ISLAMIC INSURANCE TAKAFUL AND ITS APPLICATIONS IN SAUDI ARABIA A thesis submitted for the degree of Doctor of Philosophy by Yuosef Abdullah Alhumoudi Law School Brunel University October 2012 DEDICATION I dedicate this thesis to my wife and children for their unconditional support and love. ACKNOWLEDGEMENTS First of all, purely and simply, I would like to thank God for providing me with the heath and the intellectual ability necessary to complete this thesis. It is from him I draw support in life. Secondly, I would like to thank my wife, my sons, my Father in-law Mr. Hamad Alhumoudi, my brother and my sisters who have supported me. I pray God will reward them with all the happiness and success that life can bring. Thirdly, my special thanks go to his highness Mr. Saleh Al Sheikh, the Minister of Islamic Affairs in Saudi Arabia, who made it possible for me to fulfil my goal of pursuing postgraduate studies. Fourthly, I would like to thank my friends for their constant and unwavering support, for providing me with advice, for encouraging me to work hard and to achieve all that I have accomplished. Last but not least, this piece of research would have remained incomplete without the guidance, advice and encouragement of my supervisor, Prof. Ilias Bantekas who has always been forthcoming and generous with his time and assistance. iii ABSTRACT Takaful is an Arabic term meaning solidarity, which is used to describe a system of Islamic insurance that functions as an alternative to conventional insurance. Takaful, as a form of insurance, is entering a fast growing global market, promoted by the growth of the Asian economies and economic prosperity in the Middle East. The Takaful system is based on the principle of cooperation or mutual assistance, and is Tabarru (Voluntary), meaning that the attendant risks are spread collectively across the group of volunteers. The Takaful system is best understood as a pact (or policy) ascribed to by a group of participants who choose to jointly guarantee themselves against loss or damage suffered by individual signatories, as confirmed in the policy. The prediction is that Takaful will be the default choice for citizens in Islamic countries in the near future. The combination of the system’s financial efficacy, combined with principles underwritten by religious correctness has accentuated the attractiveness of this, and similar, Islamic banking and financial products to Muslims. By examining the Saudi insurance sector, which is a market leader in the region, this thesis delivers a brief history of insurance in general and of the Saudi insurance legal framework in particular, and by so doing sheds light on Islamic insurance Takaful applications worldwide. It also engages in an evaluation of insurance products available in Saudi Arabia to determine whether the facilities offered by the insurance companies operating in the country incorporate obstacles and obstructions, which may impact on the effectiveness of governmental regulations and supervision in relation to setting a legislative framework. This influences the extent to which the foundations for the insurance market are secured in Saudi Arabia. The aim of the present study also leads to some suggestions and recommendations for future practice. iv Table of Contents List of Figures ....................................................................................................... xii CHAPTER 1: INTRODUCTION 13 1.1 overview .......................................................................................................... 13 1.2 The context ...................................................................................................... 13 1.2.1 Islamic Insurance Takaful ................................................................... 13 1.2.2 Islamic Sharia Law ............................................................................. 15 1.2.3 Saudi Insurance Law ........................................................................... 16 1.3 Motivation ....................................................................................................... 16 1.4 Purpose ............................................................................................................ 17 1.5 The objectives of the thesis ............................................................................. 17 1.6 The significance of the thesis .......................................................................... 18 1.7 study capacity and justifications ..................................................................... 19 1.8 Methodology ................................................................................................... 20 1.9 Contribution and Originality of the Thesis ..................................................... 22 1.10 Research Questions ....................................................................................... 23 1.11 The scope of thesis ........................................................................................ 23 1.12 Summary ....................................................................................................... 24 CHAPTER 2: COMMERCIAL INSURANCE FROM THE PERSPECTIVE OF ISLAMIC SHARIA LAW 26 2.1 Introduction ..................................................................................................... 26 2.2 Global Development of Commercial Insurance ............................................. 26 2.2.1 Introduction ......................................................................................... 26 2.2.2 The Emergence of Insurance .............................................................. 27 2.2.3 The Origins and Development of Insurance ....................................... 28 v 2.3 Principles of commercial insurance ................................................................ 34 2.3.1 Indemnity ............................................................................................ 35 2.3.2 Insurable Interest ................................................................................. 36 2.3.3 Utmost Good Faith .............................................................................. 36 2.3.4 Mitigation ............................................................................................ 36 2.3.5 Subrogation ......................................................................................... 36 2.3.6 Proximate Cause ................................................................................. 36 2.4 Conventional insurance from an Islamic contract perspective ....................... 38 2.4.1 Introduction ......................................................................................... 38 2.4.2 The Definition of Contract (Aqd) in Islamic Sharia Law. .................. 40 2.4.3 Basic principles and features of Islamic Insurance ............................. 41 2.4.4 Pillars of the Insurance Contract from an Islamic Perspective ........... 45 2.5 An Islamic Jurisprudential analysis of the Commercial Insurance ................. 59 2.5.1 Insurance as an idea or theory vis-à-vis Insurance regulation of existing contracts .............................................................................................. 59 2.5.2 Jurisprudential analysis of the rules of commercial insurance ........... 60 2.5.2.1 Introduction: ............................................................................ 60 2.5.2.2 Jurisprudential contradiction of rules of insurance ................. 61 2.5.2.2.1 The opinion that commercial insurance is unlawful ... 61 2.5.2.2.2The view that commercial insurance is permissible: ... 69 2.5.3 The rule of commercial insurance in Islamic Sharia .......................... 70 2.6 Takaful Commercial Insurance ....................................................................... 73 2.6.1 The Basic Principle of takaful Commercial insurance ....................... 73 2.6.2 Takaful Types ..................................................................................... 73 2.6.2.1 Family Takaful ........................................................................ 73 2.6.2.2 General Takaful (Non-Life Insurance) ................................... 76 2.6.2.3 Re-Takaful (Re-Insurance) ..................................................... 77 2.6.3 The Model of Takaful ......................................................................... 78 2.6.3.1 The Mudarabah model (share in profit) .................................. 78 vi 2.6.3.2 The Wakalah Model ................................................................ 78 2.6.3.3 Wakalah with waqaf ............................................................... 79 2.6.4 Takaful insurance Similarities & Differences ..................................... 79 2.6.4.1 Similarities .............................................................................. 79 2.6.4.2 Differences .............................................................................. 80 2.7 survey of Takaful operations .......................................................................... 80 2.7.1 Takaful in Arabian Countries .............................................................. 82 2.7.2 Takaful in EAST ASIA ....................................................................... 84 2.7.3 THE WEST ......................................................................................... 86 2.8 The Regulation of Takaful .............................................................................. 87 2.9 SUMMARY ...................................................................................................