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Centre for Islamic Economics & Finance, South Africa


In The Name of Allah, The Beneficent, The Merciful

All Praise is due to Allah and may Peace and Salutations be upon the last and final messenger Muhammad Sallallahu Alaihi Wa Sallam.

Over the past few years, a general awareness seems to have been created with regards to the impermissibility of dealing in interest, and therefore dealing with conventional banks. Many people seem to have understood why most of the dealings of conventional Banks are prohibited from a Sharia point of view. People have understood that their transactions are by and large interest based and are thus not acceptable. People have also understood that the transactions of an Islamic Banks are asset backed, and not interest based which is the key factor that makes the profits that they earn acceptable in terms of the Sharia. However, the question as to why conventional insurance is impermissible and as to what the basis for the permissibility of Takaful is, is a question that is still not clear to many. The present short article aims at briefly addressing this question.

It is my hope and prayer that Allah accepts this insignificant effort and makes it a means for people to carry out all their transactions in a manner that will please our Creator, Allah.

At the outset, it should be clearly understood that Islam does not condemn the basic concept of insurance which is to protect oneself from potential loss or in other words to manage one risk (risk management). Infact, Islam has promoted assisting one another in cases of loss. This is a concept has been endorsed by the Sharia at the highest of levels. The Holy Quran promotes mutual assistance and protection of one another. Similarly The Holy Prophet Sallallahu Alaihi Wasallam has endorsed the paying of blood money by the “Aaqila”, a third party, to the family of the injured which serves as a form of compensation for them. There are also other traditions of the Holy Prophet Sallallahu Alaihi Wa Sallam that indicate towards the acceptance of the concept of risk management. One such example is the incident in which Rasulullah Sallallahu Alaihi Wa Sallam restricted Hazrat Sa’ad ibn Abi Waqqas (R.A.) to giving only one third of his wealth to charity saying that leaving your heirs in a wealthy condition is better than leaving them poor and thus compelling them to stretch their hands out before others. This Hadith clearly depicts that the Sharia condones the concept of risk management. Sharia scholars also use this particular Hadith as a hadith that supports the concept of risk management in the case of life insurance. Another tradition that supports the concept of risk management is the Hadith that has been reported in Bukhari which explains that Rasulullah Sallallahu Alaihi Wa Sallam gave his wives the provisions of the entire year to come.

Hence, the concept of protecting oneself from potential loss and the concept of risk management is one that is well within the framework of the Sharia. However, it is the method in which this concept is implemented that would either make the system permissible or impermissible.

Why conventional insurance is not Sharia Compliant

Conventional insurance has certain features that are not consistent with some of the essential values of an Islamic financial contract. Ulama (Shariah Scholars) have highlighted three of these features as being the main reasons for conventional insurance being unacceptable from a Sharia point of view.


Custom or usage have been developed with legal effect since the early primitive era until today. Customs which have been unanimously accepted by the society and became enforceable as unwritten laws. In the primitive society of Babylon, for example, people used to protect against any risk by their own family or tribe. Subsequently, when they migrated from rural to urban life, those people then faced lack of co-operation and protection as a result, eventually they required insurance for material protection. The Babylonian then introduced a kind of commercial contract known as Bottomary, 1 which has been acknowledged as had been being the foundation of today’s insurance practices.

 Table of Comparison

Principles of Contract Affecting Insurance and Takaful



It originated from the ancient Arab tribal custom.

It originated in the ancient Babylon Society in 4000-3000 B.C.

It was developed through Doctrine of al-’aqilah.(العاقلة)

It was first developed through the contract of Bottomry.

The doctrine of al-’aqilah could only be practised by way of mutual understanding or agreement between the tribes.

The Bottomry could only be practised by way of a mutual agreement.

The doctrine of al-’aq began its practices on the basis of mutual contributions.

The Bottomry began its practices with the Usury based transaction.

Sources of law are basically based on the Divine sanctions.

Sources of the law are basically based on human thoughts and cultures.

There is a universalism as far as the chief sources of law are concerned.

