Edited by S. Nazim Ali and Shariq Nisar
Edited by S. Nazim Ali and Shariq Nisar
Ajmal Bhatty and Shariq Nisar
Modern takaful practices have evolved in response to reservations against conventional insurance that trades in risk; where operations involve excessive uncertainty (gharar) that is prohibited in shari’ah; and where investments are made in interest bearing instruments and activities that are generally harmful for society and the environment. The chapter discusses the inspirations and factors behind the development of takaful as an alternate mechanism for social protection. It analyses various takaful models that have been developed in response to market needs and shari’ah compliance preference. It also discusses the challenges associated with these models in view of the practical realities where takaful businesses are mostly publically quoted entities and required to bring risk-based capital to support participants’ risk pools. Finally, the chapter analyses some of the key challenges impeding the growth and development of takaful and offers suggestions that can help overcome these challenges.
Takaful is often presented as a system of cooperation and mutual help. This does not capture takaful realities properly. Islamic insurance schemes were not initiated by people looking for mutual protection against risks of life but by Islamic banks seeking protection for leased assets, collateral and outstanding debt. Most takaful undertakings are not organized as member-centred mutuals, but as hybrids with a profit-oriented shareholding company as the driving force. Regulators have stipulated that the solvency of the participants’ risk fund has to be guaranteed by the takaful operator through an interest-free loan (qar_) in case of need. However, the repayment of a qar_ is highly unlikely in a competitive market. An unrecoverable loan implies the factual transfer of the underwriting risk from the participants to the takaful operator. Contrary to takaful rhetoric, the economic quality and socio-economic impact of takaful and conventional insurance do not differ in substance.
Mahmoud A. El-Gamal
The general thrust of Islamic jurisprudence of financial transactions is to approach the ideal of justice in exchange. The Islamic finance envisioned by Islamic economists wrongly emphasized contract forms (namely, partnership finance, ostensibly more approbated than debt finance, without any supporting evidence from Islamic scripture or classical jurisprudence). This gave rise to an industry based on legal arbitrage, synthesizing conventional finance at a cost, thus replicating any injustice or inefficiency therein, and adding inefficiency through arbitrage procedures. Mutual contracts were traditionally exempted from juristic prohibitions, for example, in interest-free loans, which are technically riba, mutual insurance and so on, because of their apparent charitable purpose, as argued by Al-Qarafi in his Furuq. However, mutual structures can be arbitraged just as easily (and inefficiently) as commutative ones. The regulatory substance of classical Islamic law – seeking justice – cannot be enforced solely through contract and corporate forms, mutual or otherwise.
The chapter proposes that the waqf-wakalah model of takaful is the most shari’ah compliant and is best suited to serve as a viable lslamic alternative to conventional insurance. It discusses the mindset among many consumers that takaful is the same as conventional insurance, evaluates controversial practices within the takaful industry that reinforce this prevailing attitude and analyses the effects such practices have had in stunting the growth of the takaful industry. The chapter provides an overview of the three major unlawful elements of contemporary insurance, that is, riba, qimar and gharar, and describes how these elements are avoided in different takaful models in light of expert research. The chapter also highlights the history of the waqf model along with some of its salient features such as the waqf of money, the independent legal entity of the waqf fund and the right of the donor to benefit from the endowment. Finally, the chapter addresses some criticisms of the waqf model that have been lodged by shari’ah experts and practitioners and examines the practical challenges of implementing the waqf model in the United States.
Conventional (commercial) insurance involves an intolerable magnitude of gharar (uncertainty), and hence its prohibition in shari’ah. In order to Islamize insurance, it needs to be reconstructed on a different basis so that the inherent uncertainty associated with the concept of insurance will not invalidate its contracts. This is thought to be doable only if the commutative nature (mu’awada) of insurance is converted into donation (tabarru); deeming the contributions of the policy holders as mutual donations, with the takaful company being only responsible for the administration of the takaful fund as well as the takaful operations. Nevertheless, the existing takaful structures, which supposedly adopt the said methodology, still have unresolved fiqh issues. These issues pertain to the underlying concept of takaful being genuinely of donation nature and also to the applications and practices of takaful being capable of substantially ascertaining their differences from those of the conventional insurance. The chapter scrutinizes the existing takaful structures and highlights their shortcomings in an attempt to outline a new sound model, with a special emphasis on its practicalities and applications.
Sara E.B. Carmody
The chapter focuses on the regulatory challenges and potential for the future growth of takaful products within the Gulf Cooperation Council (GCC) states. Takaful is a contract that creates risk sharing obligations between participants, with monies pooled between participants in order to provide coverage for specified events. Cooperative and mutual entities are very similar in terms of their underlying principles; they have all grown within the fields of ethical investment and microfinance. One of the barriers to the growth of takaful within the GCC is the regulatory environment for shari’ah-compliant mutual and cooperative organizations that has been put in place. The challenge is to provide competitive products on commercial terms within the marketplace that meet regional financial service regulatory standards whilst adhering to principles of sharing and mutuality. There are significant barriers within the legal framework currently in place, most notably the lack of developed laws for cooperative and mutual structures and for trusts within the GCC states. The chapter (1) defines a cooperative and a mutual, as a point of comparison and analyses the compatibility of the same principles to shari’ah-compliant financial institutions; (2) studies the companies that may offer various regulated financial services products within the GCC states, with reference to capital requirements and corporate vehicles required by law; (3) considers various issues arising from a mutual model that is to be compatible with shari’ah-compliant principles and meet regulatory requirements; and (4) reflects the overall trends in terms of financial services legislation and practice within the GCC states and whether a move to encourage a mutual model within the financial services industry is feasible for the GCC states.
Umar A. Oseni
Recent years have seen significant progress in the takaful industry with a strong double-digit growth of 16 per cent amounting to US$11 billion global gross takaful contributions in 2012. In order to sustain this growth and enrich its legal landscape, there is a need to examine the feasibility of effective dispute resolution mechanisms for the takaful industry while drawing some lessons from the conventional insurance industry. This does not undermine the significance of the relevance of Islamic law in designing suitable models of enforceable dispute resolution mechanisms. While using qualitative legal analysis that predominantly adopts content analysis of current trends in takaful and insurance litigation, the chapter finds that effective dispute resolution processes such as arbitration and mediation could be adapted to suit the specific needs of shari’ah dispute resolution in the takaful industry. This would allow for cost-effective settlements that will guarantee existing business relationship among the parties and prevent unnecessary bad publicity in a highly competitive global insurance industry.
Joe W. Bradford
The chapter examines fatwa in Islamic insurance and its role as an underlying cause of regulatory capture and arbitrage. The progression of the Islamic insurance industry from one almost unanimously forbidden to a multi-billion dollar industry in less than three decades is indicative of the notable advances the industry has made. With its core principles of cooperation, mutuality and sharing of loss/gain, Islamic insurance is of particular appeal to the consumer. The chapter highlights the key obstacles preventing Islamic insurance from achieving true mutuality and cooperation, and as such truly serving the consumer for whom it was created. These obstacles include the conflation of terms in understanding mutuality under an Islamic rubric, the undue emphasis on the contractual particulars governing the consumer and the role of fatwa or lack thereof in creating regulatory capture. It covers the need for a review of the Islamic legal approaches used in the formation of fatwa in order to limit regulatory arbitrage by way of fees and charitable contributions.