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.

Concept and ideology Islamic Insurance


Islamic insurance (Takaful) means the act of group of people reciprocally granting each commercial profit sharing contract between the providers of funds for a business venture and the entrepreneurs who actually conduct the business. In other words, the Takaful business conducted by the company and the individual members of a group of participants who desire to reciprocally guarantee certain loss or damage that may be inflicted upon any one of them. This chapter deals with the conceptual issues, principles of contract insurance, types of general insurance policies, insurance in an Islamic perspective, modas operandi of Islamic Insurance Company, and other relevant matters.

We all know that life is full of uncertainties and it is general human tendency to avoid the uncertainties of life as far as possible. Social scientists of modern age have, therefore, stressed much need for the study of the subject of risk. In fact scientific study and management of risk is very important in the present context of worldly affairs. We know that different types of risk are involved in the society and one should know how to avoid or deal with it.

In the present day society, insurance is one of the most used, desired and prime methods of handling risks. However, insurance is a complex subject and is also a subject of much misunderstanding. It has been observed that much of the misunderstanding has arisen due to two main reasons:

i) We have failed to understand the basic nature of risk

ii) The relationship and difference between insurance and other methods of handling risk have not been properly understood.

Therefore, in order to grasp the functions and nature of insurance we will try to understand some basic concepts of risks and insurance.

Risk and Insurance

Risk has been defined as the uncertainty as to the occurrence of an economic loss. Risk and probability are not synonymous. Before analyzing the relationship between risk and insurance, we must understand the difference between risk and probability. The term's hazard and peril are more closely related to probability than they are to risk. For example, collision is a peril that causes the automobile accident and loss. The condition that makes the occurrence of collision more likely is called the hazard. For example, foggy weather is the hazard that creates the peril of collision. This means probability of collision increases when the hazard of foggy weather creates the peril of collision. Therefore, one can say that probability is the long run chance that out of a given number of possibilities, certain number of specific events will occur. But risk is the uncertainty as to occurrence of a loss. This is measured in the terms of degree of variation that actual events bear to probable events. The larger the number of exposures, the smaller is the risk. This is because under this situation, the smaller is the variation that actual events bear to the probable events. This called the law of large numbers.

The law of large number states that for a very large number of exposures, one can predict precisely the actual number of occurrence of an event. This law has proved very significant in the study of the subject of insurance. This is mainly because, the risks of the insurer is that he does not know what is the actual probability of a loss. It is, therefore, necessary to estimate the actual probability. The law of large number is of vital significance in analyzing this problem (Majumdern & Dewan 1999, p.23). According to this law, one can estimate the probability of occurrence of certain events more precisely by increasing the number of observations by sampling process. It has been observed that the average value of a very large number of observations will be very close to the actual average of the population from which the observations were taken. For example, probability of death at certain age can be estimated by way of a large number of observations in a sampling process.

It may be noted that foundation of insurance rests upon the law of large numbers. The insurers obtain a very large number of observations. In the case of life insurance mortality records of people at different ages are analyzed and summarized to find out the probability of death at certain age. In the case of general insurance the insurers usually have the statistical records of loss against different perils and thus they can fairly measure the underlying probability of a loss against, fire, accident, mechanical breakdown etc.

How to Handle Risk

An individual is always concerned because of the uncertainties of life. He does not know whether or not a given loss will occur to him individually. For an individual, the risk is very large. This is simply because an individual cannot obtain a sufficient number of exposures to have an accurate prediction as to the occurrence of loss. It is not the probability of loss which causes difficulty, but rather the uncertainly as to whether an individual will be among those who are expected to suffer loss. Had the loss been certain, one could perhaps prepare him for it in advance. Since this is not the case, one should try to reduce risk through insurance and other means.

One can handle risk by assuming it. Most of the people do it knowingly and unknowingly. In many cases we pass through life by way of accepting or assuming many small risks. However, in many occasions one has to accept it simply because one cannot afford to pay for it's reduction or transfer. If one can afford to pay the price of risk transfer, the insurance company or some other organization will bear the risk. In that case the insurance company will bear the risk for a price. But how will the insurance company bear the risk? The insurance company handles risk by utilizing the combination method as the basis of their insuring operation. The method of combination is the system of handling risk that usually involves the use of large numbers. The insurance companies persuade a large number of individuals, known as insured to pool their individual risks in a large group. When sufficiently large numbers are grouped the actual loss experience over a period of time will closely approximate the probable loss experience. The insurance company has little or no risk at all if this method is used properly When all of the individual objects are pooled into one group, the risk is no longer present, if the requisites of insurable risks are met with.

It may be noted here, that insurance companies do not cover all risks. That is to say, all risks are not insurable. Usually it is only the “pure” risks that are insurable and not the “speculative” risks. A pure risk can cause only loss but a speculative risk causes either a profit or loss. For example, there is risk in any investment and business venture due to market fluctuations. This is a speculative risk and therefore, not insurable. However, a businessman can insure the assets and legal liabilities against specified perils like fire, flood, cyclone, negligence, collision, etc. Similarly, one cannot insure the risk of gambling. However, all pure risks are not insurable as there are many situations that can cause loss where the loss a of large number does not operate satisfactorily. For many situations large number of required statistical records are not available. If the insurers cannot obtain statistics over a sufficient length of time on losses resulting from a particular peril, they cannot accurately predict the probable loss experience. In that situation it is not prudent to cover such risk. So it is evident that the prime requisite of insurable risk is that the number of objects must be of sufficient number. This means that the probable loss must be subject to advance estimation in order that it can be made accurate and the objects to be insured must be similar so that reliable statistics of loss can be formulated. For example, in case of fire and theft insurance, commercial buildings and private dwellings should be grouped separately as the hazards against these risks are different. Similarly the properties situated in the cyclone belt should not be grouped with that of the properties located in the cyclone free zone. This means the physical and social environment of the group ought to be roughly similar. Therefore, it is evident that from the viewpoint of the insurer, one of the prime requisites of insurable risks is that the number of objects must be sufficient in number and quality so that a reasonably close calculation of probable loss can be made (Greene 1962, p.47).

