"Risk Management in Islamic Finance" by Professor Rodney Wilson



Organised by the Institute of Islamic Banking and Insurance (IIBI) London held at British Bankers' Association on 16/03/2007

About the Speaker: Prof. Rodney Wilson is the Director of Post Graduate Studies at Durham University's School of Government and International Affairs. He manages the Durham Islamic Finance Programme and he is also on the academic committee of the Institute. He worked with the Islamic Development Bank, and is currently serving as a consultant to the Islamic Financial Services Board. His most recent book is: Islamic Economics: a Short History,Brill Academic Publishing, 2006. He has contributed to numerous professional publications on Islamic finance topics including sukuk, asset management, retail banking and most recently takaful. Professor Wilson acts as facilitator for courses on Islamic finance in London, Kuwait, Bahrain, Dubai, Kuala Lumpur and Singapore.

An Islamic mega-bank

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Banker Middle East 2007 There has been a lot of talk lately about an Islamic mega-bank. Mike Gallagher reports. The idea of an Islamic mega-bank has been going around for years, mostly as a sort of Middle Eastern fantasy that had very little in common with reality. People would talk wistfully about Islamic mega-banks like they would about world peace. It sounds like a good idea, revolutionary even, but in practice impossible. Until recently that is. Then things began to happen across the wider financial spectrum. The price of oil more than doubled as war and surging Asian economies, notably those of China and India, created unprecedented demand and the countries that produced oil started seeing their budgets ballooning as the revenues kept coming in. The GCC banks were a natural deposit for all this cash, especially in the aftermath of 11 September as many Middle Eastern investors started looking at other places to invest their oil wealth. Banks started springing up around the Gulf and they, in turn, started investing this money for their clients in a wide range of ventures as the booming economies in turn created yet more demand for specialised banking products. People had fantastic amounts of money to invest and a small but growing number of Islamic banks started coming to the fore in the region. This quickly included many large international banks who saw which way the wind was blowing and decided to get in on the act by opening up Islamic windows in an attempt to gain a foothold in a lucrative market. Competition bred competition and international finance and banking centres sprang up right across the Gulf and Levant as everyone jockeyed for position. That is the history, but as usual, there is more to it than just simple figures. Geography is obviously a critical factor. Islamic banks exist across a wide range of countries and there are roughly 300 Islamic institutions worldwide, holding about $300 billion in deposits, with almost as much being held by conventional institutions with Islamic arms. Saudi Arabia, with 25 per cent of the world's oil reserves making up between 90 to 95 per cent of the country's revenues, and a population of around 27 million that has nearly tripled since 1980, is where a lot of attention was focused. The banks there started to capitalise on the oil boom, much as their neighbours had done around the Gulf and slowly the now plausible idea of an Islamic mega-bank began to emerge. Saudi banks are easily amongst the most profitable in the GCC and from there came Al Rajhi bank. All Saudi banks are Islamic and Al Rajhi, with more than 500 branches across the kingdom is easily the biggest Islamic bank in the world. Its return on assets was 3.5 per cent and its return on equity was in excess of 26 per cent. Kuwait had also been busy making the most of the windfall from yet another petrodollar driven boom and it was from there that Kuwait Finance House (KFH)Kuwait Finance House (KFH) materialised. KFHKFH, which is the third oldest Islamic bank in the world, is that rare thing in Islamic banking. It has cleverly managed to second guess all the major market movements over the years and has an uncanny knack of being able to position itself where the consumer is at his most willing. KFHKFH also recognized the impact of non-branch distribution of services, both in terms of customer service and reduced costs and the bank has become a leader in exploiting technology to serve business needs. The talk of expansion or consolidation has been on everybody's lips for quite some time and it goes without saying that if the idea of an Islamic mega-bank that could compete with the world's largest conventional banks was ever to be realised then it would be inevitable that at least one of the banks would have to break out of the GCC region and go overseas. Competing with the world's largest conventional banks is not going to be easy, especially when you look at the hard facts. UBS has total assets of around $1.5 billion while the four biggest Islamic banks have a sum total of just $8 billion between them. Mohammed Amin from PricewaterhouseCoopers put it in perspective when he said that "the reason why many conventional banks are very big is that you get economies of scale. But the theory is that as you get bigger, you are able to have lower costs of processing, in fact you are able to share information across countries, so that explains the rationale as to why many, many conventional banks have chosen to get big by a combination of expansion and acquisition. That same logic should apply to Islamic banking." "I do not see a fundamental reason why Islamic banks should not grow much larger than conventional banks. The banks will follow where the economic growth is and the fact that you are seeing significant economic growth in places like Malaysia, India and China so that explains why you should expect to see Islamic banks trying to grow in those areas." Mardig Haladjian from Moody's agreed and said that "if you look at conventional banks and global banks, you realise that there is a difference in scale. We have been criticising Islamic banks for being so fragmented in the sense of a limited scale and concentration of risk. The steps that we are seeing from the likes of Kuwait Finance House, Al Rahji and Al Baraka, who are what might be considered large players are quite positive in a sense that, on one hand they are diversifying their presence with the interest of gaining a foothold in the Asian markets where Islamic banking demand is high and they will have good opportunities to grow there. And on the other hand they are putting more capital behind their institutions and as a consequence this is increasing the prospects of them becoming major regional players." Al Rajhi BankAl Rajhi Bank decided to make its presence felt when it decided to embark on an ambitious expansion programme and open 50 branches in Malaysia. But Al Rajhi BankAl Rajhi Bank officials were coy when they were asked what kind of retail and corporate products they planned to offer, although word started leaking out that they planned to offer products like car and real-estate financing as well as mutual funds. Al Rajhi is one of three foreign Islamic banks in Malaysia, which also includes KFHKFH and HSBC AmanahHSBC Amanah. KFHKFH has also decided to further its ambitions and is currently negotiating to acquire Utama Banking Group's entire stake in the Rashid Hussian Berhad Group. KFHKFH has been battling EON Capital for control of RHB and many analysts seem to think that the Gulf house stands the best chance of doing so. The odds of this increased when the board of RHB approved a planned restricted offer for sale of the company's RHB Capital shares to RHB shareholders. KFHKFH further reinforced its intentions when it said that said that RHB would not be a foreign-controlled bank but operate as an Islamic brotherhood partnership. It also said that the group would support the Employees Provident Fund's (EPF) proposed restricted offer for sale of RHB Capital shares or any other proposals by the shareholders in dealing with RHB's debt as long as it would benefit all shareholders. Cheah King Yoong, the head of investment research for SJ Securities in Malaysia said that he believed that "KFHKFH has the upper hand because they have the commitment and they have said they are going to invest about $3.4 billion into transforming the RHB group and they are really sure of their game plan. They do have the financial capability if they really want to increase the bid and have already done their due diligence on the company." There is a common perception that being established in Malaysia is all about clever positioning for greater things further down the road in South East Asia, especially in Indonesia; and Malaysia has been described as a good foundation for those with ambitions for moving into Indonesia. However the growth of Islamic finance may not be all it has been hyped up to be, as a survey by the Islamic Financial Services Board, (IFSB) claimed that demand in the first half of 2006 was significantly slower than it had been in 2004 and 2005. The IFSB contacted nearly a dozen central banks and over 50 Islamic banks across Asia and the Middle East and suggested that there were no obvious indicators for any trends regarding asset growth for Islamic banks. Some of the bigger Islamic banks reported that growth by June of 2006 was below that of previous years. Islamic real estate finance appeared only to have increased in Qatar and Malaysia. Some commentators have suggested that the appeal of Islamic products may in some markets be overdone. Others have said that it is the quality of service that counts at the end of the day. Mohammed said "One of the comments I have heard many times from Iqbal Khan who used to run HSBC AmanahHSBC Amanah was that in Malaysia 70 per cent of the customers were ethnic Chinese, who are of course not Muslims. And they were simply going to HSBC, not because of any religious reasons, but because they were offering them better service and better products." "Islamic banking does not have to be directed exclusively at Muslims and this is important to remember for banks who are thinking of moving into parts of the world where there is no natural customer constituency of large Muslim populations. So there is no logical reason as to why Islamic banking should not expand into places like Latin America. It goes without saying that when you are expanding overseas, money always tends to go where it is easiest first, which is rational, hence the attraction of Malaysia." Haladjian said that "There are the other issues of differences of interpretation of Shari'ah law between the Islamic community in the Gulf and Asia. But that is something that may, or may not be bridged by moves towards a single authority." Malaysia has long been at the forefront when it comes to the issuance of Sukuk, but it has sold many of them using the bitamin ajiil rule of deferred payment which some say effectively makes it a form of debt payment but Haladjian says that "a scarcity of capital will determine where they make their move. These cross border moves by Islamic banks will also highlight the need to come up with a uniform industry regulation. That is the other dimension to Islamic banking. There is not a lot of uniformity, so as you see banks hopping from country to country, it should become much more relevant for the Islamic banking community to solve." So while it is probably safe to say that the dream of an Islamic mega-bank is now a little closer, much remains to be done. Whether one of these banks can ever hope to compete with the likes of Barclays or HSBC is probably a discussion for well into the future, but for now the next and more interesting step will be, from Malaysia to where? China, which is well on its way to becoming the next superpower, could be where the contest is decided. If an Islamic bank is successful there, then that could be where the definition of what constitutes an Islamic mega-bank is finally decided. Chinese government officials were recently in Jeddah, urging Saudi bankers to open branches there. "Chinese banks are willing to open branches here and we also invite Saudi banks to open branches in our country," Dr. Hu Wei former Chinese ambassador to Riyadh said. China has 23 million Muslims, mostly concentrated in the North-western province of Xingjian. Indonesia, another country that is also a natural next-step has a population of 250 million, most of them Muslims. Watch this space.

