Shariah History

History of Islamic Insurance

From a survey of the primary sources of the Islamic Shariah it has been adduced that the concept of insurance against certain risks is firmly embedded in Islamic history and society. It has already been illustrated that the concept of insurance is not alien to an Islamic state. Even in the time of the Holy Prophet Muhammad (PBUH) there were instances of:

  • Risk management on behalf of others from individuals and the Islamic state;
  • Asset management on behalf of others by individuals in order to secure against risk of loss to person and property;
  • Pooling of resources by individuals linked with each others or groups without links with each other in order to share in the potential of risk.

In the first instance the duties of covering the citizens of a nation against potential risk, accident, calamity and natural disaster falls upon the Islamic state. Following persons are especially entitled to financial assistance from the Islamic State:

  1. All poor persons who need assistance with basic sustenance in life.
  2. Incapacitated or physically disabled individuals who cannot earn.
  3. Helpless persons like orphans, widows, old and unemployed.
  4. Refugees or fugitives who are forced to leave their homeland and their belongings under oppression or persecution.
  5. Students, teachers, preachers, etc. who have dedicated their lives for the cause of learning and propagation of Islam and thus have no time or means to earn for their subsistence.
  6. Persons who are overtaken by some calamity like flood, earthquake, epidemic, war, cyclone, storm, etc.
  7. All other helpless, destitute, distressed and needy persons, who are forced to begging in order to eat and cover themselves.

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The duty of the Islamic state towards the poor and the needy and their share out of the revenues of the state is highlighted by the following verses of the Quran:

  • And know that whatever ye take as spoils of war, Lo! A fifth thereof is for Allah, and for the Messenger and for the kinsman (who hath need) and orphans and the needy and the wayfarer(8:41)
  • The alms (Zakat) are only for the poor and the needy and those who collect them, and those whose hearts are to be reconciled and to free the captives and the debtors, and for the cause of Allah, and for the wayfarers; (9 : 60)
  • That which Allah giveth as spoils unto His Messenger from the people of the townships, it is for Allah and His Messenger, and for the near of kin and the orphans and the needy and the wayfarer, that it become not a commodity between the rich among you (59 : 7)

The duties of the Islamic state towards the poor and the needy and its status as their guardian have been further clarified by the Prophet Muhammad (PBUH):

  • Allah has made Zakat obligatory upon the Muslims. It is to be collected from the wealthy among you and distributed among the needy ones. (Muslim)
  • The government is the guardian of anyone who has no other guardian. (Abu Daud, Tirmizi)
  • When anyone dies in debt or leaves behind dependants unprovided for, the latter should come to me because I am their guardian (as head of state). (Bukhari, Muslim)
  • If anybody dies while he owes a debt and does not leave behind any property for its payment then the responsibility for its payment is mine (as head of the state). But if anyone leaves any property behind, it is for his heirs. (Bukhari, Muslim)
  • If anyone leaves behind property, it will go to his heirs, but if anyone leaves behind some liabilities (instead), the burden of their responsibility falls on us (i.e., the State) (Bukhari, Muslim)

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The above mentioned verses of the Quran and sayings of Prophet Muhammad (PBUH) establish beyond any doubt that the responsibility of providing basic needs to its citizens lies on the Islamic state. In this matter, Islam has made no distinction between the Muslims and non Muslims. Caliph Umar once found a Zimmi begging alms. He granted him pension and absolved him from payment of Jizyah. Khalid, the famous general of Islam, concluded a treaty with the non-Muslims of Hira which made a provision for financial assistance to the poor and destitute non-Muslims.

Thus, in an Islamic concentration of wealth in only few people is frowned upon, and through systematic economic policies measures are taken for equitable distribution of wealth. This system has paved the way for establishment of socio-economic justice in an Islamic state. The gulf between the rich and the poor is narrowed and economic disparities are removed.

The view of Abu Dhar Ghaffari, who was a very close companion of the Prophet, is that the rich should surrender all of their surplus wealth to the community or the state so that needs of the poor should be satisfied. According to him, no Muslim is entitled to keep wealth more than his needs when even a single Muslim remains hungry or naked in the country.

As to the prohibition of keeping surpluses while fellow citizens are in dire need, Ibn Hazm quotes another saying of the Prophet related by Whoever has an extra camel, let him give it to him who has it not and needs it; whoever has surplus food, let him give it to him who is without it. The Prophet went on talking about parting with surpluses of various kinds until we came to belief that we are being taught that no one has any right to any surplus.

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The Islamic economic model emphasizes fairness. This is reflected in the requirement that everyone involved in a transaction makes informed decisions and is not misled or cheated. On a macro-economic level, the Islamic model aims at social justice and the economic prosperity of the whole community; for example, specific Shariah rulings seek to reduce concentration of wealth in a few hands, which may be detrimental to society.

Islam encourages and promotes the right of individuals to pursue personal economic wellbeing, but makes a clear distinction between what commercial activities are allowed and what are forbidden. For example, transactions involving alcohol, pork related products, armaments, gambling and other socially detrimental activities.