Requisites of Insurance for Covering Risk

Apart from what has been discussed above, the other requisites of insurance may be summarized as following:

(a) Insurance must be effected by means of a legal contract and must meet the general requirements of contract as follows:

i) It must be made by parties with legal capacity to contract; and

ii) It must be affected with a meeting of the minds of the parties.

(b) For any insurance contract to be valid it is necessary to have insurable interest of the insured on the subject of insurance. This means that an insured must suffer a financial loss himself.

(c) Property and liability insurance are subjected to the principle of indemnity which states that a person must not be indemnified more than his actual loss in the event of damage caused by a insured peril.

(d) Principle of subrogation ought to be followed where the principle of indemnity is in existence. Under this principle, the insurer is entitled to subrogation, which means that they acquire the right to recover from liable third parties. This is necessary to reinforce the principle of indemnity i.e. to prevent the insured to receive more than actual loss.

(e) Principle of utmost good faith must be followed in every insurance contract and for that matter breach of warranty, material misrepresentation and concealment of facts makes the contract void.

(f) Last, but not the least, there are the principles of loss determination and payment.

Uninsurable Risks

Not all risks are insurable. This is mainly because there are some risks, which in the true sense cannot be termed as risks. Therefore, the authors of risk management have differentiated between pure risk and speculative risk. Normally the pure risk is insurable and speculative risk is handled by methods other than insurance. In pure risk, there is uncertainty as to whether the loss will occur or not, but there is a chance of producing a profit out of that event. But in case of speculative risk there is uncertainty of an event that could produce either a profit or loss. For example, a business venture and a gambling contract are the risks of speculative nature and, therefore, not insurable. Market risks such as price changes and/or changes in the exchange rate of currency are not insurable. These risks are not subject to advance calculation, hence the insurer would have no realistic basis for computing his premium. Further, in times of rising prices no one would be interested to have insurance coverage against such risk and in times of failling prices an insurer can not afford to take on the risk because he can not avail the opportunity of spreading the risk over which to average out good years with bad years. The speculative risks are handled businessmen by way of hedging, whereby a speculator assumes the price risk.

Insurance and Gambling

Although it is common to confuse insurance with gambling, from economic and legal point of view gambling and insurance are two distinct matters. It is true that insurance company pays an insured a great deal more money than it has received, in terms of premiums, but this does not mean that insurance is thereby a gambling contract. The very purpose of insurance is to eliminate risks, whereas gambling creates a new risk.

For example, “A” and “B” may agree that if the property of “C” comes under fire, “A” will pay taka 1,000.00 to “B” and if there is no fire, “B” should pay taka 100.00 to “A”. In this case before this gambling contract neither party had any risk of loosing or gaining any money from this source. When “A” and “B” agree to the above proposition, each party becomes subject to a new risk of loosing money. Moreover, neither “A” nor “B” has any insurable interest on the property of “C”. However, if an insurance contract has to be effected it is only “C” (who can insure) to the extent of loss (up to agreed value) against a fixed premium. “C” in this case in fact has exchanged a large uncertain loss for a small but certain loss called the premium.

Although, insurance as being practiced in the modern world cannot be termed as gambling, this cannot be called also Islamic, simply because it is not gambling. However, insurance as a device to combat loss can rightly be used in an Islamic Society by way of applying the basic principles of insurance and eliminating the forbidden practices.

Principles of Insurance Contract

Insurance is affected by means of a legal contract and must meet the general requirements of contract. Thus the insurance contract must not be against public policy, must be enacted by parties with legal capacity to contract, must be affected with a meeting of the minds of the parties and must be supported by a consideration. Insurance is a contract of adhesion and any ambiguities are construed against the insurer. The following legal doctrines are vital to the understanding of insurance contract.

Insurable Interest: A fundamental legal principle underlying all insurance contracts is the principle of insurable interest. This means insurance is operative only in respect of the interest of the insured in the event of property concerned and it is this interest that is the subject matter of insurance contract. It means it is not the bricks and materials used in building which is the subject matter of insurance. The subject matter of insurance is the legally recognized relationship of the owner of the building whereby he will suffer loss if the building is caught in fire. This is essential; otherwise an individual would claim indemnification, even when he had not suffered any loss. The doctrine of insurable interest is also necessary to prevent insurance from becoming gambling.

Principle of Indemnity: The principle of indemnity ensures that a person does not get more than his actual loss, in the event of damage caused by an insured peril. It is important to note that only the contracts of property and liability insurance is subjected to this doctrine. Life insurance, health insurance and personal accident insurance policies are not contracts of indemnity (as no money payment can actually indemnify for loss of life or for bodily injury to the insured).

There are several ways by which an insured can be indemnified i.e. by cash payment, repair, replacement and reinstatement. In every instance the onus of proving that that the loss was caused by an insured peril rests upon the insured. The onus of proving that the loss was caused by other than in insured peril rests upon the insurer.

Without application of this principle, the insured would be tempted to make profit out of the happening of loss. There would be a tendency in the direction of over insurance. There are, however, some exceptions to the application of this principle in property insurance. For example, in marine insurance, for commercial convenience, it is customary to issue “value” policies i.e. the insured value is mutually agreed between the insured and the insurer. In the event of loss, the indemnity is measured in terms of the value fixed by the policy.

Principle of Subrogation: This principle states that the insurer, if and when indemnifies the insured, is entitled to recover from third party liable for the loss. One of the important reasons for this doctrine is to reinforce the principle of indemnity i.e. to prevent the insurer from collecting more than his actual loss. Another reason for subrogation is to hold premiums below what they would otherwise be. This, however, does not allow the insurer to lodge claim against the insured, even if the insured is negligent. The principle of subrogation also does not apply to personal accident and life policies.