LEGAL AND ECONOMIC ASPECTS OF ISLAMIC BANKING

Islam, whose followers include almost one-quarter of the world's population, has made the faith into a guide governing all facets of life. Islamic Law, Shariah, is based on the Holy Quran "The Contemporary Message of Allah," The Most Merciful and the Most Beneficent, Sunnah "The preachings of the Prophet Muhammad", and Jjma or Umma "Consensus, the exercise of one's independent judgment based on scholarly interpretation of questions not covered by the first two sources" (Azzam, p. 82).

Islamic Law governs only those who accept it as the revealed will of Allah; thus Islam tends to be a matter of personal philosophy, rather than geography (Crane). Islamic Law has been praised by Western scholars, such as New York University's Anderson, who wrote that " After thirteen centuries of accomplishment during which the Shariah has governed the lives of myriads of Muslims in successive generations, the great Law is still the object of careful study by scholars and jurists in the East and the West" (Anderson, ix).

According to Crane, there are almost no non-Muslims, especially Western businessmen, "with any knowledge of either the Shariah, i.e., Islamic Law, as it is now developing in the Middle East, or of Islamic economics which, at least in concept, is merely a branch of the Shariah."

Islamic banking, based on the Islamic law of contracts, derives from the Law of Tawheed, i.e., "belief in the oneness of Allah, (and the teaching) that no one should claim for himself what is basically the creation of Allah or the product of another man's efforts and skills." Therefore, Islamic banking is based on- avoidance of fixed-rate interest, and on acceptance of deposits and investment funds on PLS (profit and loss sharing).

Islam condemns riba (fixed interest), which "reinforces the tendency for wealth to accumulate in the hands of a few, and thereby diminishes man's concern for his fellow men," guarantees gain without the risk of loss, and hampers investment and employment ("Islam and Financial Intermediation," pp. 110- 11). In even more explicit terms, riba is said "to impede the productive circulation of wealth, concentrate wealth in a class of economic drones, create an imbalance between production and consumption, increase the cost of production at the expense of consumers, impose rigidity in costs and a bias toward short run planning in investment, encourage unproductive speculation, and trigger credit imbalances and inflation" (Crane, p. 19).
Conversely, Islam teaches that absence of riba ' 'provides a check on the exercise of private proprietorship, and tends to reduce exploitation of the labor force, while still permitting a free cooperative system" (Pomeranz and Haqiqi, p. 155). The need for social justice permeates Islamic teaching. For instance, expanded granting of consumer credit was recommended by Dr .Muhammad Uzair, Director of the International Center for Research in Islamic Economics (Saudi Arabia) at the 1976 Islamic Conference in Mecca; he suggested that interest-free consumer loans, premised on "living within one's means," should be small enough to be handled through an interest-free "residual fund" carried in the bank's current account (Crane, p. 49). In other words, consumer credit may be provided by Islamic banks not only to enable the borrowers to deal with personal or family emergencies and needs, but to assist them in raising their living standard.

The same orientation is reflected in another important concept, Zakah. In a western profit making enterprise, maximization of profit and minimization of loss represent the "bottom line." But Islamic economics is different. As Crane says: "Western economists generally cannot conceive of any measure that extends beyond the material world, whereas Muslims generally cannot conceive of any measure that does not." Zakah, the giving of one's bounty to others, represents one of the pillars of Islam. When he accumulates wealth and earns mole than he needs, the Muslim becomes obligated to pay Zakah to purify himself from the sin of avarice. Zakah, as an instrument of the redistribution of wealth, and of the creation of a society based on mutual assistance, also is being implemented in Islamic banking institutions.

Islamic economic desiderata may be summarized as follows:

Economic growth: An Islamic economy penalizes the accumulation of idle wealth through Zakah, and encourages rapid reinvestment in order to increase production and productivity.

Higher employment: Investment is encouraged in projects which produce wealth, rather than through relatively more passive fixed-income investments. The participative type of project is thought more likely to lead to higher employment, and to fewer negative social and economic effects.

Equal distribution of income and wealth: Zakah is designed to p(Omote more equal distribution of wealth. (Social justice, social cohesion, broth- erhood, and the harmony aspects of Zakah have origins in Tawheed.)

Preserving equilibrium and modesty: Wasteful consumption (lsraf) is discouraged, while abstinence from waste, and saving in the form of direct investment (Iqtisad) are encouraged.

The PLS scheme is thought important to the promotion of social justice and cooperative economic principles. Therefore, all Islamic banks have introduced PLS affecting depositors and borrowers; some banks are still engaged in the process of installing profit and loss sharing in their remaining operations. Several types of PLS arrangements may be found in Islamic banking:

Mudarabah ( trust-financing ): An Islamic bank, as a limited partner, pro- vides cash (capital requirements) to a borrower/entrepreneur who is free to use the funds in pursuit of the partnership's goal. While the share of each party in the profits and losses must be in percentages, and all expenses related to the partnership are deductible before profit distribution, the duration of such a scheme should not be predetermined. The funds must be in cash, and can be invested in trade or industry for an unlimited time- although either party may rescind the contract upon notice to the other.

Murabaha (cost-plus trade financing): In this contracting scheme an Islamic bank as a partner finances the purchase of commodities in return for a share in the profits realized when the goods are sold. However. if losses are incurred, the contracting bank may (or may not) share the loss-depending on the terms and conditions of the agreement. Repayment of such financing can be deferred or made in installments.

Musharaka (participation financing): An Islamic bank provides a part of the equity plus working capital of a project and shares in profits and/or losses.

Ijara (rental financing): This activity, which has provided the bulk of the operating income of Islamic banks, covers both long-term leasing/lease financing and short-term hire-purchase. In financing, the Islamic bank or its leasing company purchases a piece of equipment selected by the entrepreneur and then leases it back to him. In a hire-purchase arrangement the entrepreneur may partially purchase, and partially rent the equipment.

Since the legal basis of an Islamic bank's operations may differ in certain respects from Western commercial banks and interest-paying institutions, statutory reforms are being carried out in various Islamic countries. The major changes affect commercial law (rewritten in Pakistan), corporation law (considered to be rewritten in Pakistan), tax law (Zakah has been incorporated in Saudi Arabia and Pakistan), and the banking law (rewritten in Iran in 1984).

Regulation and Supervision of Islamic Banking in the United States

William L. Rutledge, Executive Vice President
Remarks at the 2005 Arab Bankers Association of North America (ABANA) Conference on Islamic Finance: Players, Products & Innovations in New York City

Good morning. I am very pleased to be here today, and I thank ABANA for inviting me. From my perspective as a bank supervisor, conferences that promote greater awareness of important developments within international banking are essential. Islamic finance certainly qualifies as such an area, and I expect that today’s conference will provide an excellent opportunity to exchange information and ideas on current issues relating to this important sector.

My remarks this morning will focus on the regulation of Islamic banking services in the United States, and I preface them by noting that they are my own and do not necessarily reflect the views of the Federal Reserve. My approach will be to describe some of the most important domestic developments in the industry and to review how we, as U.S. bank regulators, have approached these developments so far. I will also offer some thoughts on the regulatory and supervisory challenges that accompany introducing Islamic financial services into the U.S. framework.

At the outset, I would like to emphasize that we—and here I am referring broadly to U.S. regulators—are open to Islamic financial products. Our mindset is to try to accommodate a variety of approaches to finance, focusing to the extent possible on the underlying substance—that is, focusing on what the implications for safety and soundness and consumer protection would be of a given product. Consistent with that approach, while we are committed to accommodating Islamic finance within the U.S. structure, we will hold Islamic financial institutions to the same high licensing and supervision standards to which we hold conventional ones. Although we are certainly in no position to take a stance on issues of shari’a interpretation, it is important that we become more familiar with the principles and practices unique to Islamic finance in order to make our supervisory and regulatory judgments.

Let me highlight that U.S. regulators have already started to make efforts to more fully understand and better foster Islamic finance. I have participated, along with a number of my colleagues at other regulatory agencies, in several conferences such as this one, both in New York and elsewhere, in an effort to stay abreast of developments in this market and to emphasize our continuing interest in this industry. Just last month, the Federal Reserve Bank of New York cosponsored a seminar on Legal Issues in the Islamic Financial Services Industry in Kuwait City. In addition, several of my colleagues from the New York Fed recently participated in a workshop hosted by Harvard Law School’s Islamic Finance Project to explore regulatory challenges to the growth of the Islamic finance industry in the United States. Those colleagues are also with me today, and will help me respond to any comments or questions that you may have after my prepared remarks.

At present, the approach of United States regulators to Islamic banking has been fairly ad hoc—with individual regulators dealing with specific issues as they are presented. This has been the case because the industry is still relatively new in this country. Despite the industry’s impressive growth in recent years, there are only a small number of providers and a relatively limited array of services available. At the retail level, Islamic banking has been mostly concentrated in home financing activities; not surprisingly then, a number of the issues raised with U.S. regulators have involved this specific business line.

The first major milestones for the provision of Islamic retail banking services in the United States were two interpretive letters issued by the Office of the Comptroller of the Currency — both letters were issued in the late 1990s in response to proposals submitted by the United Bank of Kuwait. The first approval letter which came out in 1997, involved a residential net lease-to-own home finance product. According to the proposed structure, the bank would purchase the property and hold legal title to it over the course of the agreement. Upon payment of the final lease installment, legal ownership would be transferred to the home buyer. The second OCC interpretive letter was issued in 1999 in response to a proposal to offer certain murabaha-based financing products. The proposal was designed to permit the bank to acquire assets (such as commercial inventory, equipment or real estate) and then resell those assets to its customers, on an installment basis, at cost plus a markup. The OCC’s analysis was that, because the purchase and sale transactions occurred simultaneously, the bank would be acting as a “riskless principal” in such transactions, and they were therefore permitted.

I think in each of these interpretive letters, the OCC demonstrated its flexibility by looking beyond the form of the transaction to determine that these structures were the economic equivalent of products already being offered by conventional institutions, and thus were permissible under existing banking law. For example, the OCC was able to look beyond the restrictions on bank ownership of real estate to conclude that, in these cases, the risks that drove the general restrictions were not present, because the transactions were equivalent to secured loans or riskless principal transactions. The New York State Banking Department followed much the same logic in issuing similar approvals for HSBC.

