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Arabic terminology and language of contract. Theoretically, takaful is perceived as cooperative or mutual insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits, but to uphold the principle of “bear ye one another’s burden”.
Policyholders cooperate among themselves for their common good. Every policyholder pays his subscription to help those who need assistance. Losses are divided and liabilities spread according to the community pooling system.
Uncertainty is eliminated concerning subscription and compensation. It does not derive advantage at the cost of others. Muslims scholar have “hardly any difference of opinion” on “the need for managing, redeeming and mitigating general, business and life risks covered by the insurance business.
The commercial insurance contract, with a fixed insurance premium, as practiced by commercial insurance companies, contains substantial gharar, which renders the contract defective. Consequently, it is legally forbidden. Islamic scholars began forbidding commercial insurance as early as the late nineteenth century C. The uncertainty “if and when the insured event will take place and, if it does take place, what would be the relationship of compensation to the insurance premium paid.
What if the holder of collision insurance policy never has a motor vehicle accident? Regarding life insurance, everyone dies, but what if the death occurs after the first payment of a premium for life insurance? This “makes the insurance business similar to gambling, where the gambler does not know the fate of the game.
Thus, uncertainty in the conventional insurance business “is excessive and borders on prohibited gharar. Insurance companies invest surplus funds on the basis of interest and pay out a part of such earnings to policyholders as bonuses”.
According to the “orthodox interpretation”, this is riba. A minority of Islamic scholars argue that Insurance is not like gambling because in gambling, no risk is covered and no damage is mitigated.
The gamblers play a game of chance for entertainment and profit in which they can win or lose, based on a conscious decision. Insurance provides coverage for events out of the insured policy holder’s control. When the policy holder collects a payout, they are not a winner, but a loser who at least has some compensation.