Principle of Utmost Good Faith: This principle imposes a higher standard of honesty on parties to an insurance contract. The proposer must disclose before the contract is concluded all material facts, which he knows or ought to know. Failure to make such disclosure renders the contract avoidable at the insurers option. It is, important to note that avoiding the contract does not follow unless the misrepresentation is material to the risk. It is generally held that even an innocent misrepresentation of a material fact is no defense to the insured, if the insurer elects to avoid the contract. The insurer, however, in good faith pay the claim even if there is breach, and a breach of warranty may also be waived by the insurers. However, unless it is waived, a warranty must be complied with strictly and literally. It makes no difference whether the breach of warranty is material or immaterial, fraudulent or innocent.

TYPES OF GENERAL INSURANCE POLICIES

Marine Insurance: Marine policies relate to three areas of risk: the hull, the cargo and the freight. The risks against which these items may be insured are “perils of the sea,” fire, theft, collision as well as a wide range of other perils. Cargo is usually insured on a warehouse (of departure) to warehouse (of arrival) basis and frequently covered against "all risks."

Aviation Insurance: Most policies are issued on an "all risks" basis subject to certain restrictions. The buyers of these policies are the large commercial airlines, the corporate or business aircraft owners, private owners and flying clubs. Usually a comprehensive policy is issued covering the aircraft itself (the hull), the liabilities of passengers and liabilities to others.

Fire Insurance: A standard fire policy is used for almost all business insurance, the basic intention of the fire policy is to provide compensation to the insured person in the event of there being damage to the property insured. The standard fire policy covers damage to property caused by fire, lightning or explosion, where this explosion is brought about by gas or boilers used for domestic purposes.

This is limited in its scope as property can be damaged in other ways, and to meet this need a number of extra perils, known as special perils, can be added on to the basic policy. These perils can include:

n Storm, tempest or flood

n burst pipes

n earthquake

n aircraft

Accident Insurance: Personal Accident Insurance - The intention of the basic policy is to provide compensation in the event of an accident causing death or injury. What are termed "capital sums," is paid in the event of death or certain specified injuries, such as loss of limbs or sight as may be defined in the policy. The policy is usually extended to include a weekly benefit up to 104 weeks or more for compensation if the insured is temporarily totally disabled due to an accident and a reduced weekly benefit if he is temporarily only partially disabled from carrying out his normal duties. In the event of permanent total disablement (other than loss of eyes or limbs) an annuity is paid. Practice varies among insurers, some of whom pay a lump sum.

Sickness Insurance - Personal accident cover can be extended to provide a weekly benefit for an agreed upon period which may be restricted to 52 weeks, in the event the insured is temporarily totally disabled from engaging in his usual occupation due to sickness.

Engineering Insurance: The cover is intended to provide compensation to the insured in the event of the insured plant being damaged by some extraneous cause or its own breakdown.

Engineering insurers provide an inspection service on a wide range of engineering plants and this is a service much sought after by industry. Engineering covers can be summarized thus:

a) damage to or breakdown of specific items of plant and machinery

b) an inspection service of those items

c) cost of repair of own surrounding property due to (a)

d) legal liability for injury caused by (a)

e) legal liability for damage to property of other caused by (a).

Theft Insurance: Theft insurance was first introduced towards the end of the nineteenth century and was originally called "burglary insurance." Insurance companies included in their policies a phrase to the effect that theft, within the meaning of the policy, had to involve force and violence either in breaking in to or out of the premises of the insured for cover to apply.

Motor Insurance: The minimum requirement by law is to provide insurance in respect of legal liability to pay damages arising out of injury caused to any person. A policy for this risk only is available and is termed as an "Act Only" policy. A “'Third Party Only'” policy would satisfy the minimum legal requirements and in addition would include cover for legal liability where damage was caused to some other person's property. The most common form of cover is the “'Comprehensive Policy”' which adds accidental loss of or damage to the vehicle to the third party, fire and theft cover.

Miscellaneous Insurance

Money insurance - The policy provides compensation to the insured in the event of money being stolen either from his business premises, his home or while it is being carried to or from the bank.

Glass insurance - Accidental damage to glass, mainly plate glass windows but also glass doors and shelves, is covered by the Glass Insurance Policy. It is also possible to include damage to the shop front and the contents of the window.

TYPES OF LIFE INSURANCE POLICY

Life assurance contracts available are many and the basis of all these policies can be found under the following headings :

Terms Insurance: This is the simplest and oldest form of insurance and provides for payment of the sum assured on death, provided death occurs within a specified term. Should the life assured survive to the end of the term then the cover ceases and no money is payable. This is a very cheap form of cover and is suitable, for a young married man who wants to provide a reasonable sum for his wife in the event of his death. It can also be used for a variety of specific purposes such as business journeys.

Whole Life Insurance: The chosen sum assured is payable on the death of the assured whenever it occurs. Premiums are payable throughout the life of the assured until retirement of the assured. Although premiums may cease at, say, age sixty, the policy is still in force. Should the person die at age seventy-five, the policy would provide the benefits for his widow or family.

Endowment Insurance: The chosen sum assured is payable at the end of a given term of years or upon earlier death. These contracts are taken out as savings plans for the future with the added attraction of life cover. Endowment contracts will always be popular because each proposer earnestly hopes that he will live to the end of the term and spend the proceeds himself.

Annuities: When a person has a reasonably large sum of money and wants to provide an income for himself after he retires, or at some other time, he can approach a life assurance company and purchase an annuity. The annuity may start at once, when it is called an immediate annuity, or may start at some date in the future (a deferred annuity). Regardless of when it starts it can take various forms. It may provide an annuity for the life of the person, the annuitant, or it may be payable irrespective of death for a certain period, as in the case of the "annuity certain." The guaranteed annuity is similar in that it provides the annuity for a guaranteed period and thereafter until the annuitant dies.

