyholders. Under the proposed scheme, a company interested in establishing a wakala model would be able to adopt a Reciprocal Exchange account.

This type of account seems to adhere more to the precepts of Islamic insurance than the existing cooperative model. The insured would be considered owners of this account, thus responsible if any deficit arose. Customers seeking Islamic insurance can share the risk through this account. On the other hand, if consumers do not prefer the risk-sharing mechanism, the cooperative insurance scheme is still available. Under that scheme, the insured would not be responsible for any deficit, and would receive a 10% surplus from the insurance fund.

Conclusion

Sharia allows scholars to interpret Islamic law for themselves thus leading to various opinions about different issues. This diversity is exemplified by the existence of four different schools of Muslim thought. According to sharia, the

717 AbdulRahim Al-Saati, Nizam Al-tamin Al-islami; Al-–ƒ†ƒˆ‹‡–ǯƒŠ—ŽŽ- kutar [Insurance System: Solidarity in Bearing Risk], 55 J.KAU: ISLAMIC ECON., no. 1, 2010 at 34. 718 See generally Zainal Abidin Mohd Kassim, Hassan Scott Odierno and Sabbir, Hybrid Insurance Structures: Reciprocals, Hybrid Mutual Insurers, and Takaful Patel in TAKAFUL AND MUTUAL INSURANCE: ALTERNATIVE APPROACHES TO MANAGING RISKS 99 (Serap O. Gonulal, eds., 2013).

152 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia purpose of having different opinions is to provide society the chance to apply

Islamic law according to the time and place where they live. Sharia set the principles and the details have been left to the discretion of Muslims. Interpretation of Islamic law gains power when the majority of Islamic scholars agree.

In Saudi Arabia, regulators established the Senior Council of Ulema to provide Islamic opinions for the government and society. However, council opinions are not binding unless adopted by the regulator because the regulator also considers other factors such as the public interest when adopting Islamic opinions.

Islamic scholars must come to a consensus over which rules to adopt when enacting Islamic laws. This is regardless of whether the issue at hand is related to insurance or to other types of contracts. Islamic scholars have different opinions regarding insurance but have called for the adoption of Islamic insurance rules.

Conflict has arisen because some scholars judge insurance as a whole without considering the characteristics of different types of insurance products. According to some interpretations, general insurance, health insurance and life insurance are all forbidden. These types of insurance need to be considered to determine distinctly why they are forbidden under Islamic law.

It is clearly necessary for Islamic scholars to evaluate insurance from a different perspective. Scholars should view insurance as a set of several contracts and legal requirements that come together to generate one product. Such a view can help Islamic scholars adopt insurance principles in accordance with Islamic law. In addition, many benefits flow from being insured including the potential to

153 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia strengthen and protect the economy. These benefits, which will accrue to the whole society, need to be considered in light of Islamic law. The insurance company is responsible for covering risks that can potentially result in millions of dollars of losses, an amount that an Islamic insurance fund may not be able to compensate since the adequacy of the fund depends on the ability of the insured to cover deficits.

The concept of Islamic insurance has been slowly evolving, but despite its late development, creating a system that comports with Islamic law principles is clearly necessary. The current system suffers from a lack of standardization, making it difficult to analyze and thus improve upon. Islamic scholars should propose specific Islamic laws governing insurance in order to establish an Islamic insurance scheme based on the Ulema interpretation of Islamic law principles.

The biggest problem with the current Saudi insurance law is the fact that it is not sharia-compliant. Islamic scholars hold the power to legalize insurance according to sharia, but very few Islamic insurance rules regulate the Islamic insurance industry. In addition, there are significant concerns by Muslims about the legitimacy of insurance.

