Insurance islamic of shariah

Name:maryan Dahir Mohamed

Ph. morningID:713/16

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  Insurance:
Insurance is one of the means people have used for ages to deal with the
consequences of damages, risks, and disasters which befall them in order to
alleviate their impact or to avoid them completely.
Insurance has developed to cover most economic activities such as commerce,
industry, and agriculture.
People resort to insurance even though it might not be compulsory by law. For
example, insurance against public liability resulting from car accidents is
compulsory in reality because people have no means, except insurance, as an
effective guarantee against risks to which they are exposed.
Cooperative Insurance has been established and considered a
legitimate alternative to Commercial Insurance by a decision issued by the
Islamic Jurisprudence Council.
Consequently, it has been necessary to develop different ways to deal with
Cooperative Insurance and to draw up a new broad
perspective for it. This will allow the establishment of Islamic insurance
companies, whereby Cooperative Insurance becomes the basis for their business
and their transactions.

 Insurance of IslamicShari’ah:
The rules governing Islamic Finance are derived from the Shari'ah. The
Shari'ah is a framework of Islamic Jurisprudence derived from the primary
sources: The Qur'an and the teachings of the Prophet Muhammad (pbuh)
known as the Sunnah. In addition to which there is a dynamic secondary

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source of common law rulings and scholarly interpretations referred to as
Fatwa's.
These fatwas are the results of human interpretation of the Shari' ah, of its
texts, or its principles, or a combination of the two; they are not the word of
God. Islamic law, it must be remembered, is more a process than a code,
and the results of legal deliberations may differ when different methods are
employed.
Several fatwas are indicative of an acceptance on the part of Shari'ah
Supervisory Boards of new realities in the marketplace and of their
willingness to understand and work with these to the extent that Islamic
religious and legal principles will allow. Such an attitude has ever
characterized the best in Islamic legal thought.

Rules of Islamic finance:

The rules of Islamic finance adhere to the broad principles of avoiding

Maysir and Qimar which are gambling and speculation along with Gharar
which is uncertainty coupled with exploitation and unfairness. This closes
the door to the concept of interest and precludes the use of conventional
debt-based instruments. The Islamic financial system encourages risk-
sharing, promotes entrepreneurship, discourages speculative behavior, and
emphasises the sanctity of contracts.

The central tenet of the Islamic financial system is the prohibition of Riba, a
term literally meaning "an excess" and interpreted as "any unjustifiable
increase of capital whether in loans or sales". More precisely, any
guaranteed increase in return tied to the maturity and the amount of
principal, regardless of the performance of the investment, would be
considered riba and is strictly prohibited.

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Islamic finance offers different instruments to satisfy providers and users of
funds in a variety of ways.

Basic instruments include cost-plus markup financing (murabaha), profit-

sharing (mudarabah), leasing (ijarah), partnership (musharakah), and
forward sale (bai' salam).

These instruments serve as the basic building blocks for developing a wide
array of more complex financial instruments, suggesting that there is great
potential for financial innovation and expansion in Islamic financial markets.

What does Quran says on Gambling ?

it is stated in the Quran that games of chance, including Maysir, are a "grave sin" and
"abominations of Satan's handiwork". It is also mentioned in ahadith.

They ask you about wine and gambling. Say: 'In them both lies grave sin, though
some benefit, to mankind. But their sin is more grave than their benefit.'

— Qur'an, 2:219 (al-Baqara)

Gambling arises from uncertainty when there is a chance that one party will

suffer a loss while another will make a profit from an event.

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The Concept of Simple Cooperative Insurance:
Cooperative Insurance is generally based on the concept that the negative
impact of a specific incident is distributed among a group of persons instead of
making the person who experienced the loss to bear its results alone

The means to achieve this is to establish a common fund to which everyone

exposed to a specific risk may contribute in such a way that indemnity will be
paid from that fund. In this type of insurance, the Insured seeks guarantee from
a group of persons who are participants in the insurance. At the same time he
supports other members when they are faced with losses. Members who share in
this insurance insure each other's losses on the basis of legitimate cooperation.

