FORBIDDEN ELEMENTS OF BUSINESS CONTRACT IN ISLAM

Islam intends to form solid social order of society, where every individual is bound by brotherhood and affection as one universal family which is not limited by geographical boundary .
يأَيُّهَا النَّاسُ إِنَّا خَلَقْنكُمْ مِنْ ذَكَرٍ وَأُنْثَى وَجَعَلْنكُمْ شُعُوْبًا وَقَبَائِلَ لِتَعَارَفُوْا
"O mankind! We have created you from a male and a female, and made you into nations and tribes, that you may know one another".
To realize and preserve this social order of society, Islam prohibits all kinds of deceit and fraud in every activities of mu'amalah, because they can harm the social order of society what Islam yearn for . Islam explains, verily, all kinds of trades with deceit and fraud inside by doing prevarication will never get God's blessing. The holy Prophet -peace be upon him- said:
البَيِّعَانِ بِالْخِيَارِ مَالَمْ يَتَفَرَّقَا فَإِنْ صَدُقَ البَيِّعَانِ وَبَيَّنَا بُوْرِكَ لَهُمَا فِي بَيْعِهِمَا وَإِنْ كَذَبَا وَكَتَمَا فَعَسَى أَنْ يَرْبَحَا رِبْحًا مَا وَتُمْحَقُ بَرَكَةُ بَيْعَتِهِمَا
On such occasions, it is necessary to research those forbidden elements in order to form the insurance which conform to Islamic law.
1. Riba
The Arabic word riba literally means increase in or addition to (ziyadah), which is payment addition on financial principal of loan . Al-Jurjani formulated the usury definition as below:
الرِّبَا فِي الشَّرْعِ هُوَ فَضْلٌ خَالٍ عَنْ عِوَضٍ شُرِطَ لأَحَدِ العَاقِدَيْنِ
Terminologically, riba is excess free from payment devoid of recompense required to the hold one of parties.
Rahman, after studying various forms of business and credit transaction, containing the element of riba which were in vogue in Arabia during the time of the Holy Messenger -peace be upon him-, defined the riba as a predetermined excess or surplus over and above the loan capital received by the creditor conditionally in relation to a specified period. It contains the following three elements:
a) Excess or surplus over and above the loan capital.
b) Determination of this surplus in relation to time.
c) Bargain to be conditional on payment of a predetermined surplus to the creditor .
Clearly, Allah prohibited the usury in any types. This prohibition is based on qur'anic verses:
الَّذِيْنَ يَأْكُلُوْنَ الرِّبَوا لاَ يَقُوْمُوْنَ إِلاَّ كَمَا يَقُوْمُ الَّذِيْ يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ذلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا البَيْعُ مِثْلُ الرِّبَوا وَأَحَلَّ اللهُ البَيْعَ وَحَرَّمَ الرِّبَوا
“But those who devour interest cannot stand except like the one whom Satan was bewitched and maddened by his touch. They have been condemned to this condition because they say, Trade is just like interest, whereas Allah has permitted trade and forbidden interest”.
يَأَيُّهَا الَّذِيْنَ أمَنُوا اتَّقُوا اللهَ وَذَرُوْا مَا بَقِيَ مِنَ الرِّبَوا إِنْ كُنْتُمْ مُؤْمِنِيْنَ
“O Believers, fear Allah and give up what is still due to you from interest, if you are true believers”.
Muslim jurists never stop discussing the interest limitation. They agree in prohibiting the riba, but differ in determining the savings interest. Dr. Muhammad Hatta differentiates between riba and savings interest. In his opinion, riba merely occurs in the consumptive loan with the high return addition. And the savings interest occurs in the productive loan with the low return addition, which as the yield of capital .
Yet practically, it is difficult to differentiate between riba and savings interest, because actually they are equal in complicating the loaner .
Dr. Yusuf Al-Qardhawi argued strictly the permitting of productive riba. He maintained his argument with the historical fact proofed that the dominant riba in the pre-Islamic epoch was not consumptive riba. If there was so, the case was rare and could not be the measuring rod of this permitting. However, the riba which commonly used to be done in trade expedition in that era was productive riba .
