ISLAMIC INSURANCE Some Muslims believe insurance is unnecessary, as society should help its victims. ‘Insurance’, however, need not be a commercial venture. In its purest sense, it is assistance with the adverse effects of inevitable afflictions, an arrangement beneficial to all. Schemes to ensure the livelihoods of traders and communities have been in existence for millennia. Commercial insurance, on the other hand, was invented ostensibly for the same ends but with the chief beneficiaries being the shareholders and directors. Among the countless revelations Islam passed on, two prohibitions, namely riba (usury) and gharar (risk), have been used by legislators as grounds for the prohibition of insurance. Islam is not against making money, and there is no inherent conflict between the material and the spiritual. Islamic law allows ijtehad (initiative) to the benefit of the people as long as there is no harm to other people. Muslims can no longer ignore the fact that they live, trade and communicate with open global systems, and they can no longer ignore the need for banking and insurance. There is no prohibition in Islamic law against banking or insurance, similarly, Muslims can create insurance schemes that use their faith as the immutable basis for a working model. Aly Khorshid demonstrates how initial clerical apprehensions were over- come to create pioneering Muslim-friendly banking systems, and applies the lessons learnt to a workable insurance framework by which Muslims can compete with non-Muslims in business and have cover in daily life. The book uses relevant Quranic and Sunna extracts, and the arguments of pro- and anti- insurance jurists to arrive at its conclusion that Muslims can enjoy the peace of mind and equity of an Islamic insurance scheme. Aly Khorshid, born in Egypt, received his PhD from the University of Leeds in 2001. He is a researcher in Islamic economics, and a consultant to Islamic banks and Islamic institutions in both the Middle East and Europe. Besides being a company director, he is also on the board of management of several companies. Dr Khorshid has published various articles on Islamic economics. ISLAMIC INSURANCE A modern approach to Islamic banking Aly Khorshid First published 2004 by RoutledgeCurzon 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by RoutledgeCurzon 29 West 35th Street, New York, NY 10001 This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” RoutledgeCurzon is an imprint of the Taylor & Francis Group # 2004 Aly Khorshid All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing fromthe publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available fromthe British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-45828-1 Master e-book ISBN ISBN 0-203-33762-X (Adobe eReader Format) ISBN 0–415–31105–5 (Print Edition) To my late parents who would have been pleased to see this book published and to my wife Noha, and my children CONTENTS List of tables ix Introduction xi Acknowledgements xiv 1 The meaning of insurance in Islam 1 2 Riba (Usury) and Gharar (Risk) 31 3 Pre-modern and modern jurists’ standing on insurance 44 4 The development of mutual insurance in the West 97 5 The development of Islamic banking and insurance in Malaysia: a case study 113 6 The development of Islamic banking and insurance in Saudi Arabia: a case study 132 7 Basic principles for an insurance scheme acceptable to the Islamic faith 155 8 Conclusions 166 Appendix 1: Mudaraba for investment and savings and Takaful among Muslims (Shahab El-Din 1990) 173 Appendix 2: Arabian insurance guide: Islamic re-insurance operating principles 180 Appendix 3: Glossary of mutual insurance using case studies from the USA, Australia, Canada, Japan and Finland 183 vii CONTENTS Appendix 4: Glossary of Islamic financial terms 206 Notes 208 Bibliography 216 Index 223 viii TABLES 5.1 Number of financial institutions 128 5.2 Number of branches/Islamic banking scheme counters 128 5.3 Financing deposit ratio 129 5.4 Total assets 1994–March 2002 129 5.5 Total deposits 1994–March 2002 129 5.6 Total financing 1994–March 2002 130 5.7 Deposit services 130 5.8 Retail/Consumer banking 130 5.9 Corporate banking 131 5.10 Treasury/Money market investment products 131 5.11 Trade financing 131 5.12 Other products and services 131 6.1 Number of national and foreign insurance companies in the States of the Gulf Co-operative Council as at 31 December 1985 136 6.2 Financial situation of the NCCI, 1993–9 136 6.3 Growth (or fall) in Saudi insurance market by category 137 6.4 Policyholders’assets 147 6.5 Shareholders’assets 147 6.6 Policyholders’liabilities and surplus 148 6.7 Shareholders’liability and