Personal Finance

Is Insurance Haram or Halal?

Be sure to check the follow-up article on “Is insurance haram or halal

I suspect this is the most controversial article to appear yet on IFG. Why? Well, much of the opinions I hold on Islamic Financial matters are the mainstream ones, but as I have studied the topic of insurance more, I have increasingly found myself switching position. Below are my preliminary thoughts in favour of why insurance of most kinds should be considered permissible (halal).

Let me also add, for those of you who may not realise this, there are a minority of scholars currently alive and passed away who have held that insurance is halal. This may not be immediately obvious given how widespread the view is that insurance is haram, but it is important to point this out so that one doesn’t think that what is being put forward here is completely novel. These scholars and academics include, Sh. Mustafa Zarqa, Sh. Ali AlKhafeef, and Nejatullah Siddiqi. There are also some quite prominent modern scholars but I would not want to attribute complex positions to them without studying with them first, and it is best left to them to articulate their own positions should they feel the need to.

The Basic Premise

The basic premise I want you all to keep in mind is that Islam and the fuqaha do allow us to mitigate risk by pooling our wealth and paying out to those who lose out from an uncertain loss. Traditionally in Arabia if a tribesman needed to pay blood money (a large sum) to someone, then the entire tribe would chip in a small amount to make up the sum. They did this as a charitable gesture so no one of their number would be overcome by the massive payment. Relating to this, fuqaha allow takaful insurance – which is a form of cooperative insurance along these lines. More on this later, but remember: the basic principle of mitigating loss by pooling wealth is uncontroversially halal. The debate is on how it is done, i.e. the conditions and structures involved.

Gharar

The argument against conventional insurance is that it involves riba (interest), gharar (uncertainty), and maysir (gambling). In this article I will focus on the strongest and most central of these objections: gharar.

For the purposes of this article let us take “insurance” to mean common types of insurance like car insurance, house insurance, pet insurance, medical insurance, and business insurance (as opposed to more complicated setups such as life insurance or reinsurance).

Islam forbids transactions in which there is gharar. The argument against conventional insurance goes that this is a gharar-based transaction where something uncertain is being bought in exchange for a premium – so is not allowed. You are uncertain if you will ever have an accident after you buy car insurance and most people don’t and lose all their money for no return each year.

Takaful or cooperative insurance on the other hand is allowed as it is fundamentally a gift to the pot – and so – even though it looks structurally identical to conventional insurance – in fact from a fiqhi perspective because it is a gift, it is okay to get back more or less than that which you put in. So, the guy who pays his fellow tribesman a contribution for the blood money due is doing it not as a bilateral contract but as a gift out of the goodness of his heart.

But having considered the arguments based on gharar that forbid insurance I have come to the conclusion that conventional insurance is not the kind of gharar-based transaction the ahadith about gharar are trying to forbid. Let me show you why.

These are a flavour of the hadith dealing with gharar:

  1. Imam Muslim records in his Sahih: “On the authority of Abu Hurairah who said that the Messenger of Allah (peace and blessings of Allah be upon him) forbade ‘sales of a speculative nature’ (bai al-gharar).”
  2. Tirmidhi records the Prophet said “Do not sell that which you do not have.”
  3. Al-Bukhari and Muslim record “On the authority of ibn Umar who said that ‘the Messenger of Allah (peace and blessings of Allah be upon him) prohibited the sale of fruits until their ripeness and freedom from disease were apparent. He prohibited both the seller and the buyer.’”
  4. Ahmad and Ibn Majah record “The Prophet (PBUH) has forbidden the purchase of the unborn animal in its mother’s womb, the sale of the milk in its udder without measurement, the purchase of spoils of war prior to their distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver.”
  5. Ahmad records “the Prophet forbade the purchase of a runaway slave.”
  6. Ibn Al Athir Al Jazaria records “The Prophet forbade the selling of fruit before it is known to be of acceptable quality.”
  7. Al-Bukhari and Muslim record the Messenger of Allah (PBUH) has allowed bay’ al-araya in quantities less than five awsaq (equivalent to approximately 653kg), meaning the sale of fresh dates on the palm in exchange for aged dried dates.
  8. Aisha narrated “I said “Oh Messenger of Allah, people borrow bread and yeast from their neighbours, and they return more or less, is this permissible?” He said: “There is no harm in this; it is a common practice of the people, and the increase or diminution is not what they intend.” (Abu Bakr Ash-Shafi from Aisha, mentioned in Zuhayli’s “Financial Transactions in Islamic Jurisprudence, p.254); and in another narration from Muadh ibn Jabal , “so take the larger amount and give the smaller, or take the smaller and give the bigger, the best among you is the one who is best in paying back his debts.”
  9. Muslim records “Ibn ‘Abbas (Allah be pleased with them) reported that when Allah’s Prophet (may peace be upon him) came to Medina, they were paying one and two years in advance for fruits, so he said: Those who pay in advance for anything must do so for a specified weight and for a definite time.”

