Globally-practiced-takaful-models

Globally Practiced Takaful Models

The constitution of the Islamic Republic of Pakistan states, “for the promotion of social and economic wellbeing of the people, the state shall eliminate riba as early as possible.” [Article 38(f)]

Are we Eliminating Riba As Early As Possible?

There are 45 conventional insurance companies and 28 of these have window takaful operations. There are only 5 full-fledged takaful operators in Pakistan.   

The elements of riba(interest) and maysir(gambling) are found in conventional insurance which makes it impermissible. Just as we cannot get involved in theft, robbery, gambling, and earn riba in order to help the poor therefore we cannot help victims of accidents or losses from a riba based fund. The end does not justify the means!  

وَمَا آتَيْتُم مِّن رِّبًا لِّيَرْبُوَ فِي أَمْوَالِ النَّاسِ فَلَا يَرْبُو عِندَ اللَّهِ وَمَا

آتَيْتُم مِّن زَكَاةٍ تُرِيدُونَ وَجْهَ اللَّهِ فَأُولَٰئِكَ هُمُ الْمُضْعِفُونَ

“That which you give as an interest to increase the peoples’ wealth increases not with Allah; but that which you give in charity, seeking the goodwill of Allah, multiples manifold.”

(Surah al-Rum, verse 39)

The element of riba is removed in the takaful business model by investing in halaal activities, not in investments with fixed interest rates. Riba is also removed by converting the conventional insurance sale contract between the participant and the insurance company into a Mudarabah(profit/sharing) contract or Wakalah(agency) contract.

Maysir(gambling) is disallowed in Islam because of excessive risk and uncertainty. The participant takes a risk by contributing a small amount to the fund with the hope of gaining a large sum – one can easily see the resemblance here with respect to gambling. One party’s profit is dependent on the other party’s loss. There is also uncertainty about whether the insured event will take place or not and the participant loses his amount if the event does not occur. There cannot be uncertainty in a sale contract in Islam when one buys something, he should receive it. Thus, by changing the nature of the contract to profit/sharing and agency, we can remove uncertainty from the model.

The element of maysir is further detached in the takaful business model by bringing in the concept of Waqf(donation) and Tabarru(contribution) along with the intention of helping a person who suffers a loss. By incorporating the intention of donation, contribution and mutual cooperation of the participant towards the fund, every time a claim is made from the fund, the participants get the reward of helping someone in need.

Narrated ‘Umar bin Al-Khattab: I heard Allah’s Apostle saying, “The reward of deeds depends upon the intentions and every person will get the reward according to what he has intended. So, whoever emigrated for worldly benefits or for a woman to marry, his emigration was for what he emigrated for.” (Source: Sahih Bukhari, Book #1, Hadith #1)

In the nineteen-eighties, the government of Pakistan initiated a program to establish an interest-free economy, but the program failed due to a lack of well-trained human resources in the field of Islamic finance, and so a parallel conventional financial system prevailed. (Hanif, Iqbal: 2017)

We have come a long way since then and even after 50 years since the first attempt was made to eliminate riba from our society, the struggle is still on and conventional insurance still surpass takaful.

“O you who have believed, fear Allah and give up what remains [due to you] of interest if you should be believers. And if you do not, then be informed of a war [against you] from Allah and His Messenger……..”

(Surah al-Baqarah, verse 278-9)

Such strong words have been used by Allah (SWT) with regards to Riba and still, we have failed to remove it from our system despite knowing that alternative shariah-compliant business models are present for us to adopt. Here I would like to summarize the globally accepted takaful business models for reference which are currently being practiced.

Mudharabah Model:

This model is not being practiced currently in its pure form but as a hybrid with other contracts. However, I have mentioned it here for an understanding of the following models.

  • It is a profit-sharing contract between the takaful operator (Mudarib) and the participants (Rab ul Maal).
  • The participants (Rab al Maal) pool into a takaful fund.
  • The takaful operator (Mudaraib) manages the investments of the fund as well as payments of the claims.
  • The investment income and the underwriting surplus is shared between the participants and takaful operator on an agreed basis.
  • All Management and operational cost are borne by the shareholder’s fund and the incidental cost related to the underwriting and investments are borne by the takaful fund.
  • The losses are absorbed by the capital provider (Rab al Maal).