Pension Schemes: These schemes are designed to provide an income at retirement. So far as insurers are concerned they may be asked to arrange a scheme, rather than a firm doing all the work itself. This involves collecting the premiums, investing them and paying pensions to retired people. Many schemes are endowment policies with group life insurance cover to provide benefits, should the death of a member occur before retirement age, but there are different ways in which this can be done.

INSURANCE IN AN ISLAMIC FRAMEWORK

Insurance is a socio-economic institution that reduces risk both to society and to individuals. This accomplished by combining, under one management, a large group of objectives so that the aggregate loss to which society is subject become predictable. Insurance has scientific basis and is effected by legal contract, under which the insurer for consideration promises to reimburse the insured for any loss suffered during the tenure of the contract.

There are many social and economic value of insurance, but the greatest value lies in the benefits following from the reduction of risk in society. Insurance has the advantage as a device to handle risk and, therefore, it is necessary that its services be extended in order to bring about the greatest economic advantage to a given society. In order to establish the validity of this point we must have clear concept about the socio-economic objectives of an Islamic Society.

Belief in Allah is central in the Islamic concept of society. This is the organizing force without which life losses it’s full meaning. Belief in a supernatural power reduces man's vanity and despair. Belief in one Allah does not mean that the individuals in the society are just the dolls in the hand of the Almighty. In fact, Islam fosters initiative and responsibility. The Quran insistently and consistently reminds people that they are judged on their own merits as independent, responsible individuals.

Another important aspect of Islam is that the society at large is based on the concept of humanity and brotherhood of the Muslim community. Concepts of universalism on the one hand and individualism on the other must be understood in its true spirit and applicability. Muslims in their minds should have a sense of awareness of mutual rights and obligations binding each individual of the society in their faith and Islam have a set of goals and values encompassing all aspects of human life including social, economic and political. The Islamic way of life being goal oriental, can be best understood by the practices of an organized community, which is governed in accordance with the tenets of Islam.

We all know that Allah has provided all necessary resources on this earth. Man, being the vicegerent of Allah on this earth, has the responsibility to utilize these resources for the general human welfare. According to Islamic principle, it is basically the moral responsibility of the individual to cater for his own needs through his own efforts.

The ethic of Islam clearly counsels against begging, against being a parasite living on the labor of others. In Islam, man's economic endeavor is praised and economic resignation is condemned. Islam suggests a great attention to every aspect of material life of men and women. The Shariah has given us a pattern of material wealth distribution with which to order our lives. In Islam every Muslim by law is entitled to get support from fellow Muslims if he can prove his need. The purpose of Islamic Law is always to inject morality and responsibility into the fabric of human relations. Islam is not only a religion but also the supreme unifying social bond. From history we know that the Madinites affiliated themselves as brothers and sisters with the Makkan-immigrants. They voluntarily and gladly shared their entire property with Makkan. This type of affiliation was not motivated by any kind of gain or profit or even a promise of gain or profit. It was simply motivated by conviction, commitment and dedication towards a common cause. The new principle of sharing was established. The Muslims drew a great amount of satisfaction from offering ones help, property and life for the cause what they believed to be the ultimate truth. In fact, the Islamic way of life is inconceivable without an organized community governed in accordance with tenets of Islam.

Therefore, in an Islamic society, all organizations and institutions including the State should cater to the welfare of the people. Islam considers mankind as one family. All members of this family are alike in the eye of Allah. There is no difference between the rich and the poor, the high and the low or the white and the black. There is to be no discrimination due to race, color or position. The only criterion of a man's worth is character, ability and service to Islam and humanity. Since Islam emphasizes distributive justice and incorporates in its system a program for organized community with the commitment of human welfare, there ought to be compulsory arrangement for insurance against unemployment and occupational hazards, old age pension and survivors benefit. The Islamic society should also provide assistance to those who because of disability, physical or mental handicaps or obsolescence, are unable to support himself or herself or to attain a respectable standard of living by their own efforts.

The objective of an Islamic Economic System is to create an exploitation free society and upliftment of the society as a whole. Therefore, any system or organization that is for the welfare of the mankind is not in contradiction with Islam. The objective of the Shariah is the promotion of welfare of people that lies in safeguarding their faith, life, intellect, posterity and property. Whatever ensures the safeguarding of these elements of human beings serves public interest and is desirable. This is because the basis of Shariah is wisdom and welfare of the people. Further, anything that departs from justice to injustice, welfare to misery, from mercy to harshness and from wisdom to folly has nothing to do with Shariah.

The principle foundation of insurance as an economic institution is the equitable distribution of the financial losses of a few over many. In insurance, each policyholder contributes an amount commensurate with the risk he introduces to a fund; established and administered by the insurer and out of the fund the losses are paid to the insured members. The main functions of an insurance organization then becomes the management of the fund and the assessment of the equitable contributions to be made by the policyholders.

In the business world without insurance, businessmen would have to set aside some of their capital resources against the possible losses that might occur. The capital thus safeguarded is freed for further development of the business. Apart from that, insurance removes the anxiety and thus helps to increase the efficiency of the business community. Insurance also helps to achieve a consistency of trading results and an avoidance of wide fluctuations. In this way insurance helps to develop and consolidate business on stable basis.

In the field of overseas commerce, the banks will not negotiate the bills of exchange unless the goods are insured against marine, and, sometimes, war risks. Even when the bank does not finance shipments, common prudence calls for marine insurance protection, as the cost of insurance is but a small fraction of the market value of the goods. Similarly, the large industrial organizations could not operate, as the banks would not be prepared to finance them without insurance arrangement. No large-scale enterprise could function, were it not possible to transfer many of its risks to insurer. Vast amount of capital in the form of premises, plant and machinery are at risk in industrial concerns. Without insurance, these risks would remain uncovered.