My purpose in describing these actions is to demonstrate how a regulatory framework can ensure compliance with the clear substance of general objectives, while still allowing for significant flexibility in how they are met. This flexible approach has fostered notable development of Islamic banking services in the United States. Although estimates of the potential size of this market vary widely, it is clear from the recent domestic growth of these services that significant demand exists for these products. HSBC, University Bank in Ann Arbor, Michigan, and Devon Bank of Chicago all now offer Islamic banking products in the United States. There are also several non-bank mortgage and finance companies offering these services. Freddie Mac and Fannie Mae have purchased shari’a-compliant mortgages from a number of these providers, supplying crucial liquidity that has enabled these Islamic financial institutions to originate additional mortgages.

Clearly, Islamic financial institutions have identified a real and substantial market need. The financial institutions of this country continually adapt to changing demographics and growing populations, be they Muslim, Hispanic or any other ethnically or religiously defined groups. When a customer base is growing, it is likely to receive attention from companies seeking to serve those expanding markets—either from specialized firms or from broad gauged companies looking to add a targeted set of services to their broader platform.

Despite the progress that has been made in the provision of Islamic financial services here in the United States, not all of the regulatory challenges raised by these institutions have been resolved—challenges that arise from looking to introduce Islamic financial principles into a regulatory framework that was structured without these principles in mind. In the United States, these issues are made even more difficult by our complex system of financial services regulation, which divides responsibility for supervision among a number of federal and state agencies.

Now, what are some of those challenges? One example is that banking organizations in the U.S. and the U.K. have recently sought approval to offer profit-and-loss sharing deposits; not surprisingly, regulatory complications have arisen. Profit-and-loss sharing deposits are typically structured so that the bank has something akin to a joint investment with the depositor, with returns based on a portion of the profits earned and not on a set rate. Most important, in contrast to a conventional deposit, if the bank loses money, so does the account holder. For this reason, offering a profit-and-loss sharing deposit is a particularly difficult proposition under a Western framework, which takes the certainty of deposit principal as a given.

In the United States, this has meant that deposits fully structured according to profit-and-loss sharing have not been permitted. SHAPE Financial Corporation has publicly described having to modify the deposit product it proposed to offer through University Bank, so that principal is guaranteed, and the deposit-holders share only in bank profits, not losses. Somewhat similarly, in the UK, I understand that the Islamic Bank of Britain has made various adjustments to fit its deposit product within the UK strictures. Even so, because its deposit products are covered by the U.K.’s deposit insurance system, customers are advised that their acceptance of full repayment in the case of a loss may not be in compliance with the shari’a.

There are several other features of U.S. banking law that could potentially hold back Islamic finance. One example is the set of restrictions placed on the range of permissible investments that commercial banks may hold. To ensure that banks do not assume unnecessary risk, their investments are generally limited to fixed-income, interest-bearing securities, which are prohibited by the shari’a. In addition, commercial banks must meet numerous disclosure requirements in order to comply with regulatory policy such as the Truth in Lending Act. These requirements typically mandate advance disclosure of APR and other terms that do not fit the principles on which Islamic finance is structured. On top of these issues, an Islamic financial institution that intends to finance the purchase of a home or a car according to murabaha or ijara structures may need to consider whether state law requires the institution to qualify as a licensed leasing company or auto lender.

The difficulty for Muslim consumers in obtaining shari’a-compliant insurance presents another hurdle to the accessibility of Islamic finance in Western markets. As I mentioned earlier, both Fannie Mae and Freddie Mac have purchased Islamically structured mortgages. However, both entities require property insurance and private mortgage insurance to be held on the securitized mortgages they purchase. This requirement forces customers of Islamic financial institutions to purchase traditional insurance for these mortgages that I understand is not compliant with the shari’a.

Beyond the legal issues regarding the activities a bank is permitted to conduct, bank supervisors have issues to confront in how to assess the safety and soundness of individual Islamic banks. A flexible approach to these issues corresponds with a larger trend toward a more adaptable, risk-oriented strategy in which supervisors are evaluating the specific risks and risk management practices of individual institutions. This manner of supervision can allow for an accommodative approach to Islamic banking that is based on its unique structure and related risks.

Let me elaborate on our supervisory approach. A key starting point in the process of supervising financial institutions is the design of a framework that sets out our supervisory expectations around such key areas as risk management, compliance and control, corporate governance and capital policy. Each country may do that a little differently. Some may be very rules-based in setting out how objectives are to be met, spelling out in considerable detail how a bank must operate.

In the United States, we do have extensive legal and regulatory requirements as I have discussed, and we do incorporate into our supervisory regime some very specific financial requirements (such as those around capital adequacy). But much of our regime is based on examiners making informed judgments on how individual institutions are managing and controlling the risks that result from their specific business strategies. We seek to understand each individual institution – what is its business strategy; what risks arise from that strategy (cutting across such categories as credit risk, market or investment risk, operational risk, and legal risks). We then ask such questions as: how well does management understand, measure, and manage those risks? and how sound is the overall governance and control structure of the firm? We look to train and develop our examiners so that they can make the necessary case by case judgments in a rigorous and fair way.

What we include in our broad framework of approach and how we train and develop our examiners to make those individual judgments is, of course, strongly influenced by supervisory practices developing around the world. I was a member of the Basel Committee for five years and found the sharing of information, and coordinated efforts to address areas of common concern, extremely useful in understanding how we can continue to improve our supervisory processes in the United States.

The opportunity for us to learn from others on supervisory approaches to Islamic banking is particularly great. Bank supervisors from other parts of the world are clearly ahead of us in confronting the challenges in understanding the risks facing Islamic financial institutions, and how they can be most effectively managed and controlled. The Islamic financial community is in the process of developing international supervisory standards and practices that reflect the specific needs of shari’a-compliant finance.

To this end, institutions like the Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Financial Services Board are serving a critical function. In fact, the IFSB recently released exposure drafts of capital adequacy and risk management standards for Islamic financial institutions. These standards will help regulators both in countries that already have well-developed Islamic financial systems and in Western countries, to understand and supervise Islamic finance.

The IFSB is also working to strengthen the corporate governance framework for the Islamic financial services industry, and the Federal Reserve Bank of New York will be contributing to this process through its participation in an upcoming IFSB-sponsored summit on this topic in Doha, Qatar. Of course, corporate governance issues have become particularly important to us here in the United States over the past few years, and some of the approaches we are taking to address this issue already have much in common with the practices of Islamic finance.

In the same way that shari’a supervisory boards of Islamic financial institutions were established in order to review the appropriateness of proposed investments, conventional institutions now too see the wisdom of this process. Thus, many of them have begun instituting “appropriateness” reviews that look beyond legal compliance and toward even more difficult issues of trust, transparency and the ethical nature of their transactions.
Some of the features of shari’a-compliant investing may also hold an appeal for Western investors. Islamic funds and investors screen out companies to exclude those that take part in activities that are not considered to be shari’a-compliant. In addition, companies that are overleveraged or that rely too heavily on accounts receivable are screened out. Although based on Islamic principles, these filters may serve a broader purpose of excluding firms that may present particular risk. These practices may also be attractive to many non-Muslim investors who are not only interested in the risk/reward relationship of their investment, but who are also concerned with issues of accountability and social responsibility.

In closing, let me emphasize that, as U.S. bank regulators, we have an open mind on how to approach the issues raised by Islamic finance. These issues may not always be easy to resolve, but we are prepared to rise to the challenge. In this regard, it is essential that we not adopt the mindset that the relationship between banks and supervisors is one of action and reaction. Instead, we ought to think collectively through the issues and work together to address them successfully. We recognize that the basic objectives of bank managers and bank supervisors are very similar to one another—we all want to ensure the safe and sound operations of a banking system. But to achieve that objective over time, we need a system that is dynamic – one that can adapt to changing customer needs. Meeting the customer demand for Islamic banking services will require that the industry and the supervisors have a particularly strong dialogue going forward.

Malaysia - The role in the growing global Islamic finance industry

Welcoming remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the INCEIF Inaugural Intellectual Discourse “Islamic Finance: Issues and Challenges of Co-existence in an Entrenched Conventional System", Central Bank of Malaysia, Kuala Lumpur, 23 February 2007.