equity 148 6.8 NCCI financial highlights for 5 years (1997–2001) 149 6.9 Annual report – financial statements – balance sheet as of 31 December 2000 and 2001 149 6.10 Shareholders’assets 150 6.11 Policyholders’liabilities and surplus 150 6.12 Shareholders’liability and equity 151 6.13 Annual report – statements of insurance operations and accumulated policyholders’surplus for the years ended 31 December 2000 and 2001 151 6.14 Costs and expenses 152 6.15 Accumulated policyholders’surplus 152 ix TABLES 6.16 Annual report – statements of shareholders’income for the years ended 31 December 2000 and 2001 152 6.17 Annual report – statements of policyholders’cash flows for the years ended 31 December 2000 and 2001 153 6.18 Cash flows from investing activities 153 6.19 Cash flows from financing activities 154 x INTRODUCTION What is it about insurance that is so divisive and emotive to modern Muslims? Is it not that Islam is a religion based on peaceful coexistence with fellow man, with the maintenance of stable and constructive societies? This second question is perhaps the most germane; the answer is yes, Islam is a society that cares for its most unfortunate members, the result of which is a community that can thrive, free from crime, bitterness and sorrow. And if this is the case, if communities and nations pull together to assist those most in need, there is a distribution of wealth and resources unrestricted by a nadir of charitability. The gains of the rich and comfortable, be they from skill or fortune, will help the poor with their losses, be they foolish or calamitous. Under a system such as this, why bother getting personal insurance? There is another reason why insurance is frowned upon and outlawed in Islamic States and among Islamic communities: interpretation of many Quranic edicts brings the conclusion that insurance is not only unnecessary but highly unlawful Islamically. Chief among these are the outlawing of riba (usury) and gharar (risk). The lending of money at high rates of interest, or the payment of money for nothing are both linked with commercial insurance and contribute to its proscription. Riba is considered extremely anti-Islamic, and references to it pepper the Quran, each mention adding to its significance. Insurance is a risk. People in the West willingly pay money to insurance companies in order to buy peace of mind, with no guarantee of return. In one sense, never having to make a claim is a good thing as it suggests mishaps or tragedies have been avoided. In another, this means that the insurance company has literally been given the money, and the insured is out of pocket. Even the most generous no-claims bonus will not square this circle. To the Muslim, things that happen on earth are the will of God, and so to insure against them could be construed as questioning his actions. Insurance is, however, something that the Muslim participates in five times a day; what is prayer if not a form of insurance premium in the hope of a divine dividend at the end of life? Faith itself is insurance, and the Quran states many examples of how worldly insurance is as sensible and as beneficial to community as is faith. This book methodically explores many of these xi INTRODUCTION examples, and the conclusion that insurance is intrinsically bad begins to look unfounded. An additional reason for Islamic proscription is that insurance companies can (indeed, need to) accumulate vast sums of money, much of which is invested. To be suitable for a Muslim to be the insurance company’s customer, these investments must not be involved with forbidden aspects of Islamic life: things like pork and alcohol. Few insurance companies can give this assurance. If the history of insurance is taken as a whole, commercial insurance is a relatively recent invention. This book details several historical insurance schemes where no money changes hands and several where it does. It is concluded that insurance, when applied Islamically and equitably, need not invoke anathema among Muslims, and can be used to the greater good of the community. Mutual insurance and Social Security systems are looked into to provide a basis on which a model can be founded. Similar apprehensions have been experienced by Islamic States and organizations attempting to create Western-style banking systems for govern- ment and the populace. Two case studies – those of the Malaysian Takaful Act and Saudi Arabian systems – are used to demonstrate ways in which Islam and finance can, by focused and careful readings of Sunna and application of business sense, combine to create a system that is as acceptable to Muslims as it is to the financial world.