Insurance Regulation

Classically, scholars categorized contracts as being from one of three types.

  1. Commutative exchange (Mu’awaDat معاوضات) – Involving the voluntary exchange of good, services, and/or both for the purpose of trade. Includes: cash sales, bartering, and currency exchange.
  2. Charitable exchange (Tabaru’at تبرعات) – Involving the voluntary not-for-profit exchange of good, services, and/or both out of the goodwill of the giver. Includes: monetary loans, material loans, gifts, and will & testament etc.
  3. Contracts of record/certification (Tawthiqat توثيقات) – The recording of a right or claim of one party against another. Includes: Liens, pawn certificates, debt records, Kafala, etc

When the question of insurance presented itself to the Muslim world, scholars generally took the position that commercial insurance was prohibited. They based this on the perceived obscurity (Gharar) and gambling (muqamarah) involved in the transaction. A small minority differed with this verdict, permitting all forms of insurance; this opinion however was built more on the permissibility of invalid contracts in certain circumstances rather than a full-fledged theory of insurance. Almost alone in his permitting commercial insurance was Mustafa al-Zarka, a premier Hanafi jurist of the last decade.

On the other hand, most allowed mutual insurance. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. A mutual company is, in the simplest terms, where all parties are members of an insurance ‘guild’ contributing to the ‘pot’. These contributions are charitable in nature and are seen as the the collective right of the guild, in which everyone agrees that if one member is faced with adversity or some loss that the money collected will be used to offset that loss.

Now for the problem

When scholars speak on the permissibility of insurance, they usually do so from the viewpoint of the insured. Hardly ever do you hear of criticism of the insurance industry as a whole, and the pricing schemes involved. We are told that commercial insurance is Haram, and that we should all go out and get mutual insurance.

This one-sided solution to the problem of insurance, if not obligated by the authorities, leaves many people high and dry with regards to protecting their personal and business interests.

As a quick side note, in classical Islamic legal discussions, compensation for losses accrued by an individual or a group of investors through natural disasters and unforeseen events beyond their control were usually compensated for by the institution known as “Bayt al Mal” or the state treasury, if not they were taken up by the persons tribal allegiances. The state had the responsibility to ensure the livelihood of its citizens, in that it is the authority which collects zakat, taxes, spoils of war, and is entrusted with the natural resources of the state and the revenue received from them.

Back to the issue of contracts, when we look at insurance practices, and if in fact insurance of any type was a commutative exchange, then if canceled or renewed there should be the option to receive back that money that was ‘contributed’ to the deal. As far as I know, you can not do this with most insurance packages. In this case, you are essentially giving away a portion of you wealth in hopes to receive compensation in the face of future losses without expecting the principle contribution back; exactly what is claimed in the case of Mutual insurance.

If this is the case, there would seem to be no difference between commercial and mutual insurance; in both you will end up receiving the same compensation and in both you will pay a similar amount. What does seem to be of consequence is the use of that money by the insurance company, their ability to cancel the policies of their clients, and their secondary investment of that money for their own profit.

The permissibility of insurance (or lack thereof) would seem to lie in regulation of the industry itself, not in the character of the end-user agreement.

Here’s an example that should bring it a little closer to home:

In silent partnerships (Mudaraba), partners are to share equally in the profit and loss of the partnership. If say, the silent partner specifies for himself some form of profit to the exclusion of the other (who here is performing the ‘work’ involved), then scholars held two opinions as to how the profits should be distributed in the face of this invalid condition (calling this MuDarabah Fasidah مضاربة فاسدة). Some said that this partner should be given salary commensurate to his work. Others said that he should receive the profit commensurate to that which a partner similar to him would receive. The point here is that the working party receives compensation for that which he entered the contract for initially, whether it be profit or salary.

If we were to characterize insurance contracts as a form of silent partnership, or at least hold them in the same light, then the contract is invalidated from one side only, not both. The main issue we should be concerned with then is regulation, and not one pertaining to the permissibility of the end-user entering into such as agreement.

In this case,  it shouldn’t matter to the end-user as to what type of insurance he buys, to what extent he insures his property, and to what extent he receives compensation for his losses. In the end of the day it is all the same, he will receive compensation commensurate to his losses; but will the Insurer receive compensation commesurate  to his effort? I suspect that in both commercial and Takaful structures some form of price gouging happens.

Just as the state should guarantee fair business practice and fair compensation, it should regulate the insurance industry accordingly.

Current Accounts… Current thoughts… on Islamic Banks

Current accounts in most Islamic banks have been conceptualized as loans, ergo it is impermissible – in the view of most modern jurists- to pay or charge an interest rate on the account. While most conventional banks do not provide any sort of interest payment unless a initial minimum deposit is made, most still provide free services for account holders, such as free checkbooks, with many offering discounted or free no-frills services to students and the elderly.

One of the main criticisms of Islamic banking has been the fact that instead of it meeting the needs of the lowest common denominator, it has largely served to enrich corporate interests and line the pockets of multi-national banks with “Islamic” windows.

Far be it from me to say seeking wealth is impermissible, but further inquiry into this issue is past due. It becomes particularly scandalizing to see an industry prided with claims of ethical behavior and divine preeminence used as an instrument of enrichment while neglecting the larger ethical principles involved in justifying the industry as a whole.

Discussing these larger ethical guidelines that Islamic law strives to ensure, Ibn ashour says:

As I mentioned in the previous chapter, the most important objective here is preservation and economization of this nation’s wealth. This nation’s wealth, whence viewed as a whole, is preserved through regulating the manners by which it is managed generally, in addition to the manners in which individual wealth is preserved and managed. Preservation of the whole depends on preservation of its components; the majority of Islamic legal principles dealing with wealth relate directly to the preservation of individual wealth, which in turn preserves the wealth of the nation; there being a direct correlation between the benefit of personal wealth and the benefit of public wealth in relation to the prosperity of the nation.

Key here to this discussion is his mention the “Preservation of the whole depends on preservation of its components“. While this may be true, it is evermore problematic to preserve components that serve the exact opposite of the whole they claim to maintain.

Back to current accounts. Considering current accounts to be loans, means account holders can neither receive nor ever expect to receive any return on their deposits, regardless of the amount. Fine. But when you take into account (no pun intended) the fact that most Islamic banks do not offer investment accounts for retail clients (at least for clients that have less than 10k US in their possession) the dilemma remains. Add to this that Islamic banks charge fees for accounts that do not maintain a minimum monthly balance, and your wealth will probably earn more under mattress than in a current account. To say the least you won’t earn enough to at least pay zakat with at the end of the year.

What to do? Either create an Islamically “viable” solution to offering a return on deposits, make the deposit holder a shareholder in the bank (much like a credit union), or uphold the status quo and support the current framework.

This is the premise of a paper I am working on, part of a larger research interest. The standing system has been veraciously defended (something to be fed up to the back teeth about), and arguments for mutuality have been made. Granted mutuality has not been researched in the relentless fashion that the current system has, I doubt that Islamic banks (and those that support them) will move anytime soon to converting to Credit Unions.

A more equitable solution is in line that would satisfy the needs of all parties involved, the larger ethical objectives of Islamic law, and the pre-modern legal precedents that are the mainstay of Islamic Financial product creation.

A tall order indeed!