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.
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:
- 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).”
- Tirmidhi records the Prophet said “Do not sell that which you do not have.”
- 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.’”
- 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.”
- Ahmad records “the Prophet forbade the purchase of a runaway slave.”
- Ibn Al Athir Al Jazaria records “The Prophet forbade the selling of fruit before it is known to be of acceptable quality.”
- 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.
- 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.”
- 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!
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.
- http://www.amjaonline.org/en/component/easyblog/entry/the-question-of-insurance-part-1?Itemid=327 – An excellent summary of the conventional arguments against insurance
- Gharar in contracts and and its effects in modern applications – Dr. Muhammad Al-Ameen Ad-Dareer [Arabic]
- The Insurance System – its reality and a legal opinion on it – SH. Mustafa Zarqa [Arabic]
- Radd al-Muhtaar ala al-Durr al-Mukhtaar Sharh Tanweer al-Absaar – Muhammad Ameen ibn Abideen [Arabic]
- http://www.jamaalzarabozo.com/audio/insurance.pdf – Sh. Zarabozo article on Insurance