The problems of the Saudi insurance industry can be eliminated through the development of a strong regulatory framework. Article 83 of the CIL bylaws directs the governor of SAMA to create a committee to improve the development of the insurance sector. SAMA should take advantage of this article and create a Committee of Islamic scholars to study insurance. The purpose of the committee would be to study and analyze insurance today from both perspectives: Islamic and

154 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia conventional. One study can be done by collecting the insurance company data of those companies who implement sharia boards and gathering information about the roles of the boards in each company. These data can then be compared with data from insurance companies that operate without sharia boards in order to study insurance demand. This would also require taking into account those who buy insurance voluntarily. This will provide a window into understanding the behavior of those who believe that insurance is sharia-compliant.

Moreover, members of the committee must have advanced knowledge in both Islamic and conventional insurance practices. This would help scholars distinguish both systems and their functions. Moreover, the committee members should be selected carefully. For example, the committee should consist of both those who issued opinions prohibiting conventional insurance and those who allowed it so that agreement can be reached. The committee should also include insurance experts, lawyers and economists and when advice is needed in a particular field, e.g., health, the committee can seek professional consultation.

Until the committee can find a definitive answer to the insurance dilemma,

SAMA should establish some rules related to existing sharia insurance boards. For example, in order for insurance professionalsȄbrokers, actuaries and appraisersȄ to obtain a valid license to practice in the market they should be required: (1) to

Š‘Ž†ƒ—‹˜‡”•‹–›†‡‰”‡‡ƒ–‹‹—ƒ†–‘Šƒ˜‡ˆ‹˜‡›‡ƒ”•ǯ‡š’‡”‹‡ ‡™‘”‹‰‹ the insurance industry, and (2) to pass the examination that is approved by

155 Chapter 5: Analysis of the Current Insurance Market in Saudi Arabia

SAMA.719 However, SAMA does not specify any requirement or rules governing sharia boards even though their role is essential to the Islamic insurance company.

SAMA needs to license Islamic scholars who are interested in practicing insurance.

They should have at least a minimum diploma in insurance so that their judgment can be based on both their religious interpretations research about business and insurance alike. SAMA should act with the goal of providing a product that complies with Muslim beliefs. These requirements have the potential to protect the insurance industry from the Islamic scholars who are not trained properly to advise financial institutions particularly the insurance institutions at issue here.

719 Implementing Regulations, art. 4(2).

156

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Nooraslinda Abdul Aris & Roszana Tapsir, Risk and Risk Management of Takaful Industry, 4 J. GLOBAL BUS. & ECON., no. 1, 2012, at 29.

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Cherif Bassiouni & Gamal M. Badr, Š‡Šƒ”‹ǯƒŠǣ‘—” ‡•ǡInterpretation, and Rule- Making, 1 UCLA J. ISLAMIC & NEAR E. L. 135 (2002).

Renta I. Bekkin, Islamic Insurance: National Features and Legal Regulation, 21 ARAB L.Q. 109 (2007).

‘Š†Ǥƒǯ•—‹ŽŽƒŠǡIslamic Insurance: Its Origins and Development, 13 ARAB L.Q. 386 (1998).

‘Š†Ǥƒǯ•—‹ŽŽƒŠǡQuantum of Damages in Takaful (Islamic Insurance): A Reappraisal of the Possibility of Adopting the Doctrines of Al-Diyah and Al-Daman, 14 ARAB L.Q. 339 (1999).

Mark Cammack, Islamic Finance: Prospects and Significance, 18 SW. J. INT'L L.113 (2011).

Cooperative Health Insurance Council, Sheikh Al-ƒ‡ǯƒǣ‘–Š‘‡” ‹ƒŽƒ† Cooperative Insurance are Halal, COOPERATIVE HEALTH INSURANCE MAGAZINE, Aug. 2008 at 11, available at http://www.cchi.gov.sa/en/Magazine/MagazineLibrary/magazine2.pdf.

Hossein Esmaeili & Jeremy Gans, Islamic Law across Cultural Borders: The Involvement of Western Nationals in Saudi Murder Trials, 28 DENV. J. INT'L L. & POL'Y 145 (1999).

Hossein Esmaeili, The Nature and Development of Law in Islam and the Rule of Law Challenge in the Middle East and the Muslim World, 26 CONN. J. INT'L L. 329 (2011).