If the sort of forbidden riba was merely consumptive, Prophet Muhammad -peace be upon him- would not curse the manager of riba as much as he cursed the eater. However he cursed those eater, manager, writer and witness of riba as mentioned in his saying:
عَنْ جَابِرٍ قَالَ لَعَنَ رَسُوْلُ اللهِ صَلَّى اللهُ عَلَيْهِ وَسَلَّمَ آكِلَ الرِّبَا وَمُؤْكِلَهُ وَكَاتِبَهُ وَشَاهِدَيْهِ وَقَالَ هُمْ سَوَاءٌ
From Jabir, he said that Messenger of Allah -peace be upon him- cursed those eater, manager, writer and two witnesses of riba, and he -peace be upon him- said: “they are equal”

Also, Qardhawi opposed the legalization of riba because of its small percentage. . Thus, no differences in law status between riba and savings interest, both are unallowable.
2. Maisir
The Arabic word maisir literally means an ancient Arabian game of change (forbidden by the Koran) played with arrows without heads and feathering, for stakes of slaughtered and quartered camels . Rahman defined maisir as getting something too easily without hard labour, or receiving a profit without working for it; therefore it is called gambling .
The Arabic word “azlam” used in the Qur’an also refers to the practice of gambling. Maisir on other hand applies to all this forms by which wealth is acquired or divided by devices of chance, for example, lottery, betting, wagering or gambling.
Thus gambling in general (maisir) and raffling in particular way (azlam) and all forms of betting, raffling or lottery which, on principle, come under gambling forms are prohibited in Islam . Islam prohibited all forms of business in which monetary gain comes from mere chance speculation and conjecture and not from work. This prohibition is clearly mentioned in Holy Qur’an:
يَأَيُّهَا الَّذِيْنَ أمَنُوْا إِنَّمَا الْخَمْرُ وَالْمَيْسِرُ وَالأَنْصَابُ وَالأَزْلاَم ُرِجْسٌ مِنْ عَمَلِ الشَّيْطانِ فَاجْتَنِبُوْهُ لَعَلَّكُمْ تُفْلِحُوْنَ
“O yee believers! Wine and gambling and divining stones and arrows are an abomination of Satan’s handiwork. Leave it aside in order that you may prosper”.
وَأَنْ تَسْتَقْسِمُوا بِالأَزْلاَمِ ذلِكَ فِسْقٌ
“(Forbidden) also is the division (of meat) by raffling with arrows, that is impiety”.
Prophet Muhammad -peace be upon him- had prohibited many business practices including maisir. Those practices are:
a. Habal-al-Habla
It is narrated by Abdullah bin Omar the Holy Messenger -peace be upon him- forbade the sale called Habal-al-Habla which was a kind of sale practiced in the pre-Islamic days of ignorance period. In this sale one would pay the price of a she-camel which was not born yet but would be borne by the immediate offspring of an expectant she-camel.
عَنْ عَبْدِاللَّهِ بْنِ عُمَرَ رَضِي اللَّه عَنْهمَا أَنَّ رَسُولَ اللَّهِ صَلَّى اللَّه عَلَيْهِ وَسَلَّمَ نَهَى عَنْ بَيْعِ حَبَلِ الْحَبَلَةِ وَكَانَ بَيْعًا يَتَبَايَعُهُ أَهْلُ الْجَاهِلِيَّةِ كَانَ الرَّجُلُ يَبْتَاعُ الْجَزُورَ إِلَى أَنْ تُنْتَجَ النَّاقَةُ ثُمَّ تُنْتَجُ الَّتِي فِي بَطْنِهَا
“From Abdullah bin Omar -may Allah be pleased with both-, verily Holy Messenger -peace be upon him- forbade the sale called Habal-al-Habla which was a kind of sale practiced in the pre-Islamic days of ignorance period. In this sale one would pay the price of a she-camel which was not born yet but would be borne by the immediate offspring of an expectant she-camel”.