It is my great pleasure to welcome you to INCEIF Inaugural Intellectual Discourse Series. INCEIF has made remarkable progress within a period of less than a year. In 2006, INCEIF has gained the university status, it has currently enrolled 756 students from 39 countries, and it has entered into strategic alliances with a number of industry training and education providers from the Middle East, South East Asia and the West. Indeed, INCEIF has received an overwhelming response. As an institution of higher learning dedicated to the development of human capital for the growing global Islamic finance industry, INCEIF will have an important role in meeting the increased demand for talent and expertise for the industry.
The topic for today's deliberation, "Issues and Challenges of the Co-existence of Islamic Finance in an Entrenched Conventional System", is most relevant in the currently highly competitive financial services industry where new challenges and opportunities are continuously emerging in this era of globalisation and of rapid change that is also driven by advances in technology.
Today's initiative brings together Islamic finance experts and scholars to deliberate the issues confronting Islamic finance in an environment where the conventional finance is dominant and highly entrenched. The primary objective of today's Inaugural Intellectual Discourse is to explore the prospects for Islamic finance which has now reached a stage of development in which it is now no longer regarded as a niche product serving a specialised market. Today, it is a robust industry that operates in more than 60 countries, and it is a viable form of financial intermediation that is competitive and resilient. Islamic finance, nevertheless faces many challenges with respect to its product offering, its distinctive ethical and moral dimension, and its relevance to all customers.
The Islamic financial system in Malaysia has evolved as a competitive component of the overall financial system, complementing the conventional financial system as a driver of economic growth and development. Malaysia will continue to foster the expansion of the dual banking system where both, the Islamic and conventional systems operate in parallel to deliver innovative and competitive financial products and services. The global experience has however shown that institutional and development financial infrastructure, the broadening and deepening of the financial markets, and a rigorous legal and regulatory framework is vital for the soundness, stability and resilience of the financial system. Developments in both domestic and international economic and financial conditions have from time to time tested the resilience of financial systems. Thus, Islamic financial institutions will not only be assessed by their Shariah aspects, but also by other factors including their effectiveness and efficiency, their resilience and their ability to evolve and reinvent to meet the challenges of the continuously changing demands as we advance forward.
After more than two decades of experience in the development of Islamic finance, we are now seeing the international dimension of our Islamic financial system gain significance. This has followed the increased foreign presence and participation in our domestic Islamic financial system. Malaysia has also ventured to participate in international financial markets and in term of presence beyond our domestic borders. More specifically, three new foreign Islamic banks are now participating in our domestic financial system. Following further liberalisation measures, there is also increased foreign participation in our domestic Islamic financial institutions. Our takaful industry has also become one of the success stories in Islamic finance. In the four new licences issued recently, it has comprised of joint ventures with foreign participation. The Malaysian bond market has also been liberalised to enable foreign entities to raise funds in our domestic market. Our experience in launching the first Sukuk has drawn significant interest by corporates and sovereigns for raising long-term financing based on Islamic structure instruments.
Following these developments we are now entering a new phase in the development of Islamic financial system in Malaysia with the new initiatives to promote Malaysia as an International Islamic Financial Centre. This aims at strengthening our economic and financial inter-linkages and thus promoting greater trade and investment across borders. This is therefore the beginning of a new phase of development for Islamic finance in Malaysia as it becomes more integrated with the international financial system. We have set high standards in market coverage and broadening of Islamic financial products beingoffered to the market. The challenge is for the financial institutions to have a more extensive outreach. Islamic finance must promote greater financial inclusion involving all levels of the community. Opportunities also need to be created for Islamic financial products to have an outreach to the small and medium-sized enterprises. Moreover, financial instruments structured under the Salam, Istisna' and Musyarakah contracts need to be designed to stimulate activities in those sectors such as agriculture and manufacturing where there is limited participation by conventional finance. We need to reach those segments of society and economic activities that have not fully benefited from the success of Islamic finance.
As part of the global development of Islamic finance, of equal importance is the supporting international architecture that is evolving. Both AAOIFI and IFSB have contributed significantly to the development and the harmonisation of accounting and prudential standards. This will allow for the potential of strengthening the inter-linkages across borders to take place.
The conventional banking as a more matured market has also continued to grow and prosper in Malaysia. Since the beginning, it has attracted dominant global players. There are fourteen 100% owned banks in our financial system that accounts for almost one third of the market share. In the insurance sector the foreign participation is even greater. In conventional finance, Malaysia is therefore already highly integrated with the international financial system. This has been reinforced by the progressive liberalisation of our capital account which now allows for the free inflow and outflow of funds. Our financial system has therefore facilitated Malaysia 's strong international economic and financial linkages which have for several decades contributed to our economic growth and development.
In this competitive global environment, new challenges and risks can be expected to continuously emerge. The growing world wide participation in Islamic finance as a form of financial intermediation in this highly challenging environment has demonstrated its viability and competitiveness. This dynamic environment in which we operate will thus require continued developments to be pursued on all fronts.
The discourse among the expertise in the field will not only provide us with further insights into the issues and challenges of coexistence not only in our domestic systems but also in the international financial system. This will contribute to the awareness and understanding of the journey for the sustainable development of Islamic finance.

Human Resources Development in Islamic Banks

The Islamic Banks have their own human resources consisting of recruitment, placement, promotion, transfer, and termination. The components of the Personnel Policy are discussed below.

Recruitment

Islamic Banks assess their needs for manpower recruitment with the company’s organizational goals. Open positions are advertised the National Dailies. The advertisement mainly provides a description of the positions, scale of pay, age, nationality, educational qualifications, experience and other terms and conditions of the application and service. Current employees may apply to fulfill the advertised open positions. In terms of age of a candidate, normally he shall not be less than twenty years and more than thirty years of age at the time of appointment by direct recruitment as an officer, and not less than eighteen years and more than thirty years of age at the time of appointment by direct recruitment, as an employee other than an officer in the service of the banks. However, in special cases, the employer can relax the upper age limit for reasons to be recorded in writing. In terms of nationality, Islamic banks do not appoint any person to any post unless he is a citizen of Bangladesh. Physical fitness is another important factor in the recruitment of personnel at a bank. Thus an applicant must be declared physically fit by the Medical Officer of the bank or some other Medical Authority specified by the bank on their behalf.

Placement:

Positions may be filled by direct recruitment or by the promotion of an existing employee. Prior to starting in a new position, a new employee must fulfill the terms and conditions stipulated in the appointment letter he receives notifying him of the offer.

Promotion:

Islamic banks may consider promoting an employee according to his merit based upon the total marks obtained on his Annual Confidential Report (ACR). The ACR keeps track of an employee’s academic qualifications, professional qualifications, training, seniority in the feeder grade, adverse service record in the feeder grade, promotion examination (viva-voce or written test or both). In the event two candidates have the same quality marks, seniority may be used as a determining factor. Seniority is calculated by years of service with fractions of the year being calculated on a pro rata basis rounding towards the nearest whole number.

Transfer:

An employee may be transferred between locations or job classifications as per the order of the competent authority. Normally an employee must be in a position for at least three years prior to being transferred. Transfers result in new challenges, environment and employee relationships revigorate an employees interest in his work.

Dismissal:

Islamic banks may dismiss the service of an employee at any time once he has been given at least one month’s written notice. As an alternative, an employee can be terminated immediately if the bank chooses to make payment equal to one- month's salary in lieu of giving such notice. In addition, the employee may not be entitled to any form of compensation for termination of service. The duration of such notice depends upon the nature of service, whether it is temporary, probation or confirmed. Normally disciplinary issues or medical concerns may be given as causes for dismissal from service.

TRAINING

Need for Training

Training is widely considered as an important tool for enhancing a person’s Attitude, Skill and Knowledge (ASK). It is the process of assisting a person for developing his efficiency and effectiveness at work by improving and updating his professional knowledge, by developing skills relevant to his work and growing appropriate behavior and attitude towards work and people. Training is, therefore, an effective tool for Human Resource Development (HRD) as well as for achieving the goals of an organization.
Islamic banking is a Shariah-based interest-free banking system. It has to operate in a way that benefits society as a whole. Its features and functional procedures are quite distinctive than that of the traditional banking system. To satisfy the objectives of the Islamic banking and to face the challenge of the next century, the job of Islamic banking is becoming more complicated and more technical day by day. The personnel of Islamic banks require special ASK, which can be developed through proper training. Obviously, that a large number of properly trained employees would result in increased output and reduced costs, further resulting in maximum utilization of human resources, which will ultimately benefit the entire nation.

The four (4) Islamic banks of the country also have recognized the importance of training for their employees. This can be substantiated from the following paragraphs:

Islami Bank Bangladesh Limited (IBBL) has mentioned that “since our system is new, training is considered to be sin-qua-non for successful operations of the Bank. Before establishment of the Bank, Bangladesh Islamic Bankers’ Association (BIBA) conducted several Orientation Courses on Islamic Banking in which senior and mid-level bankers, lawyers, chartered accountants, media-men, management experts participated. Most of the officers of the Bank were selected from their list. Training academy of the Bank has also been established. Orientation and skill development courses are conducted regularly. Special attention is paid to on-the-job training on the basis of job rotation plan. Besides, the officers and employees periodically attend seminars and symposiums organized by the Bank and other bodies.

Similarly, Al-Arafah Islami Bank Limited has mentioned that “Since Islamic banking is different in many respects than that of conventional system of banking, the officers are, therefore, required to attain thorough knowledge about the Islamic banking system in order to explain the same to the clients properly. Therefore, effective training program for the officers are being undertaken. Side by side, on-the-job training is also being imparted specially for the new employees. The Board of Directors is aware that the objectives of the Bank might be defeated if the officers don’t practice the Islamic rituals in their daily life. Therefore, all officers are being motivated to be practicing Muslim in their daily life apart from saying prayer in Jamaat. It may be mentioned that every branch has hours at the time of prayer. Nevertheless Dars-e-Quran and Hadith is also being held after Asar-Prayer everday”.

The Social Investment Bank Limited (SIBL) has also recorded that “training is the basic need for the development of Human Resources. Accordingly, SIBL has decided to establish one training academy in the name of University School of Social Economics and Management. The new recruits (officers) would be inducted with basic foundation training including advanced training courses to get them fully acquainted with the basic concept and objectives of SIBL. There is an ultimate aim of development this training academy to a real-life university which will be staffed by eminent professional bankers, economist and scholars from home and abroad.”

Al-Baraka Bank Bangladesh Limited has also indicated the necessity of the training mentioning that “Despite their unequivocal commitment to provide only Islamic banking they were unable to deliver full Islamic finance which was a major disappointment. The Shariah Council had, once again, pointed out these failures.”

A.K.N. Ahmed, Former Governor of Bangladesh Bank is of the opinion that each bank officer and stuff should subject to intensive training on banking ethics and customer service before they are put to the job. He also suggests that the activities of training academies should be revived to ensure that each bank is getting proper output from these institutions.

Conceptual Framework for Training Management
Training is provided to the employees of an organization in order to achieve the goals of the organization. Thus, for any management training exercise, the goals and objectives of the organization must be taken into consideration. In fact, management of training gets its direction from the organizational goal set by the management at a macro level. This implies that the first thing that comes into consideration for training management is the organizational goals and objectives.

Organizational goal setting is followed by the formulation of a training plan based on a training needs assessment. Once a plan is in place, management has to execute the plan. At this stage training is provided to the trainees on a needs assessment basis. The training institutes conduct workshops and seminars. The final process of a training management system can be illustrated.