Hossein Esmaeili, On a Slow Boat towards the Rule of Law: The Nature of Law in the Saudi Arabia Legal System, 26 ARIZ. J. INT'L & COMP. L. 2 (2009).

Syed Umar Farooq , Tariq Saeed Chaudhry Fakhr-e-Alam & Ghayur Ahmad, An Analytical Study of the Potential of Takaful Companies, 54 EUROPEAN J. ECON. FIN. & ADMIN. SCI., no. 20, 2010, at 54.

Ahmed Al-Ghadyan, Insurance: The Islamic Perspective and its Development in Saudi Arabia, 14 ARAB L.Q. 332 (1999).

Ahmed Al-Ghadyan, The Judiciary in Saudi Arabia, 13 ARAB L.Q. 235 (1998).

Rihab Grassa, Šƒ”‹ஞƒŠ ‘˜‡”ƒ ‡›•–‡‹ •Žƒ‹  ‹ƒ ‹ƒŽ, 27 ARAB. L.Q. 171(2013).

Andreas Haberbeck, Insurance under Saudi Arabian Law, 1986 LLOYDǯS MAR. & COM. L.Q. 246 (1986).

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Andreas Haberbeck, Risk Sharing in an Islamic Society, 2 ARAB L.Q. 138 (1987).

Andreas Haberbeck & Dr. Kilian Bälz, Regulating the Saudi Arabian Insurance Industry, IBA SECTION ON BUSINESS LAW INSURANCE NEWSLETTER, Aug. 2000.

Insurance Culture, THE CREDIT, Issue 14, Mar. 2013 at 14, http://www.simah.com/Magazine/2013/Q14x/English/magazine.html.

Ayoub Al-Jarbou, Judicial Independence: Case Study of Saudi Arabia, 19 ARAB L.Q. 5 (2004).

Ayoub Al-Jarbou, The Role of Traditionalists and Modernists on Development of the Saudi Legal System, 21 ARAB L.Q. 191(2007).

Ayoub Al-Jarbou, The Saudi Board of Grievances: Development and New Reforms, 25 ARAB L.Q. 177 (2011)

Mohammad Hashim Kamali, Shari'ah and Civil Law: Towards a Methodology of Harmonization, 14 ISLAMIC L. & SOC'Y 415 (2007).

David J. Karl, Note, •Žƒ‹ ƒ™‹ƒ—†‹”ƒ„‹ƒǣŠƒ– ‘”‡‹‰––‘”‡›ǯ•Š‘—Ž† Know, 25 GEORGE WASH. J. INT. L. ECON. 131 (1991).

M. Fahim Khan, Setting Standards for Shariah Application in the Islamic Financial Industry, 49 THUNDERBIRD INTǯL BUS. REV. 303 (2007).

Mercy A. Kuo, Islamic Finance in Southeast Asia: Strategic Context and Trends, 5 J. ISLAMIC ECONOMICS, BANKING & FINANCE, no. 3, 2009 at 63.

Amr Daoud Marar, Saudi Arabia: The Duality Of The Legal System And The Challenge Of Adapting Law To Market Economies, 19 ARAB L.Q. 91(2006).

Samir Mankahady, Insurance and Islamic Law: Islamic Insurance Company, 1 ARAB. L.Q. 199 (1989).

Rashed Aba-Namay, The New Saudi Representative Assembly, 5 ISLAMIC L. & SOC'Y 235 (1998).

Rashed Aba-Namay, The Recent Constitutional Reforms in Saudi Arabia, 42 INT'L & COMP. L.Q. 295 (1993).

Mohamed Abdel-Khalek Omar, Reasoning in Islamic Law: Part One, 12 ARAB L.Q. 148 (1997).

Marcel Omar Papp, Takaful Review 2012: Easing Inherent Tensions in the Takaful Model Takaful, MENA INSURANCE REVIEW (n.d.), http://www.menainsuranceceoclub.com/Article.aspx?id=33110 (last visited April 25, 2014).