Human life has value for many reasons. The main economic problem that arises when someone in the family dies is the loss of earnings of the deceased person. In a business firm, if a key employee dies, the firm may lose valuable customers whose loyalty depends on this individual. The value of human life, apart from death, may also be diminished through loss of health by way of loss of earning due to disability and expenditure for medical care. Old age is another peril that affects earning capacity, just as premature death or loss of health.

Because human life is recognized to have great economic value, a demand has grown for life and health insurance. As a social and economic device, life insurance is a method by which a group of people may co-operate to even out the burden of loss resulting from the premature death of any member of that group. The purpose of life insurance is, therefore, primarily to accumulate wealth or property and, even if death intervenes, to ensure that the intended wealth will be available. Two distinct objectives of life insurance must be understood clearly. The first objective is termed a 'saving need' and the latter is termed as 'protection need'.

The basic theory of life insurance is that all who pay life insurance premiums to the common fund do so with the willingness that the fund should be used to compensate the estate of those contributors at whatever age in life they may die. However, increasing emphasis on the investment aspects of life insurance has tended to overshadow the primary purpose of protection against premature death.

The uncertainties of life are such that no man can say how long his life will last and every prudent and considerate person desires to make some provision for his dependants in the event of his death. The fundamental economic purpose of life insurance is to mitigate such possible loss.

Technically speaking, insurance is a socio-economic device, which implies sharing of losses sustained by some members of a group by all the members of that group. It provides economic security against loss of life or property or pecuniary interest. Insurance also provides indemnity to the persons for legal liability. Therefore, insurance as a system is acceptable to Islamic Society as it resembles the concept of Bait-ul-Maal (Ali 1989).

MODUS OPERANDI OF ISLAMIC INSURANCE (TAKAFUL) COMPANY

An Islamic insurance company transacts business on a co-operative basis in accordance with and subject to the principle of Islamic Shariah. All the functions of conventional insurance companies, i.e. underwriting, claims, reinsurance, marketing, investment, company management, etc. of Islamic Insurance Company should fully conform to Islamic Shariah Code. At the same time, the Islamic insurance companies should also make the scope and benefits of insurance coverage traditionally provided by the conventional companies available. Islamic insurance companies have developed extensive facilities to transact all classes of general insurance such as life, marine, fire, motor, accident, aviation, engineering, etc. Islamic Insurance Companies are now functioning very efficiently on most economic and competitive terms consistent with safety and security.

The cost of insurance is one of the most important factors in a sound analysis of risk. Both the insured and the insurer are interested in a rate that is fair. The basic criteria for rate making are:

a) The premium should be adequate but not excessive to meet the claims; and

b) The premium should be allocated among the insured on "fair" basis.

These criteria will be followed by an Islamic Insurance Company on a more rational basis. For example, a participant (policyholder) of a general Takaful (insurance) scheme shall enter into contract with the company on the basis of the principle of Mudaraba as per "partnership" clause of the policy. This clause stipulates the rights and obligations of the participants as well as the company. The Company, acting as an entrepreneur collects the Takaful contributions (insurance premium) from the participants and manage the various classes of general Takaful fund. The amount of the premium to be paid by the policyholder of an Islamic insurance company depends upon the class of Takaful and the rate fixed on the basis of sound principles of rate making. The participants shall pay the premium to an Islamic insurance company as "Tabarru". These Takaful contributions are credited into the "General Takaful Fund" of the company. The company in accordance with the requirements of the Shariah will invest the funds. All the profits from the investment shall be pooled back to the fund. The company shall pay from the General Takaful Fund compensation or indemnity to fellow participants, who have suffered a defined loss caused by one or more than one of the insured perils during the policy period. From this fund, operational costs of General Takaful Business, required reinsurance premiums are to be borne. Further, a “reserve” for unusual losses is to be built up from this fund. The surplus (profit) if any after meeting all these expenses and required reserve, will be shared between the participants and the company. However, the participants who had suffered losses should not have any share of profit as they have been already compensated out of this fund. This sharing of the surplus will be in a ratio agreed to in accordance with the principle of Mudaraba. The operation of the General Takaful is illustrated below.

Chart I: General Takaful Scheme of Islamic Insurance

The mode of operation of a General Islamic Insurance Company can be best described by taking an example. Say, the participants of fire risk contribute one crore taka in a particular year as Tabarru to a company, the company will keep this in a special account to be called Fire Takaful Fund. At the end of the year it may transpire as follows:

i) Claims paid or to be paid (25%) Taka 25,00,000
ii) Operational cost during the year (15%) " 15,00,000
iii) Reinsurance premium (20%) " 20,00,000
---------------------
Taka 60,00,000
The company may decide to keep reserve for unusual year (30%) Taka 30,00,000
---------------------
Taka 90,00,000

Therefore, the surplus money Tk. 10,00,000 can be distributed to the policyholder as per terms of the contract. If the ratio agreed is 70:50, then 70% of this surplus i.e. Tk. 7,00,000 will be distributed among the participants. This means a policyholder who has paid at the time of taking a cover as contribution Tk. 1,000/- will receive (Tk. 70/-) return on the amount of premium paid. This is only an example, the return can be as high as 20% to 25% depending upon the net underwriting surplus of a particular portfolio. This surplus will vary from year to year. In rare case, the policyholders may be asked to contribute additional premium.