In the sources of law there is no universalism in nature.

If there is a conflict between the chief sources and analogical sources or ijtihad, the chief sources will always prevail.

If there is a conflict between the common law and the principles of equity, the equity will prevail.

If there is a conflict between the custom (العرف)and chief sources of law, the chief sources will prevail.

If there is a conflict between the custom and other sources of law, the custom will prevail.


The contract is a bilateral in nature which binds both contracting parties on the basis of Surah al-Madiha: 1.

The contract is a unilateral which binds the insurer only.

It is a co-operative institution based on the principles of contract and also mutual co-operation (التعاون).

It is a business institutions operated based on the principles of contract.

It opposes the riba while proposes an alternative doctrine called al-mudarabah(المضاربة) (profit and loss sharing) financing technique.

It involves the element of riba(الربا) (interest) in its transaction.

Practices of Contract Affecting TAKAFUL AND Insurance - Compared

Formalities in Takaful Contract

The basic formalities in a commercial contract(العقد) (al-‘aqad) is that, there must be a subject matter( المعقود عليه ) (al-ma’qud ’alaih) upon which the intended parties called al-Muta’aqidayn (المعقود عليه)(contracting parties) mutually agree2 by an offer (الإيجاب)(ijab) and an acceptance (القبول)(qabul) for an exchange of a valuable consideration(العوض المتقوَم) (al-‘Iwad al-Mutaqawwim) upon which parties are bound to perform the contract according to the terms and condition(الشروط) (shurut) agreed upon. The Majalle provides that, the basic formalities required in a contract are that, two parties undertake upon themselves to do something upon an offer (Ijab) and an acceptance (qabul).3 Dr. Hussain Hamid Hassan opines that, as regard to the formalities of a contract under Islamic law, there is a legal relationship created by a promise of one of the contracting parties (offeror) with the promise of the other (offeree) as the result of which follow consequences in respect of the subject matter of the bargain.4

 A takaful policy is a kind of financial transaction which is formed based on the general principles of contract. Since a takaful is a kind of contract, the formalities for the formation of a valid policy are based on the formalities required in other form of commercial contracts. The formalities before the conclusion of a policy required by the takaful companies of the contemporary world are based on general principles of contract (al-‘aqd). Under Islamic Law to form a takaful policy, there must be a subject matter at risk, upon which (subject matter) two parties (operator and participant) mutually agree by a proposal (ijab) and an acceptance (qabul)5 in which both parties undertake to share the responsibility to provide a reasonable material security against unexpected but defined risk on the subject matter. In other words, the formalities in a takaful policy are the proposal (ijab), acceptance (qabul), issuance of a cover note (a temporary document for a policy provided by the operator to the participant) and payment of takaful contribution(المساهمة) (al-musamahah) which are further analysed as follows:

 Proposal (الإيجاب)(Ijab)

RESOLUTION No. (50/1/6)


Compiled By:
Prof. Dr. Mohd. Ma’sum Billah
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Quote-The Council of the Islamic Fiqh Academy, holding its sixth session  held in Jeddah, Kingdom of Saudi Arabia, from 17 to 23 Sha'ban, 1410 H (14 to 20 March 1990);

Having studied the papers presented to the Academy on the subject of "Real  Estate Financing", and having listened to the discussion that took place on the subject;


First:  House is a basic human need. This need should be fulfilled through  legitimate means by lawful (halal) money. The method of advancing loans on  interest adopted by the real estate and housing banks or other financial institutions is prohibited under Shari'a, no matter how high or low the
interest rates may be, because this method is based on Riba (usury) transaction.