b. Muzabanah and Muhaqalah
Muzabanah was the exchange of fresh fruit for dry ones in a way that the quantity of dry fruit was actually measured and fixed, but the quantity of fresh fruit given in exchange was guessed while still on the trees. Likewise muhaqalah was the sale of wheat in exchange for wheat in ear which was estimated by conjecture while still in ears . It is reported by Ibnu Abbas that God’s Messenger -peace be upon him- forbade the transactions of muhaqalah and muzabanah:
عَنِ الشَّيْبَانِيِّ عَنْ عِكْرِمَةَ عَنِ ابْنِ عَبَّاسٍ رَضِي اللَّه عَنْهم قَالَ نَهَى النَّبِيُّ صَلَّى اللَّه عَلَيْهِ وَسَلَّمَ عَنِ الْمُحَاقَلَةِ وَالْمُزَابَنَةِ
“From Syaibany, from ‘Ikrimah and from Ibnu Abbas -may Allah be pleased with them- said that Holy Prophet -peace be upon him- forbade the transactions of muhaqalah and muzabanah”

c. Mukhabarah
Mukhabarah refers to the sale of fruit or grain or vegetables before ripening . It was forbidden by the Holy Prophet -peace be upon him- in order to protect the interest of buyer during the period of purchase before ripening when many kinds of diseases, storms, could destroy the fruit or corn crops and ruin the buyer.
عَنْ عَطَاءٍ سَمِعَ جَابِرَ بْنَ عَبْدِاللَّهِ رَضِي اللَّه عَنْهم نَهَى النَّبِيُّ صَلَّى اللَّه عَلَيْهِ وَسَلَّمَ عَنِ الْمُخَابَرَةِ وَالْمُحَاقَلَةِ وَعَنِ الْمُزَابَنَةِ وَعَنْ بَيْعِ الثَّمَرِ حَتَّى يَبْدُوَ صَلَاحُهَا…
“From ‘Athaa’, he listened Jabir bin Abdillah -may Allah be pleased with them- said that Prophet -peace be upon him- forbade mukhabarah, muhaqalah, muzabanah and sale of fruit before ripening”.

d. Mulamasah and Munabadzah
Mulamasah is a sale in which the deal is completed if the buyer touches a thing without seeing or checking it properly. And Munabadzah is a sale in which the deal is completed when the seller throws a thing towards the buyer giving him no opportunity to see, touch or check it. Abu Saeed said that the Holy Prophet -peace be upon him- forbade them in Hadith:
عَنِ ابْنِ شِهَابٍ قَالَ أَنَّ رَسُولَ اللَّهِ صَلَّى اللَّه عَلَيْهِ وَسَلَّمَ نَهَى عَنِ الْمُنَابَذَةِ وَهِيَ طَرْحُ الرَّجُلِ ثَوْبَهُ بِالْبَيْعِ إِلَى الرَّجُلِ قَبْلَ أَنْ يُقَلِّبَهُ أَوْ يَنْظُرَ إِلَيْهِ وَنَهَى عَنِ الْمُلَامَسَةِ وَالْمُلَامَسَةُ لَمْسُ الثَّوْبِ لَا يَنْظُرُ إِلَيْهِ


“From ibni Syihab, he said that God’s Messenger -peace be upon him- forbade munabadzah, it is a sale in which the deal is completed when the seller throws or puts a garment on the buyer giving him no opportunity to overturn and see it. And also forbade mulamasah, it is the sale of thing with touching without seeing it”.

Both these forms of sale are gambling. Two persons may agree to exchange one thing for another without seeing or checking either of them. The whole transaction in both forms of sale is based on sheer change or conjecture.
3. Gharar
The Arabic word gharar literally means risk, hazard, jeopardy, danger and peril . Etimologically, there are many definitions of gharar; Scholars of Maliky defined gharar as unknown event which may happen or not and may be gotten or missed. Scholars of the Shafiite persuasion defined gharar as unknown consequences of everything and more frightening peril . According to Imam Ibn Taymiya gharar is involved when one does not know what is in store for one at the end of business venture or bargain . More clearly, Ibn Qoyyim defined gharar as measureless supply in the existence or non-existence of the goods, such as selling the fled slave and wild camel.
Based on many foregoing definitions, Rahman divided the concept of gharar into two groups:
a) The element of peril or risk involving doubt, probability, and uncertainty is dominant.
b) The element of doubt due to the deceit or fraud on the part of one of the parties in paramount .
The Holy Qur'an has explicitly forbidden all business transactions including injustice in any form to any of the parties; it may be in the form of deceit or fraud, or undue advantage or peril leading to uncertainty in the business or any dealings. And in the business contract, Islam enjoined the clear and certain element with doing full measure and full balance in trading. Allah Almighty said:
وَأَوْفُوا الكَيْلَ وَالْمِيْزَانَ بِالقِسْطِ لاَ نُكَلِّفُ نَفْسًا إِلاَّ وُسْعَهَا
"He has enjoined that you should use full measure and a full balance. We charge you only with that much responsibility that you can bear".