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Paul Parashar, How Did Islamic Banks Do During Global Financial Crisis?, 5 BANKS & BANK SYSTEMS, no. 4, 2010 at 54.

Mohamed A. Ramady, Evolving Banking Regulation and Supervision a Case Study of the Saudi Arabian Monetary, 2 INT'L J. OF ISLAMIC & MIDDLE E. FIN. & MGMT 235 (2009).

The Rise in ‡Š‹ Ž‡•ǯ •—”ƒ ‡ –‡•‹ˆ‹‡•‘’‡–‹–‹‘•, THE CREDIT, issue 14, Mar. 2013 at 20, available at http://www.simah.com/Magazine/2013/Q14x/English/magazine.html.

Saiful Azhar Rosly & Mahmood M. Sanusi, Š‡’’Ž‹ ƒ–‹‘‘ˆƒ›ǯŽ-Ǯ ƒŠƒ†ƒ›ǯ Al-Dayn in Malaysian Islamic Bonds: An Islamic Analysis, 1 INTǯL J. ISLAMIC FIN. SERVICES, no. 2, available at http://www.ukm.my/hairun/kertas%20kerja%20assignment/saiful%20azhar.pdf (last visited April 26, 2014).

Abdul Rahim Al-Saati, The Permissible Gharar (Risk) in Classical Islamic Jurisprudence, 16 J.KAU: ISLAMIC ECON., no. 2, 2003 at 3.

Abdalelah S. Saaty, Empirical Analysis of the Problems and Challenges Confronting •—”ƒ ‡‘’ƒ‹‡•‹ƒ—†‹”ƒ„‹ƒǣš‡ —–‹˜‡•ǯ‡”•’‡ –‹˜‡, 6 AFRICAN J. BUS. MGMT. 5047 (2012).

AbdulRahim Al-Saati, Nizam Al-tamin Al-islami; Al-–ƒ†ƒˆ‹‡–ǯƒŠ—ŽŽ- kutar [Insurance System: Solidarity in Bearing Risk], 55 J. KAU: ISLAMIC ECON., no. 1, 2010 at 34.

Bryant W. Seaman, Comment: Islamic Law and Modern Government: Saudi Arabia Supplements the Shari'a to Regulate Development, 18 COLUM. J. TRANSNAT'L L. 413 (1980).

Amir Shaharuddin, The Bay' al-Inah Controversy in Malaysian Islamic Banking 26 ARAB. L.Q. 499 (2012).

Abdul Rahim Abdul Wahab, Mervyn K. Lewis & M. Kabir Hassan, Islamictakaful: Business models, Shariah Concerns, and Proposed Solutions, 49 THUNDERBIRD INTǯL BUS. REV. 371 (2007).

Shaykh Yusuf & Talal DeLorenzo, Shari'ah Compliance Risk, 7 CHI. J. INT'L L. 397 (2006).

Papers

MOHD. IZHAR AHMAD, TARIQ MASOOD & MOHD SAEED KHAN, PROBLEMS AND PROSPECTS OF ISLAMIC BANKING: A CASE STUDY OF TAKAFUL (MPRA Paper No. 22232, Jan. 10, 2010, http://mpra.ub.uni-muenchen.de/22232/1/.

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WAHEED AKHTER, TAKAFUL MODELS AND GLOBAL PRACTICES (MPRA Paper No. 40010, 2010), http://mpra.ub.uni-muenchen.de/40010/.

KALID ALDOIJY, RO'AIHA SHARIHIA FIE SHIRKAT AL-TAMIN AL-TAWUNI, [COOPERATIVE INSURANCE COMPANIES: ISLAMIC PERSPECTIVE] (2004), http://elibrary.mediu.edu.my/books/MAL06556.pdf.

RYM AYADI & WILLEM PIETER DE GROEN, BANKING AND INSURANCE IN THE GCC COUNTRIES: IS THERE REGULATORY CONVERGENCE WITH THE EU? (Sharaka Research Paper No. 4, 2013).