Second:There are several lawful ways which can substitute the unlawful (haram) ones for providing houses on the basis of ownership (in addition to
providing them on rental basis). For example;

a)The State can offer loans meant especially for the construction or purchase of houses and repayable in suitable installments without charging
any interest, neither in express terms nor under the name of service charges. However, if the need arises to meet the expenses incurred in the
operations of such loans and in their follow-up, the same can be claimed from the debtors with the condition that the claim must be restricted to
the real and actual expenses in the manner specified in para (a) of Resolution (13/1-3) adopted in the third session of the Council of this
b)The capable State can undertake a project of construction of houses to sell them to those who wish to acquire ownership. This sale may be on  the basis of deferred prices to be paid in installments in accordance with the rules of Shari'a explained in Resolution (51/2/6) of this session.
c)The investor, whether individuals or companies, can undertake the construction of houses which can be sold on deferred payment basis.
d)The house can also be acquired through the contract of "Istisna" on the basis of its being binding on the parties. In this contract, the purchase
of a house can be completed before it is built, provided that the specifications of the house are minutely enumerated in the contract, not
leaving any vagueness which can lead to disputes. In this case payment of price in cash in full is not necessary, rather, it is permissible to defer
the payment of price to such installments as may be agreed upon, keeping in view all the conditions prescribed for the "Istisna" according to the
jurists who distinguish it from the contract of "Salam".

to undertake further studies for bringing out other lawful modes which can facilitate acquiring houses for those who need them.

Verily, Allah is All-Knowing. Unquote (Source: "Resolution and Recommendations of the Council of the Islamic Fiqh Academy (1985-2000)” , IRTI.)



Compiled By:
Prof. Dr. Mohd. Ma’sum Billah
This email address is being protected from spambots. You need JavaScript enabled to view it.
This email address is being protected from spambots. You need JavaScript enabled to view it.

Quote - The Council of the Islamic Fiqh Academy, holding its sixth session held in Jeddah, Kingdom of Saudi Arabia, from 17 to 23 Sha'ban, 1410 H (Corresponding to 14 - 20 March 1990);

Having studied the papers presented to the Academy on the subject of "Sales on installments", and having listened to the discussion that took place on the subject;


First:  It is permissible to fix an increased price for a commodity sold on deferred payment, as compared to its cash price. It is also permissible to mention different prices for cash and deferred sales. Even the deferred prices can vary according to the different periods specified for payment, and such variance can be expressly disclosed by the seller to the customer.

But the sale cannot take place until the parties agree to contract a particular mode of payment and specify whether the payment is in cash or deferred. Therefore, if the sale takes place without specifying a single particular mode of payment, leaving it uncertain whether the buyer shall pay in cash or in installments, the sale is not valid according to Sharia'h Second:It is not permissible, in installments sale, to fix the spot price on cash basis, then to charge interest expressly tied with different periods, as separate from the price of the commodity, no matter whether the parties have agreed on a particular rate of interest or have left it to the current market rate.
Third If the buyer/debtor delays the payment of installments after the specified date, it is not permissible to charge any amount in addition to his principal liability, whether it is made a pre-condition in the contract or it is claimed without a previous agreement, because it is ''Riba'', hence prohibited in Shari'a.
Fourth:It is prohibited (Haram) for a solvent debtor to delay the payment of the insallments from their due dates. However, it is not permissible in Shari'a to impose a compensation in case he delays the payment.
Fifth:It is permissible for the seller to impose a condition in the sale agreement that if the debtor/the buyer delays the payment of some installments, all the remaining insallments shall be due at once before their agreed date. This condition may be a valid condition, provided that the buyer had agreed to it when entering into the sale agreement.
Sixth:The seller has no right to secure the ownership (of the sold commodity) after the sale has taken place. However, it is permissible for him to impose a condition that the buyer shall mortgage the sold commodity with the seller to secure his right of receiving the deferred installments of the price.


   to carry out further study in some issues relating to the " Sale on installments" so that it may be possible to find out an absolute ruling about them after preparing sufficient research material on them.

         Among these issues are the following:
a)      Discounting the Bills of Exchange through banks
b)      Payment of debt before its due date against a rebate i.e. the issue of "Da'wata ajjal".
c)      The effect of the death (of one of the parties) on the remaining

Verily, Allah is All-Knowing

(Source: "Resolution and Recommendations of the Council of the Islamic Fiqh Academy (1985-2000)” , IRTI.)


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