From (1) we can see that trades involving gharar are not allowed, as we have already discussed. From hadiths (2)-(6) we can piece together why that is so: in each of these instances the thing that is being driven at is to have a clear, unambiguous contract where there is no room for dispute down the line. Secondly, the harm of allowing outweighs the benefit of allowing, so the conclusion is not to allow.

My argument is that conventional insurance is not such a contract as it is sufficiently clear. More on this below. But let us label this the negative argument.

Let’s look at hadith (7)-(9): These are just some of the hadith where the Prophet allowed for some uncertainty in the contract to make it easy for people and businessmen, or because it was a custom of the people, and where the benefit of allowing outweighed the harm.

Thus we can clearly see Islam does countenance gharar in money matters – Bai’ salam and takaful are just two examples. There are, then, independent positive arguments for why conventional insurance is beneficial and customary enough to fall among such categories and not the one of prohibited gharar. Let us label this the positive argument.

Finally, I find that when one examines modern-day examples of transactions deemed halal that involve a degree of gharar, e.g. takaful insurance, then one struggles to pinpoint how exactly these deemed-halal examples are different to conventional insurance which is deemed haram. Let us call this the takaful argument.

The negative argument

The fundamental issue is whether the thing being bought in an insurance contract is tangible and certain enough for the contract to be deemed valid. The Prophet forbade one from buying a diver’s catch until he’d actually got his catch, come back, and started selling tangible fish. The reason was that it was unclear what exactly is being bought or sold. The object of the contract must be certain.

But let us imagine the modern day, where big data and historical statistics allow us to model very accurately what the average catch will be. In this situation, I don’t see a problem for Tesco, say, entering a year-long contract with a fishing company, to provide it whatever it catches, with the understanding that on average, x amount is what is expected.

Similarly, in insurance, certainly from an insurance company’s perspective big data allows a lot of certainty as to where they stand. The trickier question is, do consumers enjoy the same level of certainty? Well, a competitive market certainly helps. It helps efficiently price the good that customers are purchasing: “security” or “peace of mind”. This ensures that they do not get exploited.

When we think about “security” or “peace of mind” they may sound like fluffy and intangible objectives. But let us analogise with a security guard. He is paid a wage for providing security. What does that look like? It looks like him standing around waiting for the one day in the year when he needs to earn his keep. The rest of the time he is just on stand-by. But he is being paid for is being on stand-by, being available, and dealing with any other related requests you might have. Similarly an insurer contracts to have available people to speak to you, provide you with documents should you need them, and to do checks whenever you claim. They are not being called upon to deliver money every day, but they are providing some quite tangible services that are clear and understandable.

Further analogies can be made with estate agents who provide a service arrangement for landlords: if the landlord’s property ever needs repairing, the estate agent will sort it out. Or how about the law firm who contracts to provide all the legal requirements of a company? In both these cases the estate agent and the law firm expect to make a profit overall given that they will have a roster of such clients. One or two may be costly, but the other ones won’t require much work and the estate agent/law firm will be profitable in the end. The parallels between this arrangement and a car or home insurance contract where the insurer becomes responsible for paying for any damage/theft that may happen, are striking.

In short, insurance is a sufficiently clear contract, certainly in our day and age.