Types of Training

Training in Islamic banks may be of three types: (i) Ideological (ii) Theoretical and (iii) Practical. Ideological training may be related with the holy Quran and Sunnah and Shariah issues on banking. The practical training may conducted through discussions and exercises on banking issues in a classroom setting. In addition, some training may be administered while the employee is on the job, to allow the employee to learn Islamic banking through practice. The theoretical training may equip an employee with Islamic knowledge and values, which is considered to be essential for Islamic banking.

Theoretical training may provide a conceptual clarity on the understanding of Islamic banking. However, practical training of Islamic banking provides the skills and art necessary to perform a job. An employee should have all types of training in order to best prepare him to perform his job requirements.

Possible Areas of Training

Since Islamic banking mainly practices general banking, investment and foreign exchange, training should focus on these three areas of banking. Islamic banks may consider the following areas while devising their training programs:
1. Induction / Foundation Training
2. Banking Laws and Practices
3. Foreign Exchange and Foreign Trade
4. Investment Management
5. Branch Management
6. Customer Services Development
7. Audit and Inspections in Banks
8. Islamic Economics and Banking
9. Islamic Banking and Insurance
10. Performance Budgeting
11. Managing the Managers
Furthermore, Islamic banks need to be careful to tailor the training session to the specific employee’s needs. Training should be designed to address the needs of senior management all the way down to the line workers in order to be most productive.
Islamic banking needs morally sound customers for its smooth operation. Islamic value oriented customers are essential for growth in Islamic banking. Therefore, value oriented customers training may be another main area of training for Islamic banks.

The Lecture Method

Quite a good number of training methods generally used in academic and training institutions can be effectively applied to personnel development of Islamic banks. A brief discussion on the lecture method may be relevant for Islamic banks as well.
Lectures have several advantages. One instructor can handle a large class. In addition, little or no equipment is needed. Finally, a well-prepared lecture can be repeated without any great effort on the part of the lecturer, thereby allowing large groups of people to be trained on the exact material in smaller group forums.
Lectures are especially valuable for introducing a new subject and it allows the trainees to interact in the process, which would otherwise be very intimidating to them. Where knowledge is advancing rapidly, textbooks may not be available. Lectures awaken a critical attitude in trainees. Lectures can provide aesthetic pleasure inspiring a large number of trainees in an economical way.
The main disadvantage is that knowledge gained by passive listening to a factual lecture, without some participation by the class, is not readily assimilated, and boredom sets in very quickly. The lecture sometimes offers no opportunity for class participation and is, therefore, of little use in providing skills. Thus there are advantages and disadvantages so a proper mix has to be found in order to be effective.

REQUIREMENTS IN TAKAFUL CONTRACT

The basic formalities in a commercial ‘Aqd (contract) is that, there must be al-Ma’qud ’alaih (a subject matter) upon which the intended parties called al-Muta’aqidayn (contracting parties) mutually agree by Ijab ( an offer) and qabul (an acceptance) for an exchange of a valuable consideration al-‘Iwad al-Mutaqawwim upon which parties are bound to perform the contract according to the terms and shurut (conditions) agreed upon. The Majalle provides that, the basic formalities required in a contract are that, two parties undertake upon themselves to do something upon Ijab (an offer) and Qabul (an acceptance). Dr. Hussain Hamid Hassan opines that, as regard to the formalities of a contract under Islamic law, there is a legal relationship created by a promise of one of the contracting parties (offeror) with the promise of the other (offeree) as the result of which follow consequences in respect of the subject matter of the bargain.
A Takaful policy is a kind of financial transaction, which is based on the general principles of contract. Since a Takaful is a kind of contract, the formalities for the formation of a valid policy are based on the formalities required in other form of commercial contracts. The formalities before the conclusion of a policy required by the Takaful companies of the contemporary world are based on general principles of al-‘Aqd (contract). Under Islamic Law, to form a Takaful policy, there must be a subject matter at risk, upon which (subject matter) two parties (operator and participant) mutually agree by Ijab (a proposal) and Qabul (an accpetance) in which both parties undertake to share the responsibility, to provide a reasonable material security against unexpected but defined risk on the subject matter. In other words, the formalities in a Takaful policy are Ijab (the proposal) and Qabul (an acceptance), issuance of a cover note (a temporary document for a policy provided by the operator to the participant) and payment of Takaful contribution (al-Musamahah) which are further analyzed as follows:
Al-Ijab) (Proposal)
In a Takaful policy, the person whose subject matter is at risk is the one who should approach the operator to undertake a responsibility (in consideration of contribution) for the material securing against an unexpected but defined risk on the subject matter. Therefore, in a Takaful policy the owner of the subject matter (which is at risk) is the one who makes a proposal for the policy.
The owner of the subject matter according to his own wish may make a proposal to his wish. But for the purpose of a better dealing between the operator and the participant, the proposal form may be provided (with necessary questions for information) by the operator, and the proposer will complete the form with the correct and necessary information, which are material to the policy. In making a proposal, the proposer is under an obligation to disclose any defect in the subject matter likely to affect policy. Such an obligation can be justified by the following Prophetic sanction:
"Narrated by Hakim bin Hizam (r.a.), the Holy Prophet (saw) said: If they speak truth and mention defects, then their bargain will be blessed, if they tell lies and conceal the defects, they might make some financial gain but they will deprive their sale of Allah’s blessing."
'Uqba bin Amir (r.a.) also illustrated to the same effect that:
"'Uqba bin ‘Amir (r.a.) said: "It is illegal for one to sell a thing if one knows that is has a defect, unless one informs the buyer of the defect."
In the proposal form there should not be any declaration or information given by the proposer with evil purpose to deceive the operator while hoping for a gain something wrongfully. This is also indicated in the saying of the Holy Prophet (saw):
"Narrated by Abdullah bin Umar (r.a ), A person came to the Prophet (saw) and told him that he was always betrayed in purchasing. The Prophet (saw) told him to say at the time of buying, "No cheating."
In a commercial contract a proposal needs not to be made through writing or printing but an oral proposal through telephone or telex may also be held valid. Can the same method be applied in making a proposal for a Takaful policy? In other words, can a proposal be made other than in writing (i.e. verbal, telephone or telex)? It is submitted that, despite the fact that a Takaful is a kind of commercial contract its nature is different from other commercial contracts. It deals only with finance in which if a proposal is allowed to be made other than in writing or printing the terms, conditions, declarations or information contained in the proposal may be altered at any time during the policy period which may create a dispute between the participant and the operator and may also give an opportunity to the participant to seek for a co-operation in the policy with an evil cause or to the operator to escape the liability. There is no room for the one who seeks cooperation with an evil cause nor for the one who escapes an undertaken liability as Allah (swt) commanded in the following verses respectively:
"But help you not one another in sin and rancour."
"O you who believe! Fulfil your (undertaken) obligations."
In another verse, Allah (swt) ruled out that, there is no recognition for those who create destruction. Allah (swt) said:
"But they (ever) strive to do mischief on earth. And Allah (swt) loveth not those who do mischief."
It is concluded in the light of the above analysis that, a proposal for a Takaful needs to be made in writing and printing (in order to avoid any kind of mischief or dispute between the operator and the participant). Can the proposal be made through electronic media (fax, e-mail, telegram or any other printed methods) or by post which may be fall within the ambit of a written proposal? Certainly, these media used by one for making a proposal may also be regarded as written. This is because, a written proposal means any kind of visible document. The purpose of the requirement of such a written proposal is to have a document for the future proof if necessary. Hence, a proposal may be accepted if it is in writing or of a similar in nature (i.e. fax, e-mail, post, printed form, telegram, Internet, etc.). But there may not be any justification to accept an oral proposal for the sake of avoiding any dispute that may happen between the operator and the participant.
Once a proposal form is completed with appropriate information and declaration or clauses, the proposer has to sign and return it to the authorized person of the operator for further evaluation and make decision whether to accept or reject the proposal with the given terms and conditions, declarations, and information. A proposal made by the proposer does not bind him unless it is a Qabul formally (accepted) by the operator. Therefore, a proposer has an option to revoke the proposal not only until it is received by the operator but it may be extended until the moment it is formally accepted by the operator. Once therefore, it is accepted the proposer should be bound by it and may not have any right of revocation (unless the question of Khiyar (options)) arises. This is because the commandment of Allah (swt) to fulfil the obligation arises only when a promise is concluded by an offer and an acceptance. Allah (swt) commanded to the effect:
"O you who believe fulfil (all obligations)."
Qabul (Acceptance)
In a Takaful policy, the operator generally makes an acceptance. But in some situations an acceptance may be made by the intended policy holder if the operator does not agree to the earlier proposal made by the proposer and he adds some additional terms and conditions will be regarded as a counter offer to the intended policy holder. The mode of acceptance of a proposal may be inferred by any of the following conducts of the operator:
i) Issuance of the certificate;
ii) Issuance of a temporary cover note;
iii) Issuance of a receipt for the first payment of contribution; or
iv) Any kind of acceptance through (fax, letter, telex, telegram, e-mail and Internet) to the proposal of the intended policyholder.
Once an acceptance is formally made, it cannot later be revoked. This is because a contract is final once a proposal and an acceptance concluded it. Once the contract is final the parties concerned are bound by it for its Ada’ (performance). This is justified by the Qur'anic sanction:
"O you who believe fulfil (all) obligations."
The acceptance may be cancelled even after the acceptance is made if the operator is able to prove a breach of utmost good faith exists in the proposal made by the policy holder. In this case the operator shall have a right of option whether to cancel the certificate or to retain it with a reasonable remedies if any. This is justified by the following Prophetic injunction:
"Narrated by Hakim bin Hizam, the Holy Prophet (saw)) said: If they speak truth and mention defects, then their bargain will be blessed, if they tell lies and conceal the defects, they might gain some financial gain but they will deprive their sale of Allah’s blessing."
Aqd Ta’min al-Mu'aqqat (Issuance of Cover Note)
In a takaful policy, the issuance of the cover note does not give rise to a permanent enforcement. It is a mere receipt issued by the operator or his authorized agent which may act as a temporary document for a valid policy in force. A cover note is generally issued for the general policies (property, motor, business, etc.)
Sometimes, it may not be possible for the operator to issue a policy soon after the agreement is concluded between the operator and the participant. If the operator delays in issuing the policy and if the subject matter of the policy happens to face the risk before the issuance of the certificate then what would happen if the operator denies his liability to the policy holder because of non-existence of any document (issuance of certificate issued by the operator). In this situation, the policy holder may also be unable to make a claim against the risk on the subject matter because of the inability to prove a document (Takaful certificate) for the policy. In such a situation three negative consequences may arise:
i) it may give an opportunity for the operator to deceive the policy holder. In Islamic law, there is no room for the parties in the transaction to deceive each other. This is indicated in the saying of the Holy Prophet (saw):
"The Holy Prophet (saw) said: Deception would lead to the hell (fire) and whoever does a deed which is not in accordance with our tradition, then that deed will not be accepted."
ii) The policy holder may be deprived from a fair claim against the risk on the subject matter while giving an opportunity for the operator to gain which is unacceptable in the Islamic teaching as indicated in the Holy Qur'an. Allah (swt) says:
"O you who believe! Eat not up your property among yourselves in vanities, but let there be amongst you traffic and trade by mutual goodwill…"
iii) Mischief may take place between operator and policy holder which is also not appreciated in the eyes of Allah (swt). He says:
"And seek not (occasion for) mischief in the land. For Allah (swt) loves not those who do mischief."
To avoid the aforementioned evil, injustice and mischief, it is important for the operator to issue a temporary cover note for the period until the actual certificate is issued. This temporary cover note may act as a proof for the policy holder and enable him to stand on his own with a document (cover note) by which he may also make a fair claim against the risk (if any) occurring on the subject matter before the actual issuance of certificate. To hold a written document for the proof of a financial transaction (including a takaful policy as it is also a financial transactions) is justified by the repeated Qur'anic sanctions. Allah (swt) says:
"O you who believe! When you deal with each other in transaction involving future obligations in a fixed period of time, reduce them to writing, let a scribe write down faithfully as between the parties, let not the scribe refuse to write as Allah (swt) has taught him so let him write."
A written document plays a role for the most reliable proof is again justified by the Qur'anic sanction in which the offenders will be called in question relying on written record (evidence). Allah (swt) says:
"And they make into females angels who themselves serve Allah (swt). Did they witness their creation". Their evidence will be recorded and they will be called to account."
A cover note may be issued for a temporary period of time. The duration for a cover note in force could be determined by the operator and to be stated it in the cover note itself. However, the validity of a cover note could be continued until it expires. A cover note may cease its validity even before it expires that is when the operator issues the certificate before the expiry of the cover note. Therefore, with the existence of an issued certificate the temporary cover note may no longer have any legal effect.
Al-Musahamah (Contribution)
Contribution in a Takaful contract is a monetary consideration (al-‘Iwad) from the participant’s part which is an obligation arising from a contract between the participant and the operator. A takaful contract of mutual co-operation in which the consideration is required not only from one party but from both parties in which the operator is also equally bound by the contract and that in indemnity or benefit. The obligations of the settlement of the respective considerations in a transaction of a mutual cooperation is justified by the commandment of Allah (swt):
"Help you one another in righteousness and piety."
This verse of the Holy Qur’an renders a duty to mankind to provide their mutual cooperation on a bilateral basis. Furthermore, in takaful contract, once the policy is concluded the participant is regarded as a principal debtor and must settle the agreed contribution to the operator accordingly. In such a transaction the participant is under a duty to pay the contribution regularly according to the terms and conditions as stated in the certificate. This is justified by the repeated saying of the Holy Prophet (saw) in which the principal debtor is urged to settle his debt on time. The Holy Prophet (saw) said:
"Abu Rafa’ reported that: the Holy Prophet (saw) said: give it to him and verily the best of man is he who is best of them in payment of it."
The Holy Prophet (saw) also said:
"Abu Hurairah (r) reported.. that a man demanded of the Holy Prophet (saw) for a repayment of a debt…. And verily the best of you is he who is the best of your in repayment of loan."
A Takaful policy is a binding contract, and therefore, the performance of consideration from both parties (the participant and the operator) through the payment of contribution (by the participant) and the indemnification (by the operator) are obligations which must be fulfilled. This is justified by the Qur'anic sanction. Allah (swt) says:
"O you who believe fulfil (all) obligations."
Although a participant in a policy is treated as the debtor who is under a contractual obligation to settle the agreed contributions on time, it is not possible always to settle it debt on time due to some unexpected reasons. In such a situation what could be the legal position, of the participant and also the policy itself? Under Islamic law, if a debtor due to some logical reason is unable to settle the debt on time, the debtor should not be pressured by the creditor rather he is advised to extend a reasonable time for the settlement. To waive the debt with a kind heart. The Holy Prophet (saw) said:
"Abu Qatadah (r.a ) reported: I heard the holy Prophet (saw) have said: Who so gives respite to a debtor or grants him remission Allah (swt) will save him from the calamities of the resurrections day."
The Holy Prophet again said:
"Imran bin Hussein (r.a.) reported that the Messenger of Allah (swt) said: who so has his dues from a way and he gives time to him (for payment), he will get his reward of charity every day."