FAMILY TAKAFUL SCHEME

The modus operandi for Islamic Insurance companies operating life business are almost similar but more clarification is needed. Life policies are issued in the name and style of Family Takaful Scheme. The participant or the policyholder of a Family Takaful Plan should pay the agreed amount of installments on a regular basis. Each installment paid by the participants is divided and credited into two separate accounts namely "The Participant Account" and the "The Special Account". Normally the major portion of the installment amount (say 90%) is credited to the Participants Account and the balance of 10% is credited to Special Account. The deposits are paid back to the participants as per terms of the contract with profit. The amount that is credited to the Special Account is meant for those participants who will not be able to pay full installments because of their early death. Thus the company will be able to pay Takaful benefits to all fellow participants who become members of the scheme. The amount that is credited into these two accounts is invested as per Shariah Code and profits are shared between the Participants and the Company in an agreed ratio. The major portion of the profit (say 80%) is paid to the policyholders and the company is entitled to get the balance amount of the profit only.

In the event of surrender of the policy, the incumbent participant will receive the proportion of his Takaful installment, which had been credited to Participant Account together with his share of profits accumulated up to the date of the surrender. But he will not be entitled to get any refund from the Special Account.

If a participant expires before the maturity of his Family Takaful Scheme, then his or her heirs will be entitled to get the total amount of the installments deposited in the Participants Account before his death along with his share of profit credited into Participants Account. His/her heirs will also be entitled to the total outstanding installments that would have been paid by the deceased participant, had he/she survived. If a participant is alive until the date of maturity of the Takaful Scheme, he/she is entitled to get the total amount of Takaful installments deposited in the Participants Account along with his share of profit. He will also be entitled to a proportion of net surplus, if any, which is available in the Special Account as per last valuation of this account before the maturity date. We can illustrate this in Chart 2 of Family Takaful of Tk. 2,00,000.00 -

Chart 2: Flow of Family Takaful Contribution

In the above Chart it has been assumed that for a Takaful plan of an individual for a twenty-year term the participants should contribute annually Taka 10,000. At the end of the year the Participants Account will be credited with Tk. 10,080.00 and the Special Account will be credited Tk. 1,120.00. In every year, these two accounts will be credited with more or less the same figure. The profit amount may vary depending upon return on investment. If the participants want to surrender i.e. not willing or are not capable he gets back his money credited in the Participants Account. For example, if a participant wants to surrender, at the end of the fifth year of the plan, he gets back Tk. 50,400.00 ( 10,080 X 5). He receives only the credit along with the profit in Participants Accounts. At the maturity i.e. at the end of the 20^th year, presuming that the rate of return is the same throughout the period he will get Tk. 2,01,600.00. He is also entitled to get his share of surplus money in the Special Account after paying for premature claims from this fund.

If we assume that the participant expires at the end of the 10^th year of the policy term, his nominee will get (Tk. 10,080 X 10 = Tk. 1,00,800 + 1,00,000). An additional 1,00,000 taka will be granted by the other participants in the scheme and will be paid from the fund created in the Special Account. Even if a participant expires after payment of a single annual contribution of TK 10,000, his nominee/heirs will get a guaranteed outstanding balance of Tk 1,90,000 plus his portion of Participants Account along with profit i.e. Tk. 10,080, total Tk. 2,00,080 under this scheme (Ali 2000).

HISTORICAL PERSPECTIVE OF CONVENTIONAL AND ISLAMIC INSURANCE

In the seventeenth century, there were no insurance companies as we know them today. The practice was for individuals, who came to be called "underwriters," because they wrote their names TO benefit the wording of insurance policies, to guarantee commercial ventures on a personal basis. 'Lloyds Coffee House' in Tower Street of London (owned by Mr. Edward Lloyd) proved to be a favorite venue for them to conduct their business informally over cups of coffee. Mr. Lloyd promoted the trend towards business by providing his customers with pen, ink, paper and shipping information. Lloyds Coffee House thus became recognized as a like place for persons wanting insurance cover to find underwriters.

During the course of the eighteenth century, the British Mercantile Fleet had increased in size and operations. It was found that many individuals who underwrote marine risks were undependable, and after receiving substantial premiums failed to pay claims. Therefore, in 1720, an Act was passed which provided for the incorporation of the Royal Exchange Assurance and the London Assurance Companies for the purpose of effecting marine insurance. Each of these two companies had a substantial stock. Since the companies offered cover of a very restricted nature and consistently refused to underwrite any but the safest risks, the purpose of the Act was defeated and Lloyds Coffee House was established as the most important center of marine underwriting.

This system resulted in considerably less security to the insured than would have been provided by associations of individuals. Although many merchants would have much preferred to insure with the companies, and would have been prepared to pay higher premiums to them, they were not able to do so. Since the companies and Lloyds Coffee House operated from London, the difficulties encountered by traders from other ports in the UK were much greater. As a result, groups of ship owners at various ports joined together to settle own hull loss (averages) on a mutual basis, each member underwriting share of the risks, for which he was individually responsible. In such clubs each member is both insured and insurer. All the other members in proportion to their respective properties in it insure him to his own property in the club, and he is at the same time an insurer in the proportion of his own property in the club for the property of the each of the others.

In 1824, when the monopoly to the London Assurance and the Royal Exchange Assurance was removed, several other companies were founded. However, in practice, it was found that the underwriters established at Lloyds were able to quote rates. The result was that the better class of vessel was insured at Lloyds and the Clubs were left with the risks that were unacceptable elsewhere. This led to the decline of hull clubs in the long run. But in marine insurance, the P & I Clubs were very important market component in the field of ship owners liability insurance.

In the context of the above we will look into the background of the formation of the first Islamic Insurance Company. With the establishment of the Dubai Islamic Bank and the Islamic Development Bank, as the starting point of Islamic Banking Movement, H.E. Prince Mohammed-al-Faisal-Al-Saud of Saudi Arabia took initiative for the establishment of a number of Islamic Banks. In one such initiative, in February 1976, he held discussions with H.E. Gafar Nimeiry (the then President of the Democratic Republic of Sudan) and asked for permission to establish an Islamic Bank to be operated in Sudan. Executive and Legislative authorities in the Sudanese Government at all levels gave every encouragement and acceded to the proposal. In August 1977, Faisal Islamic Bank was registered as a public limited company under the Sudanese Company Act-1925.