One key Sharia ruling on economic activities of Muslims is the strict and explicit prohibition of Riba, most usually described as usury or interest. Sharia scholars consider exchanging interest payments within the conventional banking system as a type of Riba. Modern Islamic banking has developed mechanisms to allow interest income to be replaced with cash flows from productive sources, such as returns from wealth generating investment activities and operations. These include profits from trading in (real) assets and cash flows from the transfer of usufruct (the right to use an asset), for example, rental income.

The Islamic economic model is based on a risk and profit-sharing (and loss-bearing) philosophy. So, in this respect, Islamic transactions are similar to, if not the same as, equity-based transactions in rewarding performance. However, Sharia requirements go further to ensure that in distributing profits more emphasis is placed on reward for effort rather than reward for merely owning capital.

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The Islamic Law of Contracts plays a pivotal role within the Islamic financial system. Islamic commercial jurisprudence consists of principles and rules that must be observed for transactions to be acceptable in Islam; and the Islamic Law of Contracts is at the heart of this. One important principle is contractual certainty. Under this body of law, uncertainties or ambiguities that can lead to disputes may render a contract void under Sharia.

Abu Baker, who succeeded the Prophet of Islam, strictly followed the policy initiated by the Prophet regarding financial assistance to the poor and the needy. During his reign a regular Bait-ul-Mal on permanent footing was established and its income increased considerably due to accession of some conquered countries to the Islamic state. So the state assistance to the poor and the needy also substantially increased.

Umar the second caliph of Islam, who succeeded Abu Bakr, established a full-fledged and an all-embracing system of social security and public maintenance as the revenues of the Bait-ul-Mal substantially increased due to conquest of many rich countries of Iranian and Roman empires like Iraq, Syria, Iran, Egypt, Palestine, etc. So it was during his time that an ideal welfare state of Islam with large scale system of public maintenance and social justice was established which guaranteed fair and equitable distribution of wealth and minimum but reasonable standard of living for all citizens. Different departments were created for distribution of grants and allowances among the people and registers were maintained for this purpose.

Usman, the third caliph of Islam, who succeeded Umar, continued the system of public maintenance established by his great predecessor-in-office.

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Ali, the fourth caliph, reversed the principle of preference in the matter of grants and adopted Abu Bakrs principle of equality. On the whole the Islamic Welfare state under these two caliphs maintained its welfare activities and continued providing regular grants and allowances to various classes of recipients. With the death of Ali, the pious Caliphate came to an end and so did the welfare state in its purest form, except its revival for a shorter period under Umar-bin-Abdul Aziz.

During the various Caliphates in Islamic history the welfare state and the provision for assuring risk and loss to the citizens of the Muslim state were catered for sporadically. Although not practiced fully, the condensed version of the Islamic welfare was still welcome for there was no comparison to that in any other civilisation for the next thousand years.

In the 19th century Ibn Abdin (Hanafi Scholar) mentioned and introduced the term of Sukarah (premium contribution towards marine travel insurance) in practice and in Islamic legal text books e.g. Radd ul Muhtar ala al-duri al Mukhtar.

The following is the citation of his discussion:

Hukm alaqd with a non-Muslim who resides in the Islamic state.

ولا يحل لمسلم في دارنا أن يعتقد مع المستأمن (وهو الحربي الذي دخل دار الإسلام بأمان) إلا ما يحل من العقود مع المسلمين، ولا يجوز أن يؤخذ منه شيئ لا يلزمه وإن جرت العادة به كالذي يؤخذ من زوار بيت المقدس.,/

It is not allowed for a Muslim in our land (Islamic State) to conclude a contract with the Mustamin (non-Muslim who entered the Islamic state under a pledge of peace) except those Uqud which are lawful among the Muslims. And it is not permissible to take from him anything, which is binding on him, although it is customary. Like what is taken from the visitors of the Aqsa Mosque.

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Explanation of Sukrah

وبما قررناه يظهر جواب ما كثر السؤال عنه في زماننا: وهو أنه جرت العادة التجار إذا استأجروا مركبا من حربي يدفعون له أجرته، ويدفعون أيضاً مالاً معلوماً لرجل حربي مقيم في بلاده، يسمى ذلك المال: سو كرة، على أنه مهما هلك من المال الذي في المركب بحرق أو غرق أو نهب أو غيره، فلذلك الرجل ضامن بمقابلة ما يأخذ منهم، وله وكيل عنه مستأمن في دارنا، يقيم في بلاد السواحل الإسلامية بإذن السلطان، يقبض من التجار مال السوكرة، وإذا هلك من مالهم في البحر شيئ يؤدى ذلك المستأمن للتاجر بدله تماما.