Prophet Muhammad -peace be upon him- had prohibited many business practices including injustice and gharar in his Hadith, whether gharar owing to doubt and probability or gharar due to fraud and deceit. Those practices are :
e. The sale of fish in the water that is not yet caught.
f. The sale of bird in the air, because in the one case it is free and not property.
g. The sale of a fetus in the womb, because it may be born deathly.
h. The sale of catches that still in the trap, because the game-catcher may or may not catch any thing at all.
i. The sale of milk in the udder, because there is the possibility of fraud. The udder may be void of milk, and full of wind, or other might be implicated in the sale something not properly
4. Jahala
Jahala signifies an unspecified element in the quality, quantity or price of a thing. It seems something unknown or not known, leading to uncertainty in the outcome .
Any sale contract or business transaction that contains an element jahala is unlawful. For example, when one of the parties to a contract says to the other, “I sell you one of my sheep for Rp. 300.000,- “this is likely to lead the argument and dispute from the very beginning because the specification of the sheep is vague and not known. The buyer would naturally ask for the best sheep in the flock, whereas the seller would like to give the worst.
The sale is invalid if any quantity or quantity of a commodity can only be judged by conjecture. It is therefore unlawful to sell dates growing on tree in exchange for dates which have been picked, are computed from conjecture to be equal in amount to those that are no the tree as explained under the section of gambling .
In short, any type of transaction which leads to uncertainty with regard to the price to be paid, or the quantity or quality of the object of the sale or the time of payment and the completion of the sale contract, is invalid.
The Holy Messenger -peace be upon him- required to specify the terms and conditions and the time of payment in every transactions. The purpose of this instruction is to make them fair and eliminate the element of uncertainty from them as far as possible. It is narrated by Ibn Abbas that when the Holy Prophet -peace be upon him- came to Medina, the people were paying one, two or three years in advance for dates, so he said to the, “Whosoever pays in advance the price of a thing to be delivered later should pay for a specified measure and weight with a specified period” .

The Operational Practice of Conventional Insurance.

Normally, the insurance company is operated as well as other companies. However, because the transaction of insurance needs special functions in its operational practice, so in this field there are some functions specified for the insurance company only.
Although there are some different functions between life insurance and lost insurance, but the main operational practice of all kinds of insurance company is divided as below :
a. Underwriting
Underwriting is classifying the risks that will be assured. It is the essential element in the operational practice of insurance company, because the underwriting can maximize the profits through risks distribution.
The main duty of the underwriter in the risks classification is to ensure no risks can cause great difficulties for the company in next days. For this reason the underwriter must develop sharp consideration through understanding the hazards.
To execute the underwriting process effectively, the underwriter must collect the information as much as possible about the insurance subjects and the cost to get additional data. The underwriter may approve new costumer as long as he complies all underwriting requirements determined by the company. But if he does not so and the hazard risks are too big, the underwriter may reject him.
There are five essential information resources related to the risks, they are:
1) New costumer’s statement embodied in the questionnaire,
2) Information from the insurance broker,
3) Direct investigations toward new costumer’s personality related to the moral hazards such as financial status, occupation, characteristics, etc.
4) Information from the service bureau concerning to the objects or goods. For instance, health information bureau which stores the files of costumer’s physical checking up for life insurance.
5) Direct Inspection toward object’s physical condition.
b. Rating / Pricing
Rate is the price of each protection or exposure units. The rate is different from the premium; the premium is determined by multiplying the rate with the total of bought protection units.
To calculate an equitable rate of premium for an individual risk, the underwriter has recourse either to the pooled record of risks of the same class in his own portfolio, or in the wider record of a group of insurers. Having found the norm of the class concerned, he can adjust the rate upwards or downwards for favourable or unfavourable features in the individual risk to arrive at what he considers a fair rate .
By this rate, the income of insurance company from the premium must suffice all losses' covering and operational expenses. To get the income from this premium, insurance company must foretell the claim and distribute the anticipated expenses to every policyholder classes.
c. Investment
It is the liability of financial staff of company to invest the accumulated amount of money as the accumulated premiums paid by insured. The addition of investment interest purchasing is important variable in determining the rate of premium.
