Against My Religion
What if the concept of insurance were
against your religion? Muslims—followers of
Islam—do not believe in insurance, and they make up 28%
of the world’s population.
While living in Dubai, a friend of mine took out a $30,000
loan, interest free. My first reaction was “Wow, what a
great deal!” Being the Westerner that I am, my second
thought was “How does the lender make a profit?”
After all, isn’t profit the engine of capitalism and
It certainly is in the West and in many other parts of the
world, but in Islamic countries interest, or riba, is prohibited. In Islamic cultures
money has no intrinsic value and is intended to be used for
exchange only. Those with money are not allowed to benefit or
suffer from having it. To profit, the product or service
offered has to be definable.
Of course, banks do make money, but Islamic finance,
including insurance, must comply with core Islamic principles.
Islamic law also dictates that financial products avoid
uncertainty/deception (al-gharar) and gambling (al-maisir)—concepts that some think
apply to insurance.
These ideas piqued my interest, so I turned to my favorite
source of information, Wikipedia, to learn more about the
underlying principles that govern how insurance operates in the
According to the “Wik,” Islamic or takaful insurance is deeply rooted in
Islamic law. The concept has been practiced for more than 1,400
years and comes from the Arabic word kafalah, which means “guaranteeing
each other” or “joint guarantee.” In other
words, the takaful precept is based on a system of mutual
cooperation and responsibility among participants.
To take it another step back in history, these principles
are derived from the words of the Islamic prophet Muhammad. Not
unlike Judeo-Christian teachings, Muhammad preached the virtues
of helping your neighbor, responsibility for others and mutual
protection of the community over the individual. But profiting
at the expensive of another is strictly taboo.
Traditional insurance is not allowed in Muslim communities
because it is thought to violate these principles. As a result,
the insurance market has been underserved for years in Islamic
cultures, exposing its people and businesses to considerable
Fortunately, using the takaful concept of mutuality and
avoiding the three “no’s”—interest,
uncertainty and gambling—business models for insurance
that comply with Islamic law have been created.
Takaful insurance is somewhat like a mutual insurance
company. Members pool resources to protect against risk and
share in any profit. The idea is that when the risk is spread
among a large number of people, it is no longer
“uncertain” for the individual.
The basic rules of takaful are:
- Policyholders cooperate for their common good;
- Every policyholder pays a subscription to help those who
- Losses are divided and liabilities spread according to
the community pooling system;
- Uncertainty is eliminated in respect of subscription and
- It does not benefit at a cost to others.
There are two basic takaful business models: mudharabah and al-wakala.
Mudharabah Model (profit
sharing). Shareholders and fund participants pay a takaful
installment or “donation” (premium) to the takaful
operator. The premium is considered a contribution or a
donation that will assist fellow members who suffer a loss.
This approach takes the problem of al-gharar (uncertainty) out
of the equation. After claims are handled, any surplus is
distributed among the participants, shareholders and the
operator. The mudharabah model is widely used across Asia but
is banned in many Arabian Gulf states.