Samar Saud S. Bintawim, Performance Analysis of Islamic Banking: Some Evidence from Saudi Arabian Banking Sector (2011) (unpublished M.B.A. Thesis, Ritsumeikan Asia Pacific University) (on file with author).

Nuradli Ridzwan Shah Mohd Dali & Sanep Ahmad, A Review of Forward, Futures, ƒ†’–‹‘• ”‘Š‡Šƒ”‹ƒŠ‡”•’‡ –‹˜‡ǤDz ”‘‘’Ž‡š‹–›–‘‹’Ž‹ ‹–›dzǡ Presented at Seminar Ekonomi & Kewangan Islam (SEKI 2005) Conference, ESSET Bangi, Aug. 2005, available at http://www.kantakji.com/fiqh/Files/Fatawa/15405.pdf.

Maher Hasan, Jemma Dridi, The Effects of the Global Crisis on Islamic and Conventional Banks: A Comparative Study ȋ –ǯŽ‘‡–ƒ”› —†ǡ‘”‹‰ƒ’‡” WP/10/201, 2010).

SAMY NATHAN GARAS, INTERNATIONALIZATION OF ISLAMIC FINANCIAL INSTITUTIONS: CHALLENGES AND PATHS TO SOLUTION, available at http://www.albaraka.com/media/pdf/Research-Studies/Book- Internationalization.pdf.

Erik Feyen, Rodney Lester, & Roberto Rocha, What Drives the Development of the Insurance Sector? An Empirical Analysis Based on a Panel of Developed and Developing Countries (World Bank Policy Research Working Paper No. 5572 2011).

DR. AZMAN MOHD NOOR, A SHARIAH COMPLIANCE ASSESSMENT ON TAKAFUL INVESTMENT LINK, http://drazman.net/wp-content/uploads/2013/03/Dr.Azman-Takaful-investment- link-assesment-final-0305091.pdf,

Diana Sadoveanu, Islamic Banking in European Union Countries: Challenges and Opportunities (CES Working Paper III(4), 2011), available at http://www.ceswp.uaic.ro/articles/CESWP2011_III4_SAD.pdf.

Younes Soualhi, Šƒ”‹ǯƒŠ •’‡ –‹‘‹—”’Ž—•‹•–”‹„—–‹‘ǣŠƒ”‹ǯƒŠ‹‡™•ƒ†–Š‡‹” Current Implementation, ISRA Islamic Finance Seminar (IIFS), Nov. 11, 2008, available at http://www.kantakji.com/fiqh/Files/Insurance/W305.pdf.

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MURAT ÜNAL, The Small World of Islamic Finance, 6 SHARIAH SCHOLARS AND GOVERNANCE - A NETWORK ANALYTIC PERSPECTIVE (Jan. 19, 2011), available at http://www.funds-at- work.com/uploads/media/Sharia-Network_by_Funds_at_Work_AG.pdf.pdf.

SHEILA NU NU HTAY & HANNA RABITTAH ZAHARIN, CRITICAL ANALYSIS ON THE CHOICE OF TAKAFUL (ISLAMIC INSURANCE) OPERATING MODELS IN MALAYSIA 4 (2011), available at http://irep.iium.edu.my/2280/.

Reports & Corporate Documents

A.M. BESTǯS TAKAFUL REVIEW, 2013 ed., available at http://www.ambest.com/resources/takaful_review.pdf.

REEM M. ASAAD, THE REGULATORY FRAMEWORK OF ISLAMIC BANKING IN SAUDI ARABIA (2007), http://www.cibafi.org/ControlPanel/Documents/Library/Pdf/A85.pdf.

BANK FOR INTERNATIONAL SETTLEMENTS, INTERNATIONAL FRAMEWORK FOR BANKS (BASEL III), available at http://www.bis.org/bcbs/basel3.htm.

CAPITAL STANDARDS, SAUDI ARABIAN INSURANCE INDUSTRY REPORT (May 2013), http://www.capstandards.com/PDF/Saudi%20Insurance%20Industry%20Report- 20-05-2013.pdf.