Wakalah Model:

This model is currently followed by Bank al Jazira in Saudi Arabia, Takaful Ikhlas, and PruBSN in Malaysia. This model is based on Hiba or voluntary contributions to the fund. 

  • It is an agency contract between the participants and the takaful operator.
  • The ‘principals’ are the participants and the ‘agent’ is the takaful operator.
  • The takaful operator is appointed as an agent for the participants who then manages the takaful funds.
  • The takaful operator receives a predetermined fee upfront which is usually a percentage of the participant’s contributions.

Hybrid of Wakalah and Mudarabah Model:

This model is quite well accepted and is currently being followed by AbuDhabi National Takaful operator. This model is based on Hiba or voluntary contributions to the fund.

  • The Wakalah principle is applied to the underwriting activities, hence the takaful operator is entitled to an agency fee
  • The Mudarabah principle is applied to the investment of takaful funds, hence the takaful operator is also entitled to a share of the profit.
  • All underwriting surpluses are added back to the takaful fund.
  • In order to avoid the agency issues with regards to the underwriting activities, a Jualah or a ‘conditional reward’ can also be attached to it. In case if the surplus exceeds a certain limit, the takaful operator receives a bonus for good underwriting practice.    

Hybrid of Wakalah and Waqf Model:

This model was proposed by Sheikh Muhammad Taqi Usmani and is being followed by Swiss Re Retakaful globally, which is the worlds’ second-largest reinsurance company. This model is based on Waqf – similar to a trust.  

  • The general concept behind this model is to encourage an individual to save regularly with the aim of accumulating a fund which is then left as a donation under the waqf system.
  • The takaful operator is the agent of the waqf fund and therefore receives an agency fee for his services payable from the waqf fund.
  • The takaful operator can also receive jualah(performance fee) when he achieves a target with respect to the investment of the waqf fund.
  • Any claims are paid from the waqf fund as per the waqf deed and underwriting surplus is added back to the same waqf fund.

Securities and Exchange Commission of Pakistan has taken substantial initiatives for the promotion of Islamic finance; including approval of a Pakistani retakaful company, regulatory framework, registration of shariah advisors, capacity building, standardization of accounting, and are continuing to do so.

The environment for insurance companies to convert and prosper as a takaful operator has already been set. With further advisory compliance solutions, the takaful business models can be implemented for all types of takaful products.

Furthermore, according to the Islamic financial services industry stability report 2019, Pakistan’s insurance penetration rate has increased from 0.77% in 2016 to 0.84% in 2017. Even though there has been an increase there is still great potential for growth. Securities and exchange commission of Pakistan in its 2019 annual report have announced that in order to increase penetration of the insurance industry not only compulsory insurance will be implemented but also the microinsurance market will be developed.

Pakistan, being a developing nation, the development of the microinsurance market is a viable strategy to increase the penetration of insurance. However, efforts should be made by takaful windows to introduce micro takaful products instead of microinsurance from their conventional counterpart. This move should not only be supported by the regulators but also the government. Only micro takaful products should be approved in order to support Islamic finance. Hybrid of the Wakalah/Waqf model or Wakalah/Mudarabah model can be implemented in order to make the product cost-efficient.

As micro takaful is aimed towards low-income group individuals, there is a possibility that this target group is not aware of the difference between conventional and Islamic insurance, therefore sales strategies should be formulated to not only make them aware of the difference between the two but also how financial protection can fulfill their need in times of dire circumstances so that they easily adapt it. An example of the Covid-19 situation can be mentioned.      

Only 21% of Pakistan’s population is financially included which means that they have a bank account. Efforts should be made to promote bancatakaful and make it the default way of insurance, with regards to housing or motor loan in order to implement the proposed compulsory insurance strategy by SECP.

Aggressive strategies should be channeled in a way to implement takaful for eliminating riba as early as possible.

وَأَنْ لَيْسَ لِلْإِنْسَانِ إِلَّا مَا سَعَ

And that man shall have nothing but what he strives for.

(Sūrah Najm, verse 39)

About the writer: Sadaf Sawant is a panel member at Usmani & Co. She has a BS and MBA from IBA, Karachi. She also has an MSC in Islamic Finance from INCEIF, Malaysia.