Principally, life insurance is long-range investment. Hence, Life Insurance Company entrusts its funds especially in the long-range investment amounted to 2/3 of asset total invested in the company stocks and the obligation letters, the common stocks amounted to less than 10% and the government’s stocks amounted to 5%.
And loss insurance, normally, is short-range investment. Hence, Loss Insurance Company invests half of its assets total in the government and private company’s stocks. The investment percentage composition of life insurance and loss insurance can be seen in the table below :
Investment Capital Life Insurance (%) Loss Insurance (%)
Stock 9,7 32,4
Obligation 36,6 28,8
Government's Obligation 5,2 28,9
Mortgage 30,8 0,2
Real Estate 3,3 1,6
Policy Loan 8,5 -
Premium Balance - 7,2
Other Investments 5,9 7,3
d. Loss Adjustment
Before the insurance company covers the losses, it must finish the process of loss adjustment. Loss adjustment is most difficult step for insurance company; therefore it needs a good adjuster in claim section.
It is important for insurance company to pay for the claim properly, speedy and satisfactory, because it is the effective promotion device. And it is important also for insurance company to refuse the unevaluated claim, and to prevent the payment more than full indemnity.
There are two basic actions for insurance company toward a claim, those are payment and rejection. There are two matters provided the basis for insurance company to refuse the claim:
1) No losses happen,
2) The involved policy does not cover the loss, because it's out of the insurance contract, whether the contract becomes invalid or the insured violates the clauses of the legal policy.
In determining which whether the insurance company must pay or refuse the claim, the adjuster must attend settlement procedures with four main steps as below :
1) Loss information, the insured informs the insurance company that the loss was happening.
2) Loss investigation, the insurer ensures the loss fact by direct investigation which whether that loss assured by policy or not. Then the amount of losses will be countable.
3) Loss evidence, made by the insured after informing the loss.
Payment or rejection. If all steps run as well as the clauses of policy, the insurance company will draw the draft to indemnify the insured. But if they do not so, the insurance company will refuse that claim.

THE IDEAS OF ISLAMIC EXPERTS TOWARDS INSURANCE

In this modern world, it is almost impossible to live without being affected by insurance. The house and the car that people rent have got insurance cover. The bus that they board has insurance. Insurance is all around them whether they like it or not. However, what is the status of insurance according to the scholars?
The scholars are not in agreement whether insurance is permissible or prohibited. Since the kind of insurance as it is being practiced now did not exist during the Prophet's time and there is no clear injunction in Holy Qur'an and Hadith regarding it. Then, ijtihad is used to determine its status.
As the scholars are not in agreement as to whether insurance is permissible or prohibited, they are also not in agreement as to reasons for its prohibition. And the followings are the ideas of them and their reasons.
1. The Objections
Many scholars deemed insurance to be prohibited, their resistance commonly undertook beneath the existence of forbidden elements in the insurance contract. For instance, Syekh Muhammad Abu Zahrah said that life insurance is a kind of gambling because there is no justification for a person, giving a part only of a sum, to be entitled to get the whole in case he dies and to take what he has paid with the profit in case he survives in the period of insurance. This is but riba .
Syekh Ahmed al-Sharbasi, Director of Young Men’s Muslim Association said that the system of insurance is unlawful if it is based on riba and undoubtedly there is an element of uncertainty and chaos in insurance which often results in a loss to the individual and considerable gain to the insurance companies .
Furthermore, Mahdi Hasan, the Jurisconsult, Deoband, Saharanpur, India said that insurance is nothing but riba on account of the fact that there is absence of equality between the two parties. It is also gambling because there is suspension of ownership on the result of hazard. In life insurance there is an element of bribery (rishwa) too, because the compensation in it is for something which cannot be valued .
Syeh ‘Uruj Ahmad Qadri, Editor Zindagi, Rampur India said that insurance is the admixture of riba, gambling and gharar. The stipulation that the insurance companies will pay the amount agreed upon between parties, if a person dies or property perishes, before all the installments are paid, is within the definition of gambling. By offering compensation as bait insurance companies win the premiums and deal in interest carrying transactions and have assumed the role of bankers. But unlike the banks they forfeit the premiums which are already paid if the policy-holder is unable to pay further premiums .