COLLIERS, KINGDOM OF SAUDI ARABIA HEALTHCARE OVERVIEW, HEALTH CARE REPORT, 1st qtr. (2012), http://www.colliers.com/~/media/files/emea/uae/research/market- overview/ksahealthcareoverviewcihq12012.ashx.

DELOITTE, THE GLOBAL TAKAFUL INSURANCE MARKET CHARTING THE ROAD TO MASS MARKETS (2013), http://www.deloitte.com/assets/Dcom- MiddleEast/Local%20Assets/Documents/Centers/Islamic%20finance/me_fsi_insur ance_takaful_0613.pdf.

ERNST & YOUNG, GLOBAL TAKAFUL INSIGHTS (2013), http://www.ey.com/Publication/vwLUAssets/ET_Global_Takaful_Insights_2013/$F ILE/EY-global-takaful-insights-2013.pdf.

GLOBAL INVESTMENT HOUSE, SAUDI ARABIA BANKING SECTOR REPORT (Sep. 2006), available at http://www.globalinv.net/research/SaudiBanking-092006.pdf.

HM TREASURY, THE DEVELOPMENT OF ISLAMIC FINANCE IN THE UK: THE GOVERNMENT'S PERSPECTIVE (Dec. 2008), http://www.kantakji.com/media/7529/c61.pdf.

IMF MONETARY & FINANCIAL SYSTEMS & MIDDLE EAST & ASIA DIVISIONS, KINGDOM OF BAHRAIN: FINANCIAL SYSTEM STABILITY ASSESSMENT, INCLUDING REPORTS ON THE OBSERVANCE OF STANDARDS AND CODES ON THE FOLLOWING TOPICS, BANKING SUPERVISION, INSURANCE

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SUPERVISION, SECURITIES REGULATION, AND ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF TERRORISM (IMF Country Report no. 06/91, 2006), available at http://www.imf.org/external/pubs/ft/scr/2006/cr0691.pdf.

ISLAMIC FINANCIAL SERVICES BOARD, GUIDING PRINCIPLES ON GOVERNANCE FOR TAKAFUL (ISLAMIC INSURANCE) UNDERTAKINGS (Dec. 2009), http://www.ifsb.org/standard/ED8Takaful%20Governance%20Standard.pdf.

ISLAMIC FINANCIAL SERVICES BOARD, REVISED CAPITAL ADEQUACY STANDARD FOR INSTITUTIONS OFFERING ISLAMIC FINANCIAL SERVICES [EXCLUDING ISLAMIC INSURANCE (T# ) INSTITUTIONS AND ISLAMIC COLLECTIVE INVESTMENT SCHEMES], available at http://www.ifsb.org/standard/2014-01- 28_eng_IFSB15%20Revised%20Capital%20Adequacy_(Jan%202014).pdf.

SAFDER JAFFER, FARZANA ISMAIL, JABRAN NOOR & LINDSAY UNWIN, MILLIMAN RESEARCH REPORT, TAKAFUL (ISLAMIC INSURANCE): CONCEPT, CHALLENGES, AND OPPORTUNITIES (Nov. 2010), available at http://publications.milliman.com/research/life-rr/pdfs/takaful- islamic-insurance-concept.pdf.

LINKLATERS, SHARIǯA-COMPLIANT SECURITIES (Sukuk) (September 2012), http://www.linklaters.com/.../161211_Sharia_Compliant_Securities_Sukuk_Flyer.pd f.

PROSPECTUS OF JAZIRA TAKAFUL TAǯWUNI COMPANY, http://www.ajt.com.sa/freport.pdf.

AL RAJHI BANK, ALBILAD CAPITAL REPORT (Sept. 25, 2013), http://www.bankalbilad.com/SiteAssets/Pages/News/Δϛήη -ΩϼΒ ϟ΍-Δϴ ϟΎϤ ϟ΍-έΪμ Η- ή ϳήϘ Η-Ϧϋ-ϑήμ ϣ-ϲΤΟ΍ή ϟ΍/Rajhi%20Bank%20report.pdf.