Written by Dr. Muhammad Imran Usmani

DISCLAIMER: Copyrights are reserved by Usmani and Co.

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islamic-ecomic-system

Islamic Economic System

The Islamic Economic system is a system which is in conformity with the rules of Shariah. Sharia h can be explained as a “Pathway to be followed ” and can
Further, be explained as a set of divine injunctions and laws that regulates every aspect of a human being in their individual and collective lives. All aspects of the individual and collective life of a human being can be divided into five categories. Thus, Shariah a pathway to be followed in all these five categories.

The five categories are:
1) Beliefs (Aqaid]
7) Acts of Worship (Ibadat)
3) Dealing with others (Muamlaat)
4) Manners (Ikhtaqiat )
5) Economics {Maistiat)

The nature of Shariah rulings are followed:

Halaal – All those acts that are permitted and declared lawful by Shariah.
Haraam – All those actions that are prohibited and declared unlawful by Shariah and their impressibility is derived from either the Holy Quran, Hadiths Mutawatir, or Ijma. Sunnah e Mutawaatirah as the strongest narrations of the Holy Prophet P.B.U.H. in terms of their narrators, i.e. the narrators are in such a large number that is impossible for all of them to have agreed on a false issue.
Faraz – All those actions that are declared mandatory by either Quran or Sunnah e Murawaatirah or Ijma.
Wajibaat – All those actions that are declared mandatory on Muslims by the narrations which are not as strong in terms of narrators as-Sunnah Mutawaatirah.
Sunnah – All those actions that are recommended to be performed by Muslims, based upon the association of those actions with Holy Prophet P.B.U.H.
Nawafil (All those actions that are made optional and rewardable on Muslims by Shariah).

Sources of shariah

The rules and regulations laid down by Islamic Shariah are derived from the following sources:

Quran
Hadith
Ijma
Qiyas
Ijtihad

Quran
Quran is the word of Allah Ta’ala revealed over Prophet Muhammad P.B.U.H. The Holy Quran is the primary source of knowledge and Shariah rulings for Muslims. The injunctions mentioned In the Holy Quran are mandatory to follow and anyone who denies express injunctions of the Holy Ouran is regarded as Non-Muslim. Most of the injunctions mentioned in the Holy Quran are prescriptive in nature such as Order for offering Salah but information about the method and other descriptive information about offerIng salah may be obtained from other sources of Shariah such as-Sunnah:

”And obey Allah and His Messenger; if you are believers.” (8.’1)

Sunnah

Sunnah is defined as a word spoken of the act done or rectified by the Holy Prophet P.B.U.H. The Sunnah provides detailed information about the code and conduct of every sphere of life and Is also considered as Divine Revelation. The details about Sunnah are preserved in
The form of Ahadith. On the basis of clear Injunctions of Holy Quran. Sunnah can thus be regarded as the second source of Islamic Shariah after the Quran e.g Rules for Riba al Fadal has been extracted from Sunnah.

Ijma

Ijma means the consensus of scholars of Ummah on a particular issue. It is one of the most authoritative sources of Islamic Shariah since it encompasses the unanimous opinion of the scholars of a particular era over the interpretation of the Quran and Hadiths on some particular issue. The status of ljrma as an authoritative source of Sharlah has also been ascertained from the following saying of Holy Prophet P.B.U.H.

“My Ummah shall never be, combined on an error.”

Qiyas

Qiyas means to apply a recognized rule of Shariah expressly mentioned in the Holy Quran and Sunnah, to a similar thing or situation by way of analogy.

Ijtihad

Ijtihad literary means “Utmost Effort” and technically it means to exert utmost effort to discover the ruling of Shariah regarding a particular situation. The practice at Ijtihad has been duly endorsed by the Prophet Muhammad P.B.U.H in the following Narration:

”When the Holy Prophet P.B.U.H intended to send his companion Mu’adh, to Yemen as a ruler and as a judge. He asked him: How will you adjudicate a matter when it will come to you?”

He said, “I shall decide on the basis of Allah’s Book (the Holy Quran).”