The positive argument

Insurance gives certainty – this is incredibly important to the business world, but it is also incredibly important for the day to day lives of people. The Prophet specifically allowed for bai salam (for farmers to sell in advance their crop so that they may raise money now) as it genuinely helped people live their lives in a more stress-free way (see hadith 9 above). He weighed up the uncertainty caused by the transaction against the benefit that came from it, and clearly he decided that the benefit outweighed the harm.

I also find hadith (7) and (8) fascinating, not because they are precisely applicable here, but because they indicate that sometimes an unequal exchange in transactional matters is acceptable. In the case of (7) this helped ease business in Arabia where the primary agriculture was in dates, while in the case of (8) a debt was allowed to be paid back slightly more or less. Standardly of course, one must return a debt exactly, and not even add a gift on for fear of it becoming considered interest. However here maintaining community ties trumps all that.

And notice how in (7) the Prophet sets quite an easy bar for what is allowed. 650kg is a lot of dates and the Prophet allowed araya trades under that amount. He could have set the amount at 10kg, say, but the instinct was one of making ease for business and life, not hardship.

Insurance is centrally important for businesses to maintain a steady ship from month to month and to protect against unexpected crises. It helps makes large deals happen as well, as insurers will often be involved in underwriting the risk of a transaction falling through, or acting as guarantors for parties. These are all important lubricants to our economy. Further, insurance creates large pools of wealth which are then invested throughout society – again, a vital element for a healthy economy.

There are a number of other benefits to insurance, some of which are excellently outlined in this article. In a nutshell, the point is that insurance, while it may have some degree of gharar in it, it is still justifiable given that there is a great benefit to it, and that our Shariah historically does allow for some gharar-heavy transactions if the benefit outweighs the harm.

The takaful argument

The blood money mutual insurance concept was the inspiration for coming up with a takaful cooperative insurance model for our times. The basic concept is that a bunch of people pool their money together not-for-profit to mutually cover each other’s backs. I like the cooperative model. If one exists I encourage people to use that – as at heart it is much more of a charitable and communal venture.

But fundamentally, a takaful model is identical to a conventional model in the important elements of the structure. Both organisations aim to make a surplus, pay their employees and managers, pool participant cash and then pay out in the cash of a claim. There is also an element of reciprocity akin to a commutative contract in a takaful model. One isn’t just donating the money and forgetting about it. One is donating with the expectation that the takaful pool will pay out in the case the donor needs it. There is actually a quasi-commutative contract in place here as well (as there is a quasi-obligation on both parties). [so arguments that the object of the contract is indeterminate in conventional insurance, and therefore it is haram (see negative argument above) might face counterarguments that actually a classic takaful model is not a pure hiba (gift) and as such there is a quasi-contract and it has an object and this object is as indeterminate as the one in the conventional model – and so either both are haram or both are halal.]

Secondly, if we go back to the blood money situation from which takaful is often analogised with – the money wasn’t actually pooled and then invested by the tribe. The tribe would pay up as and when a calamity happened. So in a way, it was a purer form of hiba as there was no quasi-contract between tribesmen. But that is not practicable these days in a non-tribal and atomistic society. So, the takaful model allows for people to pay in beforehand. This of course creates an expectation – and it is that expectation that is the object. So the point I’m driving at is, the takaful industry has already compromised somewhat on the pure blood money setup for practicality purposes, and in so doing made itself near identical with a conventional insurer. If this point is conceded, then really there are few substantive other differences between the two models.

Yes, the conventional model can arguably be seen as more profit-driven, won’t pay out any profits to participants, and charge higher fees. But in reality, viewing things from the 21st Century lens where we live in a world of footloose capital, international finance and financial institutions that straddle multiple continents, and a population that is almost unimaginably larger than it was, say, a thousand years ago, we need insurance companies of considerable size to be able to make things work, and this requires an incredible amount of effort. To expect someone to handle all this without a profit motive is highly optimistic. And the takaful companies that exist – they are all profit-making as well. Major insurance providers are the ones who are setting them up through Islamic windows and funding them (indeed, given the enormous capital requirements for insurance companies, large insurers are often the only entities that can help start takaful companies) and they will make money off them just like their conventional insurance operations. The difference is only in the structuring. The intention to make profit is exactly the same. They price risk and meet shortfalls in funds just like conventional insurers, though in a pure takaful model presumably one would price contribution by how well-off one is (as it is a gift) and if there is a shortfall one would have a whip-round from the other members.