ALBILAD CAPITAL, SAUDI INSURANCE SECTOR 2013 REPORT (Mar. 27, 2013), available at http://www.albilad-capital.com/En/Research/Pages/CorporateResults.aspx.

SAUDI STOCK EXCHANGE (TADAWUL) ANNUAL STATISTICAL REPORT (2012), available at http://www.tadawul.com.sa/static/pages/en/Publication/PDF/Annual_Report_201 2_EN.pdf.

TAKAFUL RE LIMITED, 7TH ANNUAL REPORT (2011), http://www.takaful- re.ae/process.php?file=doc/takaful+re+annual+report+2012+-+english.pdf.

WORLD ISLAMIC BANKING COMPETITIVENESS REPORT (Dec. 2012), available at http://www.mifc.com/index.php?rp=ey_world_islamic_banking_competi.

Press Releases

Press Release, Central Bank of Bahrain, Bahrain Insurance Sector Continues its Growth in 2012 (Nov. 25, 2013), http://www.cbb.gov.bh/page-p- bahrain_insurance_sector_continue_its_growth_in_2012.htm.

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Press Release, Deloitte, Deloitte: Saudi Arabia Islamic Finance Assets estimated at US$ 94 billion (June 21, 2012), available at http://www.deloitte.com/view/en_IQ/iq/press/press- releases/ef78506e6fe08310VgnVCM2000001b56f00aRCRD.htm.

News Release, Ernst & Young, Global Takaful market to reach US$25 Bn in 2015: EY (July 2011), available at http://www.ey.com/EM/en/Newsroom/News- releases/MENA-_Global-Takaful-market-to-reach-_US-25-Bn-in-2015--Ernst--- Young.

Press Release, World Trade Organization, WTO General Council successfully adopts ƒ—†‹”ƒ„‹ƒǯ•–‡”•‘ˆ ‡••‹‘ȋ‘˜ǤͳͳǡʹͲͲͷȌǡavailable at http://www.wto.org/english/news_e/pres05_e/pr420_e.htm.

News Sources

D. Mohammed Al-Sheikh, Al-tamin Al-–—ǯŒƒ”‹–Š”ǯƒƒŽƒˆƒ”“„‹Š™‘Ž- tawani [Conventional Insurance is More Assurance and it is Similar to Islamic Insurance, Al Eqtisadiah], AL QTISADIAH [THE ECONOMIST], Aug. 21, 2011, http://www.aleqt.com/2011/08/21/article_571650.html.

Prohibited Deals Affect the Sharia Compliant in Malaysia, AL-JAZIRAH, Nov. 11, 2012, http://www.al-jazirah.com/2012/20121106/bf1.htm.

Random Fatwas Confounding Markets, Slowing Economy, ARAB NEWS, Aug. 17, 2005, http://www.arabnews.com/node/271577.

Saudi Arabia: Conflicting Fatwas Confusing Investors, ASHARQ AL-AWSAT, Sept. 7, 2008), http://www.aawsat.net/2008/09/article55257700.

Saudi Govt Pays 'Blood Money' to Save Jailed Pinoy, MANILA STANDARD TODAY, Feb. 02, 2013, 12:01 AM, http://manilastandardtoday.com/2013/02/02/saudi-govt-pays- blood-money-to-save-jailed-pinoy/.

Interviews

Interview by Asharq Al-Aswat with Sheikh Abdullah Al Manee, Member of the Saudi Council of Senior Ulama Member Sheikh Abdullah Al Manee, in Riyadh, Saudi Arabia (Mar. 23, 2006), available at http://www.aawsat.net/2006/03/article55267381.

