Thursday, March 27, 2008

Gharar, Maisir & Riba To Be Avoided!

These three - Gharar, Maisir and Riba must be totally avoided by the Takaful operation. These are the areas where Takaful Insurance differs from the Conventional Insurance.

GHARAR (Uncertainty or Speculation) :

Uncertainty is a fact of human life - mankind faces uncertainties in every aspect of personal, social and business lives. Risks are always present in whatever we are doing and Islam does not ignore this fact neither does it prohibit people from facing the risks and uncertainties that life presents.

In order to avoid Gharar in Takaful:

1. There must be a complete clarity or full disclosure in any Takaful contract.

2. Full disclosure is applicable on both sides, i.e on both the subject matter and terms of the contract (scope of cover, etc). It is not allowed to enter into a takaful contract if there is any unknown element on the subject matter and/or unknown exposure to the extent of the contract itself.

3. The Takaful contract must be made in a way that there is no exchange of Gharar from one party to another.

MAISIR (Gambling) :

Maisir is regarded as the excessive side of Gharar. Where there is a serious Gharar (uncertainty) in a contract – then Maisir (Gambling or Speculation) will naturally exists. Gambling is against the basic principles of justice, equity, fairness, ethics and morality, which are obligatory values within Islam.

Although in theory, conventional insurance is also meant to exclude any form of gambling in the sales contract, in practice there is always a very thin line involved.

Insurable interest, utmost good faith (uberimae fidae) and indemnity doctrines within conventional insurance are not enough to eliminate a speculative (gambling) attitude from either side of the insured and insurer in some contracts – unless an in depth proper knowledge is present with the underwriter(s).

Therefore, whilst the participants (the insureds) may have an insurable interest ( in the subject matter but if the risk transfer (risk sharing in Takaful) contains any speculative element, then it is prohibited under Takaful.

RIBA (Usury or Taking and Charging Interests) :
Riba is totally prohibited under the Shariah Law and under a Takaful arrangement. According to some, this refers to excessive or exploitative charging of interest, though according to others, it refers to the concept of interest itself.

Therefore, to avoid Riba, Takaful treats participants’ contributions to the risk sharing scheme not as a premium in the way a conventional insurance does but as a
contribution (Mushahamah) in the form of donation with a condition of compensation (Tabarru').

The pool of funds secured from the participants’ contributions or donations, must be managed and invested in accordance with the Shariah Law.

In the same way that Gharar and Maisir represent a continuous challenge for Takaful operators to ensure that pure Takaful arrangements are free of them, Riba free Fund Management too is becoming a specialist discipline which requires more in depth elaboration.

Whilst risk taking is a natural habit, it is therefore, difficult to eliminate this trait from human nature. What is not allowed in Islam however, is not the risk of uncertainty itself (which needs to be eliminated) - but selling or exchange of risk or risk transfer to a third party using sales or exchange contract, that is not allowed. On the other hand, helping each other especially in the event of misfortune, is highly encouraged in Islam.

As mentioned by Allah in the Quran:

“….Help ye one another in Al Birr and At Taqwa (virtue, righteousness and piety) but do not help one another in sin and transgression….’ - (Al-Maidah : 2).

Sharing the risk with the purpose of helping one another is therefore highly encouraged in Islam.