The Holy Prophet P.B.U.H. asked, “if you do not find it in Allah’s Book (what will you do)?”\

He said: “then, on be the basis of Sunnah of Allah’s Messenger.:

“If you do not find it even in the Sunnah of Allah’s Messenger (what will you do)?’ The Holy Prophet asked.

He replied: “I shall make Ijtihad on the basis of my understanding And will not spare any effort (to reach the truth).”

On This, the Holy Prophet P.B.U.H tapped the chest of Hazrat Mu’adh, with happiness and said, “Praise be to Allah, who has let the messenger of the messenger of Allah to do what pleases Allah’s messenger”. (Abu Dawood, Hadith Ho. 3592).

It is an important and often misunderstood question whether the doors of ijtihad are still open or not. For all those issues where there are clear injunctions of the Holy Quran, Sunnah, and Ijma, Ijtihad cannot be done on those issues. IjtIhad can only be done on those new issues and situations where no explicit injunctions of Shariah are available or there are some meticulous changes that require further exploration of the issue by the Scholars.

It is also important to note that Ijtihad is not merely one’s own opinion based on rational judgment- but it is indeed the result of the unbiased and utmost effort of Mujtahid on the basis of principles laid down by Shariah and it must not contradict with any clearly defined rules of Islamic Shariah. On the basis of complex nature of Ijtihad, not every scholar can perform Ijtihad but only the most learned, senior and the pious Of the scholars are eligible for the role of Mujtahid who have in-depth knowledge and understanding of Quran, Tafasir Arabic, Background of the revelation of verses of Quran, Ahadith, Usool e Fiqh, etc.

Introduction of Islamic Economics
One of the forms nf capitalism, that has been flourishing in non- Islamic societies of the world is the interest-based investment. They are normally two participants in such transactions. One is the Investor who provides capital as on loan against interest and the other is the Manager who runs the business. The Investor has no concern whether the business runs into profit or loss, he automatically gets an interest (Riba) in both outcomes at a fixed or variable rate on his capital. Islam prohibits this kind of business And the Holy Prophet P.B.U.H enforced the ruling, not in the form of some moral teaching, but as the law of the land in Islam.

It is very important to know the definition and forbidden Of Riba and the injunctions relating to its unlawfulness in all respects. On one hand, there are severe warnings of the Qur’an and Sunnah against it and on the other, it has become an integral part of the world economy today. The desired liberation from Riba seems to be infested with difficulties as the problem is very complex, detail-oriented, and has to be taken up in all possible aspects.

First of all, we have to deliberate Into the correct interpretation of the Quranic verses on Riba and what has been said in authentic ahadith and then determine what Riba is in the terminology of the Quran and Sunnah, which transactions It covers, what ts the underlying wisdom behind its prohibition and what sort of harm it brings to the society. We will start by looking at the economic philosophy of Islam via-a-vis interest.

The Economic philosophy of Islam vis-a-vis Interest

The economic philosophy of Islam has no concept of Riba because according to Islam, Riba is that curse in society, whIch causes wealth to accumulate among a handful of people and it results inevitably in creating monopolies, opening doors for selfishness, greed, injustice, and oppression.

In an interest-based economy, deceit and fraud prosper in the world of trade and business. Islam, on the other hand, primarily encourages highest moral ethics such as universal brotherhood, collective welfare, and prosperity, social fairness, and justice. Due to this reason, Islam renders Riba as absolutely haram and strictly prohibits all types of interest-based transactions. The prohibition of Riba in the light of the economic philosophy of Islam can be explained vis-a-vis distribution of wealth in a society.

Distribution of Wealth

The distribution of wealth is one of the most important and most controversial subjects concerning the economic life of man, which has given birth to global revolutions in today’s world and has affected every sphere of human activity from international politics down to the private life of the individuals. For many centuries now, this question has no one been the center of fervent debates, but also of armed conflicts. The fact, however, remains that whatever has been said on the subject without seeking guidance from Divine Revelation and relying merely on human reason has had the sole and inevitable result of making the confusion worse confounded.

Islamic Perspective of Distribution of Wealth

Here we convey the point of view of Islam regarding the distribution of wealth as extracted from the Holy Qur’an, the Sunnah, and the writings of the Shariah research scholars. But before explaining the point, it is imperative to clarify certain basic principles which distinguish the Islamic point of view about economics from the non-Islamic point of view.

