Whether Risk mitigation is allowed in Islam?

In Islam the risk mitigation not only lawful but also encouraged the following describes whether the risk mitigation is allowed in Islam

Hadith:

Dhaman Khatr AlTareeq:

Dhaman Ald ark:

Aqila:

Tie the camel and then submit to the Will of Allah

A person should undertake another person s risk without any consideration/fee in return

A person would influence a sale by promising to compensate for the loss if the subject matter proved faulty

A risk sharing mechanism in which community members pooled their share of Diyat (blood Money)

The need for insurance is shown in the following verse of The Quran. Those of you who die and leave widows should bequeath for their widows a years maintenance and residence (2.240) Why conventional insurance haram/prohibited in Islam A contract will be Hilal in Islam if following matters will be strictly observed in Islamic

Origin of Takaful (Islamic Insurance)

Takaful is not the new concept in the modern era. It can be seen in the following practices before the pre Dated Islam

Al Aaqilah: A scheme in which tribal members contribute the money and share the joint responsibility to indemnify the victim or Victims family or relatives. Later on Islam accept this principal because this is the mutual contract and every one shares join responsibility for securing the individual or family from financial liability arising from defined events such as the murder or injury of one tribe member by the other tribes member. Diya (indemnity): The arrangement for the payment of blood money to the Victims next of kin or injured party of a murder victim if the victims family agrees to take the payment against the blood. Kafalah (guarantee or suretyship): A contract of guarantee in which a third party guarantees the performance of another party involved in the contract. If the other party not perform the duty than the guarantor will perform the contract.

Aqd muwalat, These were entered into for bringing about an end to mutual enmity or revenge. Juhala: The contract in which, a person promises to reward another unspecified person in exchange for carrying out a specific work for him, in spite of the considerable amount of uncertainty involved in it. Daman Kkhatar Al-Taiq A type of agreement in which one person insures his money before going to travel if the person bears loss during travel than he will be compensated. From this concept the insurance started. Hilf Confederation were brought about by means of an agreement for mutual assistance among people

The concepts of mutual protection amongst the Muslims started between the 7th and 13th centuries when Muslim traders makes extensive trips by land and sea to India, China and the Islands of Malaysia, Sumatra and Java. But this concept was not established into the formal commercial system. From 14th century and onward the development was made in the western countries regarding the establishment of the modern insurance (Marine insurance) for protecting the commercial and industrial assets values. The pioneer Muslims not knows whether it is compliance with the Islamic laws or against the Islamic laws. So some Muslim merchants request to Hanafi Islamic School Jurist Ibn Abdin for examining the prevailing insurance whether it is under the Islamic laws. They declare it as prohibited. A number of fatwas issued regarding the prohibition of the conventional insurance was issued. In 1975 the first Islamic bank was established and the Islamic bank feels the need of insuring the Assets. But at that time there was no Takaful company in the world which insured the assets of the first Islamic bank so keeping in view for meeting the needs of the Islamic banks the first Takaful company was established in the Sudan in 1979. The need of the Takaful companies was felt after the development of the Islamic banking

1975 first Islamic Bank Foundation of Perbadanan wang Simpanan Bakal Bakal haji (PBSBH) in Malaysia

Foundation of Dubai Islamic Bank, Kuwait Finance House, First Gulf Bank

Conventional Bank opens Islamic Branches

Islamic Accounting Standards Organization Establish

1950

1960

1970

1980

1990

2000

2010

1979 First Takaful co First attempts to form Islamic banks

Foundation of Mit Ghamr Savings Bank in Egypt

Islamisation of Banking in Pakistan, Iran and Sudan

No of Banks offering Islamic products expands

Development of the Takaful Industry Worldwide

Worlds first takaful co Faisal Islamic bank of Sudan Arabic Insurance co Establish in Dubai by Dubai Islamic bank National company for cooperative insurance,Tawuniya establish in Saudi Arabia

Islamic financial service board issued 1. Guiding principal on Governance for Takaful 2. Exposure Draft on Standard on Solvency requirements for Takaful

Fatwa issued by the Fiqh council of world Muslim league on Islamic insurance

Takaful Act 1984 in Malaysia Syarikat Takaful Malaysia Bhd Ist Takaful Company in Malaysia

ASEAN Re Takaful international LTD establish in Malaysia International council of Fiqh Academy issued rules for health insurance contracts 1990

1970

1980

21st Century

1975

1979 1984 1985

1986

1997

2005

2008

2009

Fatwa issued by the Malaysian Jawatankuasa Fatwa Majlis kebangsaan on life insurance haram due to the elements of Riba, mysir and Gharer

The Fiqh council of the organization of the Islamic Conference (OIC) approves the Takaful the correct alternative to conventional Insurance in full compliance with Sharia

State Bank of Pakistan releases the instructions for Islamic banks that insure their assets under Takaful

Models of Takaful There are three models of Takaful 1. Mudarbah Model 2. Wakalah Model 3. Wakalah Model Based on waqf Model Mudarbah Model A principal and manager relationship is used between the policyholders (capital providers) and the Takaful operator (entrepreneur) for both underwriting and investment activities.

Mudarbah Model

Profit attributable to shareholders

Company

Company s Admin and Management expenses

Investment by company

Profit from investments

Participant

Takaful contribution paid by participant

General Takaful fund

General Takaful fund

Operational cost of Takaful

Surplus (profits)

Company s share from Surplus

Participant s share from Surplus

Wakala Model A principal and manager relationship is used between the policyholders (capital providers) and the Takaful operator (entrepreneur) for both underwriting and investment activities.

Wakala Model

Company (shareholders fund)

Wakala Fee (30% to 35%)

Profit from investments

Mudarib s share of PTF investment income

Management expense of company

Profit/loss attributable to shareholders

Takaful contributions paid by participant

Investment by company

Investment income sharing on Mudarabah basis

Participant s Takaful fund

General Takaful fund

Investment income

Operational cost of Takaful/ReT akaful

Reserves

Surplus (profits )

Surplus distribu tion to particip ants

Wakala- Waqf Model

Wakala-Waqf Model

Company (shareholders fund)

Wakala Fee (30% to 35%)

Profit from investments

Mudarib s share of PTF investment income

Management expense of company

Profit/loss attributable to shareholders

Initial donation to create waqf fund

Investment by company

Investment income sharing on Mudarabah basis

Waqf fund Contributions by participants

Investment income

Operational cost of Takaful/ReT akaful

Reserves

Surplus (profits )

Surplus distribu tion to particip ants

The principles of Takaful insurance are as follows:

y y y y y y y y y

Policyholders cooperate among themselves for their common good. Every policyholder pays his subscription to help those that need assistance. Losses are divided and liabilities spread according to the community pooling system. Uncertainty is eliminated in respect of subscription and compensation. It does not derive advantage at the cost of others.

Takaful Insurance
Takaful is an Arabic word meaning guaranteeing each other or "joint guarantee". The Tabarru' system is the main core of the takaful system making it free from uncertainty and gambling. Tabarru' means "donation; gift; contribution." Each participant that needs protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. The objective of takaful is to pay a defined loss from a defined fund.