When Faisal Islamic Bank was established, the bank authorities initiated studies on the establishment of a co-operative insurance company. In this respect the opinion of the Bank's Shariah Supervisory Board (SSB) was sought. The SSB studied the scheme at the first meeting. Studies continued and several steps followed. The Faisal Islamic Bank Authorities prepared the Memorandum of Association and Article of Association. The SSB proposed some amendments, which were implemented. The SSB ensured that the scheme was sound from a Shariah point of view as well as feasible from a practical point of view. Therefore, the Islamic Insurance Company Ltd. Sudan was incorporated as a Sudanese Public Company (under the Companies Act 1925) in January 1979. This is the first ever-insurance company established in the world to transact business according to the Islamic Shariah. The Faisal Islamic Bank has subscribed to the entire authorized capital of this company. The company enjoys numerous concession and exemptions. All its assets and profits are exempt from all types of taxes. Further, the assets of the company are not subject to confiscation, nationalization etc. The Company is also exempt from the application of acts regulating insurance in Sudan.

In Malaysia, the Islamic Insurance Company was established as a private limited company (in accordance with companies Act 1965) in November 1984 and started its operation in August 1985 as a composite insurance company. This was made possible by the Malaysian Government who, in 1982, took a positive step by forming a special body known as the "Task Force" for the study of the establishment of Islamic Insurance in Malaysia. This Task Force was formed on the basis of the recommendations of the National Steering Committee on Islamic Bank, which highlighted in its report to the Malaysian Government the need for an Islamic Insurance. The Committee felt that it was necessary in order to cater the insurance requirement of the Islamic Bank that was about to be launched. Members of the Task Force were drawn from personalities and groups representing religious scholars, legal experts, economists and insurance practitioners. The members of the task force visited a number of Islamic countries and also had discussions with three Islamic Insurance Companies already established or about to be established. Finally, in its report to the Government, the task force suggested that an Islamic Insurance company should be established in Malaysia as soon as possible. The Malaysian Government then promulgated legislation entitled as the Takaful Act, which regulates the Islamic Insurance (Takaful) of Malaysia. It may be of interest to note that in Malaysia, the Islamic Insurance Company (known as the Syarikat Takaful Malaysia) is practically a subsidiary of Bank Islamic Malaysia Berhad, which owns 51% of the paid up capital of the Takaful Company. The balance 49% of the shares are owned by the various state religious councils and state religious foundations within Malaysia.

DISTINGUISHING FEATURES OF ISLAMIC INSURANCE

From historical background of conventional companies we find that three predominant legal forms have been used as follows:

a) Association of Individuals (Lloyds)

b) Stock Companies

c) Mutual Companies, and Clubs

A Lloyds Association is an organization of individuals joined together to underwrite risks on a co-operative basis. Here the individual underwriter assumes risks in his own name and does not bind the organization for his obligations. Each underwriter is individually liable for losses on which he has assumed risks. Thus it can be said that a Lloyds Association is proprietary organization bent on profit and the underwriter is always an individual. On the other hand, a stock company is the corporate body of stockholders that is organized as a profit-making venture in the insurance field. However, the Mutual companies and the clubs are organized as a non-profit corporate body that is owned by policyholders as there are no stockholders.

However, in the case of Islamic insurance, we observe that the corporate objective of the Islamic Insurance Company is to provide Islamic Insurance or 'Takaful' service on a commercial basis in accordance with Islamic Principles in order to provide the service of insurance as permissible in the Shariah.

In this respect, it has been observed that an Islamic Insurance Company be established on condition that its co-operative nature be made evident. This necessitates clear stipulations in the insurance contract and certain additional clauses to signify that the premiums paid by the insured are grants from him to the company to be remitted to fellow contributors in need of assistance according to the regulations agreed upon. Therefore, it has been suggested that certain special clause should be added to the insurance contract to signify its co-operative nature. The additional terms provide the insurer the right to revert back to the insured for additional premium and the right of policyholders to share in the surpluses. The insurer also enjoys the right to invest the surplus fund in any way that it deems fit in projects and other fields of investment as allowed by Shariah and under the relevant insurance rules or regulations.

Islamic Insurance Co. (Sudan) has incorporated these principles by way of inserting additional clause in the policy condition as follows:

Co-operative (Mutual Clauses): "The Insurance granted under this policy is subject to company's Memorandum and Article of Association which provide inter alia that the company shall transact business on a co-operative basis in accordance with the subject of the Islamic Shariah. The Company accordingly maintains a distinct and separate account for its policyholders known as the policyholders Account. The Policy holders account is credited with all the premiums paid by them gratuitously and debited with their share of service charges, claims and the surplus, if any arrived at after making provision for depreciation, bad and doubtful debts and establishing traditional technical services at the end of each financial year shall be treated as follows:

(a) The Board may set aside all or part of the surplus as general reserves or other special reserves and such reserves shall be considered as gratuity from the policyholders.

(b) If the whole of the surplus has not been set aside as reserves the balance shall be distributed amongst the policy holders in proportion to the surplus generated by the premiums paid by them".

Investment Fund Clause: "The Company invests the funds held by it on behalf of the policy holders in accordance with the principles of Islamic Shariah Code".

Dr. Abdul Halim Bin Hazi Islamil, the Chairman of Syarikat Takaful Malaysia, has explained the above principles as follows:

"The provision of insurance cover as a form of business in conformity with Shariah is in essence based on the Islamic principles of Al-Takaful and Mudaraba - Al-Takaful briefly means the act of a group of people reciprocally granting each commercial profit sharing contract between the provider or providers of fund for a business venture and the entrepreneur who actually conducts the business. The Islamic insurance or Takaful business conducted by the company may thus be envisaged as the profit sharing business venture between the Company an the individual members of a group of participants who desires to reciprocally guarantee certain loss or damage that may be inflicted upon any one of them."