The Importance of the economic goals

No doubt, Islam is opposed to monasticism and views the economic activities of man quite lawful, meritorious, and some times even necessary and obligatory. It acknowledges the economic progress of man and considers a Lawful and righteous livelihood an obligation on every individual. Notwithstanding all this, it is no less a truth that it does not consider “economic activity” to be the basic purpose of man, nor does it view economic progress as the be-all and end-all of human life.

Many misunderstandings about Islamic economics arise just from be confusion between the two facts i.e. considering economics as the ultimate goal of life and further considering it as a necessity in order to have a prosperous life through lawful means. Even human logic can comprehend to show that activity being lawful, or meritorious or necessary is different from it being the ultimate goal of human life and the center of thought and action. It Is, therefore, very essential to make this distinction as clear as possible at the very outset. In fact, the profound, basic, and far-reaching difference between Islamic economics and materialistic economics can be summarized as:

Arcording to materialistic economics:

“Livelihood is the fundamental problem of man and economic developments are the ultimate end of human life.”

While according to Islamic economics:

“Livelihood Is necessary and Indispensable, but cannot be the true purpose of human life. “

So, while we find in the Holy Quran, the disapproval of monasticism and the order to:

”Seek the grace of Allah.”(62:10).

At the same time, we also find in the Quran to restrain frum the temptations of wo Idly life. And all these worldly things in their totality have been designated as “Ad-Dunya” (“the mean”) – a term which, in its literal sense, does not have a pleasant connotation.

Apparently, one might feel that the two commands are contradictory, but the fact is that according to the Quranic view, all the means of livelihood are no more than just stages of man’s journey, his finaI destination lies beyond them. The success in this ultimate destination is achieved by good intentions and through rightful means of earning livelihood in this world.

The real problem of man and the fundamental purpose of his life is the attainment of these-two goals. But one cannot attaln them without traversing the path of this world. So, all those things too which are necessary for his worIdly life, become essential for man. It comes to mean that so long as the means of livelihood are beIng used only as a path leading towards the final destination, they are the benevolence of Allah, but as soon as man gets lost in the mazes of this pathway and allows himself to forget his real destination, the very same means of livelihood turn into a “temptation” or into a “triaI”:

“And be a ware that your possessions and your children are but a trial.” (8:28).

The Holy Quran has enunciated this basic truth very precisely in a brief verse:
“And seek the betterment of the) Ultimate Abode with what Allah has given to you.” (28:77).

This principle has been stated in several other verses too. This attitude of the Holy Quran towards “the economic activity” of man and its two aspects would be very helpful in solving problems of man in Islamic economics.

The Real Nature of Wealth and Property

The other fundamental principle, which can help solve the problem of the distribution of wealth, is the concept of ’wealth’ in Islam. According to the illustration of the Holy Quran, ’wealth’ in all its possible forms is a thing created by Allah, and is, in principle His “property”. Allah delegates the right of His Property over a thing. which accuses to man, to Him. The Holy Quran explicitly says:

According to.the Holy Quran, the reason for this philosophy is that al a man can do is invest his Iabor into the process of production. But Allah alone, and no one else, cam cause this endeavor to be fruitful and actually productive’. Man can do no more than sow the seed in the soiI, but to bring out a secdIing from the seed and make the seedling grow into a tree is the work of someone other than man. The Holy Quran says:

“Well, tell Me about that (seed) which you sow; (63) is it you who grow it, or are we the one who grows? 64” [56:63”64]

And in another vorse:
“Did they not see that We have created for them cattle, among things made (directly) by our hands, and then they become their owners? (35:71).

All of these verses throw ample light on the fundamental point that “wealth”, no matter what its form, is in principle “the property of Allah”, and it is He who has bestowed upon man the right to exploit. So Allah has the right to demand that man should subordinate his exploitation of this wealth to the commandments of Allah.Thus, man has the “right of property” over the things he exploits but this right is not absolute or arbitrary or boundless, it carries along with it certain limitations and restrictions, which have been Imposed by the real Owner of the ‘wealth’, We must spend it where Allah has commanded it to be spent, and refrain from spending it where Allah has forbidden. This point has been clarified more explicitIy in the following verse

’And seek the (betterment of the) Ultimate Abode with what Allah has given to you, and do not neglect your share from this world, ond do good as Allah did Good to you, and do not seek to make mischef in the lond.” (28:77)

This verse fully explains the Islamic point of view on the question of property. It places the following guidelines before us:

Whatever wealth man possesses has been given by Allah.
Man has to use it in such a way that his ultimate purpose should be to seek the bountles and blessings of Allah in this world nnd hereafter.
Since wealth has been given by Allah, its use by man must necessarily be subject to the commandment of Allah.