Finally, the Cooperative company in the UK is a fantastic model and in my research I learnt more about them and actually joined up. They pay back profit to their members and give discounts to their members in their stores. But interestingly, they were doing terribly until they became increasingly corporatized and commercialised, and now they’re running pretty effectively. Make of that what you will!

Concluding Remarks

This is the longest article we have published on IFG – and it is so because the argument made requires more of a defence as it is a minority position. However please do note that this article is merely a summary of the topic and my views; a fuller treatment would extend into the tens of thousands of words. Each of those hadith mentioned, for example, have had countless pages written on them over the centuries, and to analyse them fully requires a small book, not to mention all the other hadith I have not even mentioned.

A few further points to note in brief:

  • Takaful is definitely halal and cooperative insurance is in my view pretty much equivalent with the exception of the next bullet point
  • Insurers invest in haram areas so to the extent you’re insuring with a certain return at the end such as life insurance, I need to do further thinking on this but preliminarily, the same rulings apply for any fund that you invest in that has haram holdings (see this article.)
  • Where you’re buying insurance linked to some kind of damage (car insurance) as opposed to any investing motive, preliminarily I don’t see any issues with this as you are contracting with the insurer, and what they independently do with their money is not your concern
  • It may be that life insurance, as opposed to other kinds of insurance, has particular issues with it – I can’t pass comment on that until further research
  • With regards to compulsory insurance like car insurance or employers’ liability insurance – this is of course fine to get from a Shariah perspective even if all my arguments above are wrong

And, as I said at the start, my thinking on this topic is still maturing as I read deeper into it. I would consequently be interested in hearing other people’s views, thoughts, and critiques of what has been written here so that we can deepen each other’s knowledge.

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8 Comments

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  • What happens to the pool of gift at the end of the year ?

    Reply
  • Robert Hannah
    December 7, 2017 3:33 am

    I am glad you are taking a positive approach to conventional insurance.

    The issue I have with takaful is simply that, if you not contribute the “gift”, then you do not get the insurance coverage. It is a contract in the same way as with conventional mutual insurance. As for the investment pool, fixed income is a much better hedge against the pool of future insurance claims than equity, consequently I would expect takaful operators if they are prudent to use fixed income instruments such as leases, sukuk, and declining balance Islamic mortgages.

    I find the approach of Islamic scholars to conventional insurance quite myopic. The obvious objective of someone who purchases insurance is to reduce uncertainty, and that is a good thing. An insurance contract is a contingent claim, not a random event; consequently it cannot be equated to gambling.

    Reply
  • Most uncertainties related to gains FRM the Hadiths which I somewhat agree as equated to profiting from possibilities thta can swing either way- some what similar to gambling. Hadiths do point that way of profiting, as it appears.
    But present day insurance is not to profit rather covers a loss to a level as it was or would be- like if a building valuation is 100 and fire damages it then max claim will not exceed the Market value, ‘thus no profit. Also the out come is not desired but anticipated due to circumstances, and that is ascertaining probabilities to the array of possibility already identified. Circumstance, in particular where the muslim community and its economy is targeted such times need to warrant conventional insurance to be opted for otherwise thru Takaful the net economic loss will be on the targeted muslim society. Thus I think u can add some thoughts FRM my comment to the very intellectually argued article of yours- mr author. Wasalam.

    Reply
  • I appreciate this perspective and thoughtful write up and I really home other scholars review this and consider revising their opinion on the matter. It seems to me that many scholars don’t put enough critical thought into contemporary issues nor do they realize the repercussions of telling Muslims that such and such things are haram, especially when they don’t offer alternative solutions to very pragmatic needs that the ummah has. As you pointed out in the article this concept of takaful is an ancient practice and we just need to do what we can to apply it to modern times. It is sad to see Muslims not reduce their exposure to everyday risk by refusing to get basic insurance for their home, car, health, business, or medical / professional practice because they fear it is haram. What we have available to us now may not be perfect and not fully align with the ideal ‘Islamic Insurance’ model but I think it makes sense to utilize what we have access to now and simultaneously strive towards entrepreneurial efforts, like the UK Cooperative company you mentioned, that work towards offering the ummah more Islamic alternatives.