It is therefore, suggested that in a Takaful policy if the participant is sometimes unable to pay the agreed contribution on time the participant should neither be penalized nor the policy be forfeited with paid-contributions. But the participant should be given a reasonable time for the settlement of the unpaid contributions and the enforcement of the policy should be continued according to the terms and conditions contained in the certificate.

However, if the participant fails to settle the unpaid contributions within the given period, the policy may be discontinued. This is because it is a contract of mutual cooperation. If, therefore, one party is unable to provide his agreed cooperation then it is unfair to the other party to continue the transaction with unilateral cooperation. Thus, if the policy is terminated due to failure of the payment of the contributions by the participant, the paid contributions should not be forfeited rather it is suggested here that, the paid contributions should be returned to the participants with the share of profits made over the paid contributions after deduction of the charges due to the operator. The charges to the operator are the debt due on the participant which must be deducted from the paid contribution as justified by the saying of the Holy Prophet (saw):
"Abu Hurairah reported that the Messenger of Allah (swt) said: Who so becomes insolvent and afterwards a man (creditor) takes hold of his exact property, he is more entitled to it than others."
It is again suggested that, under Islamic law, there is no circumstance which may render a policy forfeited with paid-contributions even if the participant commits a breach of good faith or any other offences. This is because an insurance policy is a financial transaction in which the paid contributions are the legitimate property of the participant which cannot be forfeited just because of his disfavourable acts. The participant may be charged for the wrongful acts (if any) in different ways by different laws but not by forfeiting his paid-contributions or depriving him (participant) from his lawful right paid-contributions. The paid-contributions are al-Amanah (a trust) to the operator, and they, therefore, should be due to the participant. This is because, under Islamic law, there is no justification for the trustee to refuse to render the entrusted articles to their proprietor once the depositor rightfully demands from the trustee. This is justified by the Qur'anic injunctions:
"Verily Allah (swt) does command you to render back your trusts to those to whom they are due."
Also Allah (swt) warned against those who betray a trust. Allah (swt) says:
"Contend not on behalf of such as betray their own souls; for Allah (swt) loves not one given to prodigy and crime."It is therefore, submitted that under no circumstances in Islamic law can the paid-contributions of the participant be forfeited, but a deduction may be made out of the paid- contributions and the profit made from them so as to cover the charges due to the operator if any. It is thus concluded here that, the takaful (Islamic Insurance) practice in the contemporary economy does not base it’s operations only on al-Mudharabah technique but it also involves several other Shari’ah justified nominate 'Uqud ( contract).

Dispute among the scholars on the validity of life insurance & possible refutation to the misconception

Prof. Dr. Mohd. Ma'sum Billah

Under Islamic law on the other hand, the 'Ulamā' are divided in groups over the issue of the validity of insurance. There are mainly three groups. One of them accepts the practices of insurance subject to conformity with the Sharī'ah. The second group accepts general insurance but rejects the life insurance and the third group opposes insurance entirely, claiming that the whole idea of insurance policy is contrary to the fundamental teachings of Islam.2 This research aims at focusing on the disputes which have arisen among the Islamic scholars on the validity of insurance, the grounds of their arguments and possible justifications for the legality of insurance practices in the light of the Sharī'ah principles.
Views of the Islamic Scholars on Insurance

Differences in Groups
The 'Ulamā' have mixed views on the validity of insurance. Generally, these views of the Muslims scholars can be divided into the following three groups:
Insurance practice is entirely and absolutely lawful provided that it is free from the element of riba. Among the 'Ulamā' sharing this viewpoint are Shaikh Mohammad 'Abduh, 3 the Hanafi lawyer Shaikh Ibn Abidin,4 Mohammad Taqi Amini, Shaikh Mahmud Ahmad, Mustafa Ahmad Zarqa, Sayed Mohammad Sadeeq al-Ruhani, Ibrahim Tahawi, Ahmad Taha As-Sanusi, Yusuf Musa, Mohammad al-Bahi, Ali al-Khafif, Zafar Shahidi, Mohammad Nejatullah Siddiqi, Mohammad Muslehuddin, M.A. Manna, Ali Jamaluddin Awad, 5 as well as Ayatullah Khomeni.6
There are some Islamic scholars who accept general insurance but object to life insurance as it involves the elements of Maisir (gambling) and Garar (uncertainty) and it contrasts with the principles of Mirath and Wasiyah. This view was accepted in a Seminar held in Morocco on 6th May 1972. 7 Among the scholars who accepted this view are Abdur Rahman 'Isa, Ahmad Ibrahim, Mohd. Musa, Mufti Mohammad Bakheet, Mohammad Abu Zahra,8 and Shaikh al - Azhar Shaikh Jad al - Haq Ali Jad al-Haq,9 also an anonymous statement published in the Muslim brotherhood in 1941, 10 and the Muslim League Conference held in Cairo in 1965, 11 supported this view.
The third group clearly and totally rejects any practice of insurance on the grounds that it involves the elements of riba, Maisir and Garar which are strictly prohibited by the Sharī'ah. Among the Islamic scholars who are in favour of this view are Mustafa Zaid, 'Abdullah al-Qalqeeli and Jalal Mustafa al-Sayyad. 12
However, in my effort to justify the validity of insurance, reference has to be made to the misconceptions that have surrounded the very idea of insurance and its operation which might have compelled some Muslim scholars to urge the rejection of insurance. An attempt is made to refute these misconceptions, to enable the contemporary Muslim Ummah to accept insurance as a Sharī'ah justified financing technique.
Misconceptions