Now, the Divine Commandment has taken two forms:-

Allah may command man to convey a specified production of ”Wealth° to a not her ma n. This Commandment must be obeyed, because Allah has done good to you, so He may command you to do good to others — “do good as Allah has done good to you
He may forbid you to use this ”wealth” in a specified way. He has very right to do so because He cannot allow you to use “wealth” in a way which is likely to produce collective ills or spread disorder on the earth.

This is what distinguishes the Islamic point of view on the question of property from the Capitalist and Socialist point of view. Since the mental background of Capitalism is (theoretically or practicaly) materialistic, it gives man the unconditional and absolute right of property over his wealth, and allows him to employ it, as he Iikes But the Holy Quran has adopted an attitude of disapprobation towards this theory of property, in quoting the words of the nation of Hazrat shu’aib. They used to say:
“Does your Salah {prayer) command you that we should forsake what our fathers others used to worship or that we should not deal with our wealth as we please?” (11:87).

These people used to consider their property as really theirs or “Our property”, and hence the claim of “doing what we like” was the necessary conclusion of their position. But the Holy Quran has, in the chapter ” Light” substituted the expre Psion “Our possessions” for the term “the property of Allah “, and has thus struck a blow at the very root of the Capitalistic way of thinking. And at the Same time, by adding the qualification “that Allah has bestowed upon you”, it has cut the roots of socialism as well, which starts by denying man’s right to private property. Similarly,
“thus they acquired the right property over them”

A verse in the Chapter “Seen”, explicitly affirms the right to private. property as a lift from Allah.

Difference betwéen lslam, Capitalism end Socialism.

Now we are in a position to draw clear boundary lines that separate Islam, Capitalism and 5ocialism from one another. Capitalism affirms an absolute and unconditional right to private property whereas SociaIIsm totally denies the right to private property.

But the truth however, lies between these two extremes – i.e, Islam admits the right to private property but does not consider it to be an absolute and unconditional right that is bound to cause.”dis rder on the earth”.

Written by: Dr. Muhammad Imran Usmani

DISCLAIMER: Copyrights are reserved by Usmani and Co.

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The Usmani & Co team including the honorable Mufti Taqi Usmani and Dr. Imran Ashraf Usmani visit various global Islamic & Shariah conferences to shed light on the principles of Islamic Finance and other significant subjects benefitting thousands of Muslims worldwide. Usmani & Co is one of the leading shariah advisory firms globally helping hundreds of businesses become genuinely Shariah compliant. Write to us today to find out more details:

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Covid-19: A High Time To Consider Takaful

The sudden outbreak of COVID-19 has left all of us bewildered, and just in a span of a few months over 1.8 million people in Pakistan lost their jobs because of the lockdown. Such high and unanticipated unemployment is followed by disastrous impacts on the lives of the affected individuals and families. A typical family in Pakistan comprises of 5 to 6 members, all being supported by just a single breadwinner. And when in this scenario the only job feeding the entire household comes to a sudden halt, the family crashes. The savings, which were tiny, to begin with, become their sole reliance in such testing times. And God forbid, even if one member contracts the deadly disease the huge hospital bill multiplies their agony.

Now imagine the very same scenario, but with a slight change- the family has subscribed to health takaful. So even when the family’s breadwinner loses his job and household income falls to zero, there is one less worry on the family. The hospital expense will be borne by takaful. Therefore, with strong social protection (takaful) or insurance of individuals, the cost to society imposed by such severe lockdown may be reduced in terms of deprivation and hunger.

We have various takaful companies in Pakistan that are providing their current customers complimentary benefit with respect to COVID-19 and have also introduced a protection plan for COVID-19 which can currently be bought at an affordable price. These takaful companies have further eased the burden of their participants by providing a grace period for payment of the contribution of up to 75 days. How have these companies managed to provide all these benefits? It is therefore imperative here to mention, TAKAFUL.

