With the presence of the prohibited elements such as Riba, Gharar and Maysir in the conventional insurance, it is therefore compulsory for Muslim to find the alternative way to provide them with a better security which is in line with Shari’ah. In 1979, the first modern concept of Islamic insurance was introduced in Sudan which is based on a cooperative model similar to the conventional insurance. Since then, Islamic insurance market or Takaful market has become a fast-growing insurance industry and gained its credibility and respect in international market.
In Malaysia, Takaful industry is governed under Takaful Act 1984 and Insurance Act 1996. Among the leading Takaful companies in Malaysia are Syarikat Takaful Malaysia Berhad, Etiqa Takaful Berhad and Takaful Ikhlas Sdn. Bhd. DEFINITION OF INSURANCE A contract of insurance is a conditional contract that involves two different parties in which one party undertakes, against premium, to pay to the other party certain amount (compensation) upon a certain event that occurred only due to pure risk. This contract is regulated by Insurance Contracts Regulation 1985 under Insurance Contracts Act 1984.
It is valid and comes into existence by the offer and acceptance between both parties. THE BASIC MECHANISM AND THE CONCEPT OF INSURANCE No Claim Profit Premium Protection/Coverage Insurance Company Policy holder Compensationn E. g. : accident Insurance is a risk transfer mechanism from the policy holder to insurance company or operator. The policy holder (the insured) pay an agreed financial consideration called the “fixed premium” in exchange for “protection” provided by insurer (insurance operator) that indemnifies the insured of a defined loss.
The contract of insurance operates against pure risk only in which loss is the only outcome and there is no beneficial outcome for instance death, fire, accident, or disabilities. This type of risk is opposite to speculative risk that may result in either a loss or gain for example is fluctuation in market value of trade goods. Basically insurance operates as a business with profit-maximization objectives in which it generates profit (underwriting surplus) where the total premium received from the insured is more than the total claims paid out.
UNLAWFUL ELEMENTS IN INSURANCE CONTRACT There are 3 major elements in the insurance contract that makes it unlawful in Islam namely gharar (uncertainty), maysir (gambling), and riba (usury). Firstly, the element of gharar exists in the insurance contract through the policy of the insurance itself whereby subject matters in the contract which are goods and price are uncertain. In the insurance contract, goods can be regards as protection or coverage while its price is the premium paid by the insured.
Since the actual value or amount of both goods and price are conditional upon the occurrence of the peril or hazard which is cannot be ascertained, thus the uncertainty of what the insured is buying or paying for is rejected in Islam. If no calamity happen to the insured, therefore he or she will receives nothing while if there is loss occurred upon the insured, then he or she will gets compensation in varying amounts. The situation above exhibits the existence of element of gharar in insurance contract which is prohibited in Islamic law because it may affect parties’ equal bargaining power.
In addition, parties of the contract cannot make informed and correct decision and directly may affect their consent to contract. It is proven in Quran, “squander not your property amongst yourself unjustly except it be a trade among you by mutual consent” (4:29). Secondly, the existence of riba element in the insurance contract can be noticed through investment of insurance fund in interest-based activities and the money paid to the insured is from riba. For instance the insurance company might invest the insurance fund in Conventional Bank that is clearly constitutes interest-bearing accounts.
Any activity that involves riba is totally rejected in Islam as Allah mentioned in Quran, “But Allah hath permitted trade and forbidden usury” (1:275). Thirdly, the insurance contract also involves the element of maysir in which policyholders invest small amount premium with hope to gain large profit and some time due to losses they lose their premium invested and claims may be higher than contributions (Khan & Alam, 2011, p. 283). On the other hand, insurance company anticipating that total premiums collected will exceed total claims paid out and thus generating underwriting surplus.
Apart from these 3 major unlawful elements, there are several arguments that invalidates insurance contract. The insurance contract is contrary to the principle of tawakal in which the insured wrongly put his trust on the insurer to protect him against unexpected loss instead of putting his trust only on Allah. In addition, the insurance contract violates the principle of mirath (inheritance) in which under life insurance, the benefits of insurance will be transferred to nominee as an absolute beneficiary after the death of the insured. Thus, this will deprive the heirs of the deceased of their legal rights based on the principles of mirath.