Speeches & Presentations

Mr. Abdul Rahman Al Baker, Exec. Dir., Financial Institutions Supervision, Central Bank of Bahrain, Opening Remarks at MEFT2013: Reforming the Regulatory Regime; Key Initiatives to Ensure the Long Term Profitability of the Takaful Industry in the Middle East, Reforming the Regulatory Regime - Key Initiatives to Ensure the Long Term Profitability of the Takaful Industry in the Middle East, Manama, Bahrain

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(Oct. 7, 2013), available at http://www.cbb.gov.bh/page-p-meft2013_- _reforming_the_regulatory_regime_Ȃ _key_initiatives_to_ensure_the_long_term_profitability_of_the_takaful_industry_in_th e_middle_east.htm.

Ajmal Bhatty, The Growing Importance of Takaful Insurance, presented at the Asia Regional Seminar Organized by OECD and Bank Negara Malaysia under the sponsorship of the Government of Japan, Kuala Lumpur (Sept. 23, 2010), available at http://www.oecd.org/daf/fin/46116115.pdf.

Dr. Amir Shaharuddin, Harmonizing Shariah Rulings in Islamic Finance: Issues, Way and Challenges, Fellow Seminar, Oxford Centre for Islamic Studies (presentation paper) (2012-2010) (on file with author).

Web Pages

About Solidarity Takaful Company, SOLIDARITY TAKAFUL COMPANY, http://www.sstc.com.sa/t/AboutUs (last visited Apr. 26, 2014).

ACCOUNTING AND AUDITING ORGANIZATION FOR ISLAMIC FINANCIAL INSTITUTIONS (AAOIFI), http://www.aaoifi.com/aaoifi/ (last visited Apr. 26, 2014).

Convert United States Dollar to Saudi Riyal | USD to SAR, THE MONEY CONVERTOR, http://themoneyconverter.com/USD/SAR.aspx (last visited March 9, 2014)

His Eminence Shaykh `Abdullah Al-ƒ‡ǯƒ, SAUDI ARABIA GENERAL PRESIDENCY OF SCHOLARLY RESEARCH AND IFTA, http://www.alifta.net/Fatawa/MoftyDetails.aspx?ID=6 (last visited Apr. 26, 2014).

Peter Hodgins, The Ongoing Regulation of the Saudi Insurance Market, CLYDE & CO., Nov. 23, 2010, http://www.clydeco.com/insight/articles/the-ongoing-regulation- of-the-saudi-insurance-market.

Law, Policy and Guideline, CENTRAL BANK OF MALAYSIA, available at http://www.bnm.gov.my/ (last visited Apr. 26, 2014).

List of Sharia Compliant and Non-Compliant companies-Q3 2013, AL RAJHI CAPITAL, http://www.alrajhi-capital.com/en/Pages/shariahguide.aspx (last visited Apr. 26, 2014).

SAUDI ARABIAN MONETARY AGENCY, http://www.sama.gov.sa (last visited Apr. 26, 2014).

Šƒ”‹ǯƒŠ†˜‹•‘”›‘— ‹Ž, BANK NEGARA MALAYSIA [CENTRAL BANK OF MALAYSIA], http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802 (last visited Apr. 26, 2014).

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Shariah Board, AL JAZIRA TAKAFUL TAǯWUNI COMPANY, http://www.ajt.com.sa/arabic/sboard.html (last visited Apr. 26, 2014).

Shariah Committee, NCCI-TAWUNIYA, http://www.tawuniya.com.sa/en/Home/AboutUs/ShariaCommittee/tabid/578/De fault.aspx (last visited Apr. 26, 2014).

Shariah Committee, SAAB TAKAFUL COMPANY. http://www.sabbtakaful.com/1/2/takaful-en/about-us/shariah-committee (last visited Apr. 26, 2014).

Shariah Guidelines for Trading and Investing in Capital, AL RAJHI CAPITAL, http://www.alrajhi-capital.com/en/Pages/shariahguide.aspx (last visited Apr. 26, 2014).

Takaful Laws, ICMIF TAKAFUL, http://www.takaful.coop/index.php?option=com_content&view=article&id=71&Ite mid=51 (last visited Apr. 26, 2014).

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