Takaful is an alternative to conventional insurance but one that follows Islamic law. It is based on the concept of cooperation (ta’awun) and risk-sharing. All participants contribute to a pool of donation (tabarru) fund, which allows participants to provide financial assistance to fellow participants who might suffer a loss. The recompense to the participant, in the event of loss, is according to the actual loss either totally or partially depending on the resources of the fund.

A takaful model, therefore, can be depicted as a co-operation among participants who commonly secure and ensure the interest of each other, in the spirit of brotherhood, by mutually sharing obligation to pay for potential misfortunes that may happen, through donation into a common fund. A takaful operator(company) facilitates this cooperation by providing its expertise in managing the fund. It manages the funds by investing in halaal activities and since all the risk is shared among participants, the surplus that might arise because of the investment is added back to the fund.

It is important to note here that it is investing in halaal activities that always brings with it Allah’s blessing (barakah). A takaful operator(company), however, by adopting a mudharabah, wakalah or other contractual Islamic business models can adequately sustain a fund even in a calamity such as COVID-19.

ا أَيُّهَا الَّذِينَ آمَنُوا لَا تَأْكُلُوا الرِّبَا أَضْعَافًا مُّضَاعَفَةً وَاتَّقُوا اللَّهَ لَعَلَّكُمْ تُفْلِحُونَ

Allah says in Surah Al-Imran verse 130, “….devour not usury, doubling and quadrupling, the sum lent. Fear Allah and observe your duty to Him, that you may really prosper.”

Furthermore, the intention of donation and easing the burden of a fellow Muslim in times of need only brings with it more blessing(barakah) in any situation.

Abu Huraira reported: The Messenger of Allah, peace, and blessings be upon him, said, “Whoever relieves the hardship of a believer in this world, Allah will relieve his hardship on the Day of Resurrection. Whoever helps ease one in difficulty, Allah will make it easy for him in this world and in the Hereafter. Whoever conceals the faults of a Muslim, Allah will conceal his faults in this world and in the Hereafter. Allah helps the servant as long as he helps his brother. Whoever travels a path in search of knowledge, Allah will make easy for him a path to Paradise. People do not gather in the houses of Allah, reciting the book of Allah and studying it together, but that tranquility will descend upon them, mercy will cover them, angels will surround them, and Allah will mention them to those near him. Whoever is slow to good deeds will not be hastened by his lineage.” (Source: Ṣaḥīḥ Muslim)

With the right advisory compliance solutions and retakaful, one can manage risk and inefficient management practices. Unfortunately, because of ineffective marketing strategies, there is a lack of awareness among individuals and a lack of basic health information among the masses. Taking care of all these challenges and an affordable health takaful plan for groups, individuals, and families can create a snowball effect of wellness and serve the masses.

It comes in Surah Ar Raad verse 11,لَهٗ مُعَقِّبٰتٌ مِّنۡۢ بَيۡنِ يَدَيۡهِ وَمِنۡ خَلۡفِهٖ يَحۡفَظُوۡنَهٗ مِنۡ اَمۡرِ اللّٰهِ​ؕ اِنَّ اللّٰهَ لَا يُغَيِّرُ مَا بِقَوۡمٍ حَتّٰى يُغَيِّرُوۡا مَا بِاَنۡفُسِهِمۡ​ؕ وَاِذَاۤ اَرَادَ اللّٰهُ بِقَوۡمٍ سُوۡۤءًا فَلَا مَرَدَّ لَهٗ​ۚ وَمَا لَهُمۡ مِّنۡ دُوۡنِهٖ مِنۡ وَّالٍ

“ …….Verily never will Allah change the condition of a people until they change it themselves…….”

Written by: Sadaf Sawant (MSC in Islamic Finance from INCEIF, Malaysia)

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HOW ISLAM PROMOTES ETHICS AT THE CENTER OF FINANCE & TRADE

The Influencers

Ethical finance/trade implies a socio-economic impact on stakeholders in investment and trade activities. Ethical movement promotes fair trade, distribution of wealth, impartial investment and most importantly corporate social responsibility. More and more financial institutions are trying to incorporate ethical considerations into their strategic decision making as Ethical Financing is growing exponentially due to the changes in consumer behaviour. Factors such as Consumer Protection Law, Trade description Act and other legal constraints are being imposed on financial institutions so that they meet the minimum ethical benchmarks.