From what stated so far we obverse that an Islamic Insurance company should have following features:

(a) The policyholders should have the right to participate in surplus profits .

(b) The policyholders should be liable to contribute additional amounts if the initial subscriptions (contributions) made during a particular year are not sufficient to meet all the losses.

(c) The policyholders may be given representation on the Board of Directors of the company.

(d) The company would invest its funds in sources that are not forbidden by Islam and should not indulge in the harmful and forbidden practice of Riba in any form.

(e) The company would maintain two separate and distinct accounts. One known as the policyholder’s account and the other the shareholders accounts.

(f) The policyholder’s account is credited with all the contributions made by the policyholders and their share of profits on investment of funds. The policyholder account is debited with their proportion of service charges and claim.

(g) The surplus after the establishment of necessary reserves is distributed amongst policyholders.

The deficit, if any, is written off against the general reserve.

(h) If there is no general reserve or the amount of the general reserve does not cover the deficit

fully, such deficit is met from the shareholders reserve and capital in the form interest-free loan

to be recovered from the future surpluses.

(i) The shareholders do not participate in any part of the surpluses of the policyholders account.

(j) The income derived from the investment of the share capital is credited to the shareholders

account the surplus left after meeting their share of current expenses etc., is distributed amongst

shareholders.

(k) A Zapata fund will be developed by way of charging 2.5% annually on the share capital,

reserves and profit.

(l) There should be a Shariah supervisory Board. The Board will be responsible for supervising the

day-to-day functions of the company in the light of Shariah (Ali 1991).

INVESTMENT OF PREMIUM UNDER ISLAMIC INSURANCE

The insurance industry as a whole, and an individual insurance company in particular, plays a vital role in the development of a capital market. However, investment of an insurance company is mostly guided by relevant provisions in the Insurance Act, which provides formulae for minimum investments required by a particular company depending upon the type or types of businesses and on the basis of liabilities involved in a particular year. The Act also specifies the percentage of investment to be made in Government Securities, Approved Securities and other Approved investments as may be notified from time to time. Subject to the restrictions made by the Government, investments of an insurance company are made in the following categories:

· Government Securities (including Bills, Bonds and Certificates)

· Shares

· Debentures

· Real Estates

· Deposits with Banks

· Bridge Finance

Investment Guidelines are set out in Section 27, 27A, of Insurance Act 1938 as adopted in Bangladesh. About 60% of the life funds require to be invested in Government or other approved securities. The balance is allowed in approved investments.

Investment operations are incidental yet crucial to the business of insurance. Insurers are required to generate reserves for claims that might arise and over a period a large corpus of funds is built up. It is essential that insurance companies invest these funds judiciously with the combined objectives of liquidity, maximization of yield, security, and most importantly, ensuring that they can meet the liabilities when required. The choice of investments will depend on the type of liabilities. Returns on investments from life insurance funds influence, to a large extent, premium rates and bonuses. It has been recommended that the insurers must at all times maintain a prescribed minimum level of solvency as a protection for the policy holders' legitimate interests. Because of public interest, investment of life insurance funds is regulated in some countries. Most countries do not prescribe the investment pattern, but instead set ceilings on the maximum value as a percentage of the fund in each of the different categories of investments that are admissible for the purpose of determining the solvency margin.

In Singapore, up to 35% of the fund can be invested in equity shares, preference shares, subscription rights and share warrants. Up to 5% is allowed in unquoted shares and up to 20% is allowed in property. The admitted value of outstanding premiums and agents' balances (in respect of general business only) is 12.5% of written premiums. In Malaysia, the value of investment securities should not be less than 25% of the total value of the fund and not less than 80% of the fund should be invested in Malaysia.

The life insurance industry will be competing against other financial institutions, life banks, mutual funds, and unit trusts for the investor's moneys. A level playing field is required to promote healthy competition between these different types of financial institutions. Therefore, it is recommend that the requirement for life insurance companies to be heavily invested in Government Securities be removed. Investing in equities is more volatile than investing in Government Securities but it is possible to improve returns by efficient and timely market operations and to reduce risks by properly matching assets against liabilities. A dynamic approach to the management of equities with requisite information support and the application of the techniques of security analysis is called for in the interests of the insuring public.

The general insurance sector will have liabilities, which are shorter in term as compared with the life sector. Equity investments are generally made with a medium to long-term perspective and hence the maximum investment allowed in equities should be lower for the general insurance companies than in the life sector.

An Islamic Insurance Company shall have to be guided by the relevant law of the country, but, at the same time, it must use the investible funds in financing and participating in permissible economic activities according to Shariah provided modes on profit and income sharing basis. Therefore, investment of Islamic Insurance Companies should be made as per the following modes:

(a) Musharaka (Sharing profit and loss on a productive investment).

(b) Mudaraba (project finance for a fixed time with profit and losses being shared)

(c) Real Estate

(d) Deposits with Islamic Banks.

Government and other approved Securities are interest bearing. Naturally, the Islamic Insurance Companies cannot invest the permissible required surpluses in these Securities. Therefore, in order to meet the requirements of Islamic Insurance Companies, it would be necessary to amend the relevant sections of the Insurance Act, so that it allows the Islamic Insurance to invest funds only as per Shariah approved means and modes (and not in any interest bearing Securities and deposits). Alternatively, it is necessary that the Parliament frames out and passes the required Islamic Insurance Act as per the model of Malaysia Takaful Act 1984. In fact the proposed Act has to be modeled on the existing Insurance Act with modifications and amendments, which are necessary to conform to Islamic Insurance practices.