    Reply
  • Rashad IBN Abdul-Azeem
    December 19, 2018 6:06 pm

    Excellent article and the hadiths really expand the understanding of insurance much more broadly than I have seen on most sites. That is excellent. My concern is that we buy the western profit motive too easily sometimes. And because the firms are so large we become beholden to them in an unnatural way. Which in many ways, to me, helps solidify the inherent injustices in the systems with which we have concern. We as a community have a very large economic footprint globally, but we also have a latent inferiority complex that prevents us from taking the risks to create something better that all of humanity may benefit from. So I have insurance and was brought here seeking some Islamic views on home insurance. So I believe we must be practical and intelligent but not weak and permissive. We live in a time where we are afraid even to break a sweat or lose even a months pay for a good cause all while getting fatter, and spending billions for things we dont need. And not to be extreme but until enough of us are truly committed to doing the hard work of taking advantage of our demoratic situation, demanding our rights and building something better will we be able to make a difference with the great writ which we are pledged to. If not; the secular world is doing it already and we might be quite suprised how they look at insurance going forward. So in reference to the article, the Zayan Takaful method is obviously a good starting point, but will inevitably be tied to much larger institutions in a way that makes it similar or worse than their own instruments. Much like the shariah compliant real estate models. So either we decide to gradually wake up or gradually go to sleep. The choice is ours. This verse has always helped me understand situations like these. I am not a scholar but it is clear and points the way much better than anyone can say.

    On those who believe and do deeds of righteousness there is no blame for what they ate (in the past), when they guard themselves from evil, and believe, and do deeds of righteousness,- (or) again, guard themselves from evil and believe,- (or) again, guard themselves from evil and do good. For Allah loveth those who do good.

    Al Maidah (5 :93)

    Reply
  • Jesse Reitberger
    October 23, 2019 4:04 pm

    Do you have any comments on life insurance? This is one of those things that is always touted as Haram but I am not convinced. People always say you can’t insure a life but the point is not the life it’s making sure the family isn’t left in undo hardship.

    Reply
  • Jazakallah Khair Ibrahim,

    I appreciate your courage in putting this out there and subjecting it to critique.
    A couple of my personal criticisms of the conventional insurance industry, for your consideration:

    1. Selling what you don’t have and can’t deliver:
    One thing I’ve found quite discomforting about Insurance companies is the fact that they issue policies en-mass knowing full well that if all their clients were to claim the full extent of their cover, they would not have the funds to cover them. I’m sure that re-insurers also oversubscribe their reinsurance cover on the same basis, knowing that statistically there’s a very small chance that they’ll run out of capital. But there is only so much capital in the world today and I’m pretty certain the combined total of insurance policies out there exceed the amount of capital that exists globally many fold!
    However the point I’m driving home here is that as the seller, i.e (the insurer) you are selling/guaranteeing something you know that you can’t deliver to every customer you’ve sold it to. It’s not even that they are uncertain about whether they can pay or not, they know with certainty that they cannot provide every customer with the cover in the amounts they’ve sold them. The conventional insurance model is underpinned by the principle that it is only profitable when it delivers far less than what it has sold.
    In my view, this is a direct breach of the principle of ‘don’t sell what you don’t have and can’t deliver’.

    2. Exploiting a human trait: Fear
    Just like Casino’s profit from the human trait of hope against the odds (a beautiful human characteristic when placed in God’s Mercy), and cigarette companies profit unfairly from humanity’s addictive weakness, Insurance companies try and profit from the innate fear within us in order to coin a profit. This can be just as exploitative as a casino but even more lucrative, as humans (part of our survival instincts) are more readily risk averse than we are hopeful of unlikely events. Far more people buy insurance than lottery tickets.

    In the example you’ve given of members of tribes covering the blood money of their individual participants, I think governments are in the ideal position to provide such cover for their citizenry. It shouldn’t be done with a profit motive, but as a public service to facilitate business, commerce and to help citizens out of undue hardship. Just as emergency services, police, fire, hospitals and social security are provided by governments these days.

    Thanks for reading, if the response requires a length reply then please feel free to drop me an email.
    Your brother,
    Rehan

    Reply

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