Pressure groups have vigorously opposed anti-human policies and debt burdens on developing countries too. People tend not to consider religion (particularly Islam) as a factor influencing ethics in finance. In fact, ethics is the most important factor to be considered during transactions according to Islam because the general objective of “Ethical Financing” and “Distribution of Wealth in Islam” both encompass similar norms of honesty, integrity, impartiality and justice etc.

Outline the Objectives

It is important to be well aware of the concept of wealth in Islam in order to distinguish between capitalism and socialism plus how Quranic interprets fairness, justice, righteousness and social responsibility. This is what ethical finance/trade has been propagating over the past two decades.

According to the Holy Quran, wealth in all possible forms is a property of Allah and He has delegated the right of property over a thing, which accrues to man. The Holy Quran says, “Give to them from the property of Allah which he has bestowed upon you.” [24:33]

The monastic approach of capitalism affirms that a man has an absolute and all unconditional right on private property. On the flip side, socialism totally denies the right to private property. In Islam, there is a clear line which indicates that a man has a right on private property but it is not considered an unconditional and absolute right that is bound to cause “Disorder on Earth”. As the Holy Quran says,

“And Seek the (betterment of the) Ultimate Abode with What Allah has given to you, and do not neglect your share from this world, and do good as Allah did good to you (by granting these properties to use ), and do not seek to make mischief in the land.” [28:77]

Establish the Ethics

In order to minimise injustice, unfairness, chaos among traders (مفضی الی المنازعہ ) and inequality, Islam has outlined certain basic principles of finance and trade as well as imposed restrictions on certain kinds of activities in trade (which often lead to inequality and chaos among traders).

The Core Principles

Gharar: According to the Islamic laws, all parties involved should be completely aware of the transaction they are going to execute and there should not be any ambiguity with regards to any term of the contract or the capacity of any party in relation to the execution of the contract. Hence, selling of goods without proper possession is forbidden by Allah’s Apostle, as mentioned in Sahih Muslim “He who buys food-grain should not sell it until he has taken possession of it.” [Book 10: 3640]. This is why many such transactions involving such risks of ambiguities are not allowed by Islamic laws (Shariah), like a short sale, speculative transactions, futures and forwards, derivatives, sale of debt and options etc.

No investment or slightest involvement in prohibited businesses or activities. The Holy Quran says,

“And, O my people, give full measure and weight justly, and defraud not men of their things, and act not corruptly in the land making mischief. What remains with Allah is better for you, if you are believers.” [11: 85-86]

*Interest-free: Interest or Riba will not be given or taken under any circumstances in the light of Quran and Sunnah.

“Ibn Mas’ud says that the Prophet (PBUH) cursed the consumer of riba and the one who feeds it and the one who witnesses it and the one who documents it.” [Ibn Maja: 2277]. .

This interest was also prohibited in other heavenly religions (Christianity, Judaism) as mentioned in the old testaments of the Bible. The rationale is to protect men from greed, unfair exploitation and concentration of wealth in very few hands.

Gambling and insurance is prohibited in Islam. Allah (SWT) says, “O who you believe! intoxicants (e.g. alcohol) and gambling and idols and (lottery by) arrows are an abomination of Satan’s work, so avoid them so that you may get salvation” [Quran 2:219]

Islam promotes equality, justice and fairness in trade plus advocates the concept of sharing of profit, loss and risk proportionally among all the involved parties. The activities which are impermissible according to Islam (as mentioned above) are also considered as “Immoral Activities” among pioneers of ethical finance/trade. These activities are the main cause of “Disorder on Earth” and “Unequal Distribution of Wealth”.

The Ultimate Benefit

It is then significant to place Islamic ethics at the nucleus of finance/trade. These should be used as parameters by the society to establish an economy based on agreed-upon norms, values and virtues. This would not only produce a moral economic system serving the needs of Muslims but also humanity at large where these fundamental objectives are met.

Written by: Jareer Usmani

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