Accordingly, Advanced Cooperative Insurance can be defined as "a collective

insurance contract, whereby its subscribers are committed to pay a specific
amount of money as a donation to indemnify the victims on the basis of
Takaful and solidarity, when the risk actually occurs. Its insurance
operations are run by a specialized company, as an agency for fixed fees."

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  Functions of Cooperative Insurance:
Functions of insurance are the benefits, fruit, and the positive effects
which Cooperative Insurance produces to the individuals and groups.
The most important functions are:
1. It achieves security for the Insured
2. It earns legitimate gain
3. Islamic Insurance Companies are considered one aspect of the
appropriateness and usefulness of the esteemed Islamic Sharia for
all ages.
4. It contributes to the building and prosperity of the economy and
to the growth of economic enterprises
5.Cooperative Insurance Companies complement the
Islamiceconomic cycles

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  Differences between conventional insurance and Takaful
Takaful distinguishes itself from conventional insurance with many different features, the main
distinction being the fundamental principles that govern each practice. Takaful is governed by the
principles of Shari’ah, where transactions involving Riba, Gharar and Maysir are prohibited. Riba in
conventional insurance is found in both transactions involving unequal exchange between contributions
and indemnities and also in the income derived from interest gained from interest-bearing investment.
In fact, there is a disparate value of money between premiums and
compensations as payment received against the insurance may be higher
than premium. And the way insurance funds are managed can also
originate an unknown part of profits earned through investments of the
premiums in interest-bearing financial instruments such as bonds and
savings accounts. Conversely, Riba is avoided in Takaful using contracts
for profit shares rather than fixed interest and investment in Shari’ah
compliant schemes.
The practice of conventional insurance also involves the use of Gharar due
to uncertainties on how much will be paid, when it will occur and whether
the payment will be accepted. When a claim is not made the insurance
company may even get all the profits while the participant may not get any
profit at all. Takaful contracts, on the other hand, have to follow specific
rules to avoid Gharar, such as making sure that the matter of insurance is a
legitimate and essential need, that the insurer is able to safeguard the
interests of the insured and that the insurance is transacted on a co-
operative basis under which ownership of the premium is with all
contributors to the Takaful fund; they collectively bear the risk and can
share profits or losses from the pool. Furthermore, conventional insurance
is declared Maysir because the policyholders are seen to bet premiums on
the condition that the insurer will pay indemnity on the happening of a
specified event.
The gain of one party is contingent upon the loss of the other because the
insured would lose the money paid for the premium when that event does
not occur and the insurer would suffer a deficit if the claims happen to be
higher than the premium paid. In the case of Takaful, however, collected
premiums are in a common fund. If the participant draws out of it by way of
benefit in the case of a claim, it is drawing out of a fund of which he is a
memberandto which he has contributed.

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Another essential difference is that conventional insurance by its
conception is a risk-transfer mechanism.
Takaful on the other hand does not entail a risk transfer mechanism, but
rather a social function of mutual risk-sharing. The contract of Takaful is not
a sale or an exchange, but is rather a membership contract to a common
pool, of which every member is entitled to certain benefits but also exposed
to some risks of loss.
This also what makes Takaful system commercially more viable, as the
remaining money after all claims does not belong to the shareholders, but
rather to the participants and it should thus be given back. In addition,
motivations of conventional and Islamic insurance companies are different;
while conventional companies are directed by the search of profit. Takaful
companies are also directed by ethical means for the overall benefit of
society and the environment. Regulation in Takaful is undertaken through
Shari’ah supervisory bodies that ensure that all operations are conducted in
line with the Shari’ah principles and fulfil Islamic objectives of social
welfare.

Besides, the distribution of profits in case of conventional insurance is a

managerial decision from the insurer company which is not necessarily
favorable for all parties. While, in case of Takaful, distribution mechanism is
defined in advance and the operator has no claims in underwriting surplus;
this reduces the possibility of conflict between shareholders and
policyholders.
Finally, in case of dissolution of a conventional insurance company,
reserves and surplus belong to the shareholders. While in case of
dissolution of a Takaful operator, capital is distributed back to participants
or donated to charity.