Among the misconceptions are:
An insurance policy contains the element of riba'. 13 Any transaction which involves riba' is void ab initio. Allah (S.W.T.) has clearly forbidden riba' based transaction in the following Ayat:
"... Allah (S.W.T.) has permitted trade and prohibited Riba'...."14
It contains an element of betting. This is because, the insured, in an insurance policy, hopes to get the opportunity for a material gain, and, hence, this is similar to betting. This view was developed unanimously by some Ulama in a judicial conference held in Macca in Sha'ban, 1398AH. 15

(iii) It contains the element of Garar. 'al-Garar' means uncertainty in either the object or the subject matter of a transaction. Any transaction involving the element of 'Garar' is void ab initio in the eyes of the Sharī'ah. The Holy Prophet (S.A.W.) prohibited any transaction involving the element of Garar in the following tradition:
"... The Holy Prophet (S.A.W.) had prohibited transaction with Garar, (uncertainty)" 16
(iv) It contains the element of 'Maisir' (gambling) which has been strictly prohibited by Allah (S.W.T.) in the Holy Qur'ān. 17 A transaction involving gambling occurs when a gambler pays a certain amount of money from which the gambler hopes for a material gain. Hence, it is argued that an insurance policy has the element of Maisir as the insured pays the premiums with the hope of obtaining a chance of a handsome return. Therefore it is alleged that such a transaction involving the unlawful element of Maisir, is not permissible, as Allah (S.W.T.) prohibits Maisir in the following sanction:
"...They ask you concerning wine and gambling. Say: In them is great sin ..." 18
(v) There is also no express authority from the Divine principles justifying the validity of the practice of insurance policy. Hence, it is argued that any transaction or dealing which is inconsistent with the Holy Qur'ān and the Sunnah or Tradition of the Holy Prophet (S.A.W.) should be held void. Allah (S.W.T.) has indicated:
"... If anyone desires a system other than Islam never will it be accepted from him ..." 19
It is contrary to the principle of Tawakkul. In an insurance policy, the insured puts a trust on the insurer to protect him against an unexpected loss instead of putting his trust on Almighty Allah (S.W.T.). Such practice is against the principle of 'Tawakkul' as every believer is obliged to put his own trust (Tawakkul) in Allah (S.W.T.) only. Allah (S.W.T.) says:

".... but on Allah (S.W.T.) put your trust (Tawakkul) if you have faith....." 20
(vii) It is contrary to the principles of 'Mirath' and 'Wasiyah'. This is because, in a life insurance policy, the nominee is the absolute beneficiary from the policy after the death of the insured, and this will deprive the heirs of the deceased of their legal rights based on the principles of 'Mirath' and 'Wasiyah'. 21
(viii) Some Muslims and even some Islamic Scholars claim that life insurance means to ensure one's life against death and such practice is unlawful. Among those who support this opinion are Shaikh al-Azhar Shaikh Jad al-Haq Ali Jad al-Haq, 22 an anonymous claim in the Muslim Brotherhood published in 1941,23 the unanimous decision of the Muslim scholars at a Seminar held in Morocco on 6 th May 972, 24 and also the verdict of the Islamic Supreme Court of Egypt on December, 27 th, 1926.25 The above view is based on the ground that there is no creature who can ensure one's life or death except Almighty Allah (S.W.T.) who is the only powerful Cherisher and Sustainer of the whole universe. Allah (S.W.T.) states:
"....Verily the knowledge of the hour is with Allah (S.W.T.). It is He who sends down rain, and He who knows what is in the wombs-Nor does anyone know what it is that he will earn tomorrow, nor does anyone know in what land he is to die. Verily with Allah (S.W.T.) is full knowledge and He is acquainted (with all things)....." 26
(ix) An insurance policy stands towards ensuring one's wealth and property. In the light of the Sharī'ah, a transaction which guarantees protection of one's property is said to be invalid except in three situations: fear for unjust enrichment; fear of losing one's property; and fear of one's property being destroyed or perished. This is the view upheld by Shaikh Azhar Jad al-Haq in denying the validity of insurance policy. 27
(x) A life insurance contract involves unlawful elements. A contract, which is based on unlawful elements, is not binding as the Holy Prophet (S.A.W.) said in one Tradition:
"...... Muslims are bound by their conditions except the condition which prohibits lawful one or the one which permits the unlawful one..." 28
(xi) Finally, Shaikh al-Azhar Jad al-Haq Ali Jad al-Haq recently in a 'fatwa' session advised the Muslim Ummah against insurance especially life insurance as it involves unlawful elements and, Muslims should not be making money or profits through unlawful means. 29
Refuting the Misconceptions
(i) An Islamic model of insurance does not involve the element of riba. It is practiced based on the principle of al-Mudarabah financing30 in which both the insurer and the insured share the profit, bonus and dividends obtained from the paid premiums in agreed proportions. Such a transaction is based on mutual agreement between the parties and therefore, the Sharī'ah Supervisory Board of Sudan held that such a transaction does not contravene the Sharī'ah nor does it contain any unlawful element.31 Moreover, such a practice is further justified by the Divine principle of mutual transaction as Allah (S.W.T.) says:
"…O you who believe! do not misappropriate your property among yourselves in vanities, but let there be among you traffic and trade by mutual good will... " 32
An insurance policy does not supersede the will of Allah (S.W.T.). In such a policy, (particularly in a life insurance policy) the aim is neither to ensure nor determine one's life or death nor does it intend to determine the future material luck of one's dependents. A life insurance policy also does not connote the idea that the participant is trying to protect his life from death against the will of Allah (S.W.T.). An insurance policy also does not mean that the insured is determining his future financial capacity. A policy, be it general or life, simply means that both the operator and the participant in a contract of insurance mutually agree to work for a compensation or security against an unexpected tragedy. Such concept is of course in line with the Islamic principle whereby Islam encourages the 'ummah' to strive hard in overcoming difficulties in their lives. The Prophet (S.A.W.) said:

".... Narrated by Abu Huraira ® the Holy Prophet (S.A.W.) said: Whosoever removes a worldly grief from a 'mu'min', Allah (S.W.T.) will take away from him one of the grieves of the hereafter. Whosoever alleviates a needy person, Allah (S.W.T.) will alleviate from him in both the world and the hereafter...." 33
(iii) In an insurance policy, the insured is not putting his trust (Tawakkul) in the insurer for a future protection but it is only a mutual transaction whereby both parties agree to work for the welfare or protection of the insured against an unexpected occurrence of loss or damage. This is of course in line with the Divine principle of mutual co-operation as Allah (S.W.T.) commanded to the effect:
"... co-operate you one another in righteousness and piety...." 34
(iv) An insurance policy does not involve the element of gambling or betting. Mustafa Al Zarqa maintains that the gambler, in a transaction of gambling or betting, is always hoping for a chance to gain materially and with the spirit of defeating other gamblers rather than co-operating.35 In contrast, the parties in a contract of insurance, are bound together in a spirit of mutual co-operation and good will in providing material security for the orphans,36 widows, 37 other dependents38 as well as one's own self against an unexpected future loss, damage or peril.
(v) An insurance contract also does not involve the elements of Garar (uncertainty). In an insurance policy generally, the subject matter is the life or property on which the risk is presumed to be occurring in the future. The subject matter of the insurance contract is definite and certain. Similarly, the subject matter of a life insurance policy is the life of the assured who has been blessed by Allah (S.W.T.) with a life and who will also one day die by the will of Allah (S.W.T.). Such occurrence of life and death is of course definite and certain as Allah (S.W.T.) says:
"....... Every should shall have a taste of death....." 39
Therefore, the allegation that the insurance policy involves the elements of 'Garar' (uncertainty), thus, making it invalid, is groundless.
(vi) Some believe that an insurance policy cannot be justified by express Divine sanction, hence, making it unlawful. In responding to this misconception, there are a couple of provisions in the Holy Qur'an and also in the Sunnah of the Holy Prophet (S.A.W.), which provide the principles of mutual co-operation 40 and the doctrine of al-Mudarabah financing respectively. 41 These both Divine doctrines in fact evolve around the today's Sharī'ah based insurance practices. Moreover, the idea of insurance policy and practice originated from the traditional doctrine of al-Aqilah, which was approved by the Holy Prophet (S.A.W.) in one of his verdicts in a case of dispute between two women from the Huzail tribe. 42 The Holy Prophet (S.A.W.) gave the above judgment in the following Tradition:

"Narrated by Abu Huraira ® that two women Hudhail tribe fought with each other and one of them flung a stone at the opponent, killing her and what was in her womb. The case was brought to the Prophet (S.A.W.) in which he gave verdict that the diyat (Blood-wit) of her unborn child is a male or female slave of the best quality and he also decided that the vicarious liability of the diyat on behalf of the slain is to be rendered to her paternal relatives while the Prophet (S.A.W.) made her son and those who were with them her heirs......" 43
The same doctrine of al-'Aqila was subsequently approved and commanded by the second caliph Sayyidina Umar, ® mandatorily in some cases. 44 Thus, it is baseless to allege that insurance has no basis for justification.
(vii) Some argue that the practice of insurance is contrary to that of the Islamic principle of 'Tawakkul' (putting trust in Allah (S.W.T.). While it is admitted here that both the insurer and the insured, in a policy, mutually agree to take an initiative for the protection of the insured against an unexpected risk, loss or damage on the subject matter, they still ultimately put their trust in Almighty Allah (S.W.T.) who is the sole Cherisher and Sustainer of the whole universe. In fact, the initiative which is taken by both parties does not deviate from the principle of 'Tawakkul' as such an initiative is only an effort made to the best of their ability to overcome future unexpected difficulties and nothing more. Indeed, in accordance with the Islamic concept of 'Tawakkul', man is asked to strive to the best of one's ability in performing a particular act or job before putting one's trust in Allah (S.W.T.). The Holy Prophet (S.A.W.) explained the principle of 'Tawakkul' in the following Hadith:
"The Holy Prophet (S.A.W.) told a Bedouin Arab who left his camel untied, trusting to the will of Allah (S.W.T.), "tie the camel first then leave it to the will of Allah (S.W.T.)...." 45
Therefore, it is concluded here that, the practice of insurance does not contravene the Islamic principle of 'Tawakkul'.
(viii) Life insurance policy does not contravene the principles of 'Mirath' and `Wasiyah'. In Amtul Habib v Musarrat Parveen, 46 the Supreme Court of Pakistan held that, in a life insurance policy, the nominee (s) is nothing more than a trustee who is under an obligation to receive the benefits of the policy on behalf of the heirs of the assured (deceased) and distribute the benefits among the heirs of the deceased in accordance with the Islamic principles of 'Mirath' and 'Wasiyah'. Hence, the nominee here is not an absolute beneficiary(s), but a mere trustee or executor, 50a and the nominee may receive only a portion of the benefits if he or she, is one of the legal heirs of the deceased.
Further Justifications for the Validity of Sharī'ah Model of Insurance
Besides the grounds, which have already been mentioned above in justifying the ideas and practices of an insurance policy, there are some additional grounds, which could well justify its practice. These grounds are listed as follows.
An insurance transaction is similar to the principles of al-Wadiah (deposit) whereby two parties engage themselves in an agreement in which one of them deposit money with the other as a trust or 'Amanah' for the purpose of safekeeping.47 Such method of dealing also exists in a contract of insurance as the insured deposits money with the insurer for future safety. The principle of al-Wadiah has been developed from the following Ayat of the Holy Qur'ān when Allah (S.W.T.) says:

"... Verily Allah (S.W.T.) commands you to render back your trusts to those to whom they are due ...." 48
(ii) A transaction which originated from the ancient custom or 'urf is permissible as long as such custom does not contravene any of the Divine principles and doctrine enshrined in the Holy Qur'an and the Sunnah of the Holy Prophet (S.A.W.). Islam, in this matter, has always been flexible in accepting any custom or 'urf of the people which may be convenient for the society, but of course with the condition that such custom is in line with the Sharī'ah. The justification of 'urf is indicated in the following hadith:
".... Whatever Muslims see good it is good with Allah (S.W.T.)." 49
An insurance contract may be said to have originated from the ancient Arab custom ('urf) the doctrine of 'al-'Aqila' which was approved by the Prophet (S.A.W.) 50. Hence, following the custom and, at the same time the practice of insurance is justified and given legal entity. 51
(iii) The origin of every transaction is permissible unless an authority proves it invalid. This principle has been laid down by Suyuti in the following maxim:

"The origin in everything is lawful unless an authority proves one unlawful." 52
The fundamental aspect of an insurance contract is derived from the ancient Arab custom of al-'Aqila. Its main objective is mutual co-operation justified by al-Qur'ān, (as Surah al-Maidah 5:2). Its operation is based on 'al-Mudarabah' financing for the purpose of public interest relying on the doctrine of 'Masalih al-Mursalah' and it has, therefore, been approved and justified by the Sharī'ah. Hence, it may also be logical and natural to hold such insurance contracts valid.

(v) Any transaction in which the parties undertake to fulfill their lawful obligations is valid and binding on both parties. This is because, the Sharī'ah has emphasized the performance of undertakings and promises. The Prophet (S.A.W.) once said in one of his Traditions:

"Muslim are bound by their conditions except the one which prohibits the permitted one or permits the prohibited one...." 53
This is further justified in the Holy Qur'ān when Allah (S.W.T.) says to the effect:
"O you who believe! fulfil your promises" 54
(vi) The terms and conditions to be required in a contract of insurance between the two parties are lawful, and hence binding on them. The school of Maliki hold that the insurance contract is a binding promise, and hence permissible in the eyes of the Sharī'ah. 55
(vii) The practice of insurance is also based on, inter-alia, the doctrine of public interest ('Masalih al-Mursalah') for the purpose of eliminating hardship from one's life, while, taking an initiative to look after the welfare of the poor who may have suffered resulting from an occurrence of loss or damage. It is thus, justified in the Holy Qur'ān, in that, Allah (S.W.T.) has always wished a good and convenient life for His creatures without having to face any difficulty. Allah (S.W.T.) says:
"......Allah (S.W.T.) intends every facility for you and He does not want to put you to difficulties...." 56
(viii) An insurance policy does not signify an opportunity for the insured to hope for a chance for a material gain. In fact, it is a transaction whereby the insured takes an initiative to the best of his ability to be compensated or indemnified in the event of unexpected loss, damage or peril. Such compensation or indemnity has been mutually agreed to by both the insurer and the insured, and this further signifies the element of mutual co-operation between both parties to the contract of insurance. Such principle has been justified in the Sharī'ah. Allah (S.W.T.) says:
"..... and co-operate you one another in righteousness and piety...." 57
(ix) An insurance contract also operates based on the principle of necessity. Any transaction operating along the line of necessity is permissible, as justified in the following maxim:
"Necessity makes forbidden things canonical harmless....." 58
Hence, the life insurance policy which operates based on the principle of necessity in providing material protection for the unfortunate widows, offspring and so on in the event of the death of the assured, is justifiable. The Prophet (S.A.W.) advised in one of his Traditions:
"Narrated by Saad bin Abi Waqas ®: The Holy Prophet (S.A.W.) said: It is better for you to leave your offspring wealthy than to leave them poor asking others for help......" 59
In another Tradition, the Holy Prophet (S.A.W.) said:
"Narrated by Safwan bin Salim ®, the Holy Prophet (S.A.W.) said: The one who looks after and works for a widow and for a poor person is like a warrior fighting for the cause of Allah (S.W.T.) or like a person who fasts during the day and prays over night........ " 60
An insurance policy involves an element of contribution (al-Musahamah)61. For instance, the insured in a general policy pays regular premiums for the purpose of seeking compensation in case of unexpected loss or damage occurring to the particular subject matter of the policy. In a life insurance policy, the assured pays premiums as a contribution for the welfare of his dependents and at the same time the insurer pays an amount of donation from the charitable fund for the beneficiary(s) of the assured as an addition to the paid-premiums and share of profits. 62 The Holy Prophet (S.A.W.) also used to accept donations 63. Thus, a transaction like an insurance contract, which involves the elements of contribution and also donation, could be held lawful.

(xi) The nature of a life insurance policy is similar to that of a retirement pension scheme. al-Zarqa and al-Alwan stated that all contemporary Islamic scholars unanimously agreed on the lawfulness and validity of a retirement pension scheme.64 Adil Salahi accepted the fact that all scholars of Islamic Jurisprudence approved the idea of a pension scheme for the reason of ensuring security for the subscriber himself as well as his family in cases of difficulties or death.65 Salahi went on to defend the validity of life insurance based on the approval of all scholars on pension schemes, asked why family security should be rendered lawful in a pension scheme, and unlawful in a life insurance policy when their method of operations are practically the same? 66 It was also inferred that the reason all 'Ulamā' accepted the idea of retirement pension is that it was widely accepted during the time of Sayyidina Umar ®. Hence, it is submitted that a life insurance policy, being similar to a pension scheme, should also be held lawful and valid.
(xii) It is also an Islamic teaching that, one should make and spend wealth in a lawful way, and simultaneously one should also have an economic plan to save a portion out of his earnings for future security against unexpected risk. The Holy Prophet (S.A.W.) provided a guideline for an economic plan:
"Allah (S.W.T.) blesses those who acquire wealth in good manner, then the wealth is spent accordingly and the remaining is saved for future use when risk occurs." 67
An insurance policy does not depart from the guideline provided by the Holy Prophet (S.A.W.) in the above hadith, because the nature of an insurance policy is that, the policyholder pays regular premiums (especially in a life policy) to the insurer as a saving for safe keeping for future security against unexpected risk.
Indeed based on the above-mentioned arguments, it is submitted and asserted that, an insurance policy which is based on the Islamic principle of 'al-Mudarabah' should be held valid and enforceable. It is also submitted that, the arguments put forward by Islamic scholars opposing the idea and validity of insurance are entirely refutable.
Final Submission
In the history of Common law, there has been no difference of views among the scholars regarding the legitimacy of the central idea of insurance practices. However, in Islamic law, there is a difference of views among the Muslim scholars as regards to the validity of insurance. No one could deny the importance and necessity of having an insurance policy. Hence, without looking at the scenario of the conventional insurance, the Islamic scholars (who oppose partly or entirely the idea of insurance) must come forward and suggest ideal solutions as alternatives to those of the conventional insurance practices. But if they continue to differ in their views in regard to the validity of insurance policy, this could pose a threat to the economic prospects and economic independence of the contemporary Muslim Ummah and the Ummah to come.
It is therefore suggested that the scholars should not remain in conflict with one another, but should contribute towards finding a better and justified solution to eliminate any unlawful elements from an insurance policy. In doing so, they could design a model of an insurance transaction which may enable the Muslim Ummah to benefit from a fair and legal transaction which is in line with the Sharī'ah principles. This means that an insurance policy can only be practised on the basis of the principles of profit and loss sharing technique (al-Mudarabah). This is because, such a transaction is based on mutual co-operation and good will, and the parties involved in a contract of insurance may look after each other's welfare through sharing and co-operation.
Thus, it is humbly hoped that the Islamic scholars resolve their differences in regard to the validity of the idea and application of insurance, through inventing an alternative model of insurance as opposed to the conventional model for the benefit and betterment of the contemporary society in general and the Muslim Ummah in particular.