THE DEFINITION OF TAKAFUL The legal definition of Takaful is mentioned in Section 2 of the Takaful Act of Malaysia 1984 as a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose. THE OPERATIONAL MECHANISM OF TAKAFUL Takaful Participants Takaful Operator Takaful Fund Contribute via unilateral contract (tabarru’at) Manages fund for a fee or a share in profits on investment.
Based on the above diagram, Takaful participants are the customers who subscribed to the Takaful plan where the term of payment differs according to the customers’ preferences. They can either make monthly or yearly payment where the amount of subscription is fixed upon the agreement between the participants and the Takaful operator. The amount includes the subscription fees and the management fees. Even though the term used is payment, however the more appropriate term is contribution because the participants agreed to contribute some amount of money based on the concept of mutual assistance.
The contribution is done via mutual donation (tabarru’at) which is a unilateral contract which does not represent a commercial “sale of coverage”. All the contribution paid by the participants will be accumulated to form a Takaful fund. This fund will be used to pay compensation to the participants in the event of calamity and also to be invested in Shari’ah-compliant investment. TAKAFUL AS AN ALTERNATIVE TO INSURANCE The concept of takaful is accepted in Islam because its application emphasis more on justice as compared to insurance.
In addition, the unlawful elements in insurance are absent in takaful in which gharar is tolerated since there is no commercial or sale contract in takaful and it is merely a charitable unilateral contract. Apart from that, no element of maysir is found in takaful contract since it is not a form of gambling because its nature is based on mutual indemnity and not enrichment at the expenses of others. On the other hand, takaful operators earns return which is not coming from gambling but rather receives a share of profits of invested takaful fund and acquires fee in managing takaful fund.
Therefore, there is no loser or winner in takaful as compared to insurance. The element of riba is also absent in takaful because takaful funds are only invested in shari’ah-compliant instruments only. Bear in mind that, there is no selling or buying of policy in takaful and takaful only aims to reduce or remove harm while admitting that no one can run away from divine destiny. COMPARISON BETWEEN INSURANCE AND TAKAFUL Takaful| Insurance| A combination of tabarru’ (mutual donation) contract, wakalah (agency) contract, and/or musharakah (profit-sharing) contract.
| Contract of exchange (sale and purchase) in which the insured acts as purchaser by paying the premium while the insurer acts as seller by providing the protection. | Participant is contributing the “donation” into the scheme and agreed to mutually share the surplus. | Policyholder is paying the “premium” to the insurance operator. | Profit earned in exchange for rendering a management service of takaful fund and return as mudarib in mudarabah profit sharing scheme. | Profit earned through underwriting surplus (total premiums less total claims paid out).
| Countervalue (‘iwad) is valid through effort and/or undertaking risk. | Contervalue (‘iwad) is not clear since sources of profit involves uncertainty in which (hoping) that the total premiums will exceed total claims and this involves elements of gambling. | Takaful operator acts as administrator of takaful fund and pays benefits from it in which they must provide interest-free loan (benevolent loan) in case of insufficient of the fund in order to rectify the deficiency. | Insurance company is liable to pay the benefits as promised from insurance funds or/and shareholders’ fund.
| Takaful operator manages the takaful scheme based on brotherhood, solidarity and mutual assistance. | The insurer seeks to profit by exploiting people’s need to manage risk. | Indemnification (compensation) component involves the concept of reciprocal donation (tabarru’) and mutual contribution. | Indemnification (compensation) component involves a commercial. | No insurer-insured relationship involved in takaful scheme since participant acts as both the insured and the insurer simultaneously by guaranteeing among themselves.
| There is clear insured-insured relationship. | Takaful funds must be invested in Shari’ah compliant instruments in order to avoid elements of riba. | Funds can be invested in any kind of instruments without restriction. | Takaful agent will received salary as an employee| Insurance agent will be given commission by deducting some percentage contributed by the policyholder. | CONCLUSION Based on the above discussion, it is found out that Takaful or Islamic insurance is the best substitute to the conventional insurance. The absence.
of unlawful elements such as Gharar, Riba and Maysir is one factor why consumers should subscribe to Takaful policy for their future security. Besides, the operational mechanism of Takaful is based on brotherhood, solidarity and mutual assistance towards each other. Therefore, by subscribing to the Takaful policy, people are blessed with rewards from Allah S. W. T. for their choice as well as in helping each other in the event of calamity.
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