And from our noting, the question about what a large number of inquiries are being made in our era, is also answered and it is that, when merchants charter ship owned by the subject(s) of belligerent state, then, together with the charges for the ship, another amount is separately paid to the same or another subject of the belligerent state. This payment is known as Sukrah or insurance premium and its payment means that in case goods on the particular ship catch fire, or if the ship capsizes or if the person who received insurance premium, is responsible to indemnify the merchant (s) who incurred the loss. An agent of the person receives the insurance premium, resides in the coastal cities of our country as a protectorate, after obtaining permission from the government. He receives the premium amount on behalf of his principals and, in the case of destruction of goods, indemnifies the insured for the entire loss.

Hukm of taking compensation for damage

أنه لا يحل للتاجر أخذ بدل الهالك من ماله، لأن هذ التزام مالا يلزم.

To me (Ibn Abdin) it is not allowed for the Muslim Merchant to take compensation for any damage of his property. Because it is not binding under Islamic Law.

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Comparison between the Aqd of Sukrah and some other Islamic Uqud.

فإن قلت: إن المودع إذا أخذ أجرة على الوديعة يضمنها إذا هلكت. قلت: ليست مسألتنا من هذا القبيل، لأن المال ليس في يد صاحب السوكرة، بل في يد صاحب المركب، وإن كان صاحب السوكرة هو صاحب المركب يكون أجيراً مشتركاً قد أخذ أجرة على الحفظ، وعلى الحمل، وكل من المودع والأجير المشترك لا يضمن ما لا يمكن الاحتراز عنه، كالموت والغرق ونحو ذلك.

فإن قلت: سيأتي قبيل "كفالة الرجلين" قال لآخر: اسلك هذا الطريق فإنه آمن، فسلك وأخذ ماله لم يضمن، ولو قال: إن كان مخوفا وأخذ مالك فأنا ضامن: ضمن وعلله الشارح هناك بأنه ضمن الغار صفة السلامة للمغرور نصاً: أي بخلاف الأولى، فإنه لم ينص على الشمان بقوله "فأنا ضامن" وفي جامع الفصولين: الأصل أن المغرور إنما يرجع عل الغار لو حصل المغرور في ضمن المعاوضة، أو ضمن الغار صفة السلامة للمغرور فيصار كقول الطحان لرب البر: اجعله في الدلو فجعله فيه، فذهب من النقب إلى الماء، وكان الطحان عالماً به يضمن، إذا غره في ضمن العد وهو يقتضي السلامة.

قلت: لا بد في مسألة التغرير من أن يكون الغار عالماً بالخطر كما يدل عليه مسألة الطحان المذكورة وأن يكون المغرور غير عالم، إذ لا شك أن رب البر لو كان عالماً بنقي الدلو يكون هو المضيع لماله باختياره ولفظ المغرور ينبئ عن ذلك لغة لما في القاموس: غره غراً وغروراً فهو مغرور وغرير: خدعه وأطمعه بالباطل فاغتر هواه. ولا يخفى أن صاح السوكرة لا يقصد تغرير التجار، ولا يعلم بحصول الغرق هل يكون أم لا. وأما الخطر من اللصوص والقطاع فهومعلوم له وللتجار، لأنهم لا يعطون السوكرة إلا عند شدة الخوف طمعاً في أخذ بدل الهالك، فلم تكن مسألتنا من هذا القبيل أيضأ.

If you say a depository who takes Ujrah is liable if the deposit is damaged. I say our problem here is not from this category. Because the property insured is not in the hand of the insurer. It is in the hand of the owner of the ship and even the insurer is the owner of the ship then he is a partner, he took Ujrah for saving and transporting the property. Both depository and hired person cannot be liable for some thing that cannot be avoided such as death, drowning and the like.

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If you say it is like Kafalat al-Rajulain Bailment or Daman al-khatar al-tarik if some one say to another person take this it is safe subsequently the second person took the rout and lost his property then the first will not be liable. However, if it is otherwise said that if it is unsafe and you loss your property I stand surety then, he is liable.

The situation in the Muslim world remained oblivious to the needs for insurance especially after the end of the Ottoman Caliphate at the turn of the 20th century. The advent of the new Nation State failed to recognize its more wider welfare duties. There was more or less silence and cessation of insurance activity in the Muslim world.

In 1985 the Islamic Fiqh Academy, emanating from the Organization of Islamic Conference, meeting in its Second Session in Jeddah, Kingdom of Saudi Arabia, reviewed the presentations made by the participating scholars during the Session on the subject of Insurance reinsurance. In its resolution no9 it came to the conclusion that there should be introduced an alternative form of insurance based on principles of charity and cooperation. The resolution was incohesive and lacked direction, but nevertheless was a welcome step forward for the recognition of the need of the Muslim community to engage in the insurance and reinsurance industry.

There then has evolved a number of Muslim insurance models in Malaysia, Middle East and the Asian Subcontinent under the title of Takaful. These models will be discussed in more detail under the heading Models of Islamic Insurance. What is clear is that as the understanding of Muslim Jurists has become clearer, various other models are being offered as Shariah compliant. What is also clear is that the gap between Takaful model and the mutual cooperative insurance model followed in the West has become closer. The objections to the conventional insurance have decreased.

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