Muzaffar Hussain Mazaheri, Mazhar al-‘Ulum (Islamic Institution) Saharanpur, India added that insurance is based upon riba and gambling. The premium is a loan and according to the saying of Prophet -peace be upon him- a loan which brings profit is unlawful. It is stressed by Muhammad Zafiruddin, Dar al-Ulum (Islamic Institution) Deoband, India that the amount which is paid by the company to the insured is nothing but riba. Premium being a loan advanced to the insurance company, the profit it brings is not permissible. The excess or increase without counter-value is riba in a transaction where exchange of property takes place .
There are many others scholars also deemed insurance as above; some of them are Sayid Sabiq, the author of Fiqhus Sunnah, Abdullah Al-Qolqili, the Jurisconsult of Jordanian, Muhammad Yusuf Al-Qordhawi the author of Al-Halal Wal-Haram fil Islam, Muhammad Bakhit al-Muth’I, the Jurisconsult of Egypt, etc. . The objections of those ‘Ulama, in the main, are:
a. Insurance draws on the contract of mu’awadhah maaliyyah which comprises gharar.
b. The insurance is truly based on mere chance as in gambling, wagering or betting;
c. The insurance engages the uncertain matters;
d. In case of life insurance, the total obligations of how many times the premium installment paid by insured are not known;
e. The insurance contains element of exploitation, i.e. if the policy-holder fails to continue the policy because of their inability to recover even part of the premium, he shall get nothing from this contract;
f. The shareholder invests the accumulated funds in fixed-earning (interest) and;
g. There is no matching ‘aqd in Islam can be regarded as the insurance contract.
The 'Ulama, thus, wage a relentless war against insurance and emphatically argue that the insurance contract is diametrically opposed to the ethical standards set by Islamic law. It is hazardous, unfair and uncertain.
2. The Rejoinder
On the other hand, the scholars who opined that insurance is permissible, i.e. Muhammad Abduh, Abdul Wahab Khalaf, Mustofa Ahmad Zarqa, the professor of Islamic Law in Shari’a Faculty, Damascus University, Muhammad Yusuf Musa , the professor of Islamic Law in Cairo University, Egypt, and Abdurrahman Isa, the author of Al-Muamamalat al-Haditsah wa Ahkamuna, said that insurance is a modern contract and there is no injunction (nass) regarding it. If there is no injunction, then it is allowed. They based their argument on the established legal maxim that "originally, that any matter is permissible until there is evidence prohibiting it" . This legal maxim is based on the Qur'an of which some of the related verses are as follows:
وَسَخَّرَ لَكُمْ مَا فِي السَّموَاتِ وَمَا فِي الأَرْضِ جَمِيْعًا مِنْهُ، إِنَّ فِي ذلِكَ لآيتٍ لِقَوْمٍ يَتَفَكَّرُوْنَ
"And He has subjected to you, as from Him, all that is in the heavens and on earth: behold, in that are signs indeed for those who reflect".
According to the scholars, in principle, human beings are permitted to use the resources of the universe. This implies that all acts are necessary to facilitate this usage, including transactions, are permissible. To reinforce this, the Qur'an lays down the principle that Allah Almighty has clearly explained His prohibitions. Furthermore, the universe is described as an adornment of Allah. This is stated in the Qur'an:
قُلْ مَنْ حَرَّمَ زِيْنَةَ اللهِ الَّتِي أَخْرَجَ لِعِبَادِهِ وَالطَّيِّبَاتِ مِنَ الرِّزْقِ قُلْ هِيَ لِلَّذِينَ آمَنُوا فِي الْحَيَاةِ الدُّنْيَا خَالِصَةً يَوْمَ الْقِيَامَةِ كَذَلِكَ نُفَصِّلُ الْآيَاتِ لِقَوْمٍ يَعْلَمُونَ
"Say: who has forbidden the adornment of God, which He has produced for His servants, and the things, clean and pure, (which he has provided) for sustenance? Say: They are, in the life of this world, for those who believe, (and) purely for them on the Day of Judgment. Thus do We explain the Signs in detail for those who understand".
Therefore, a mere presumption is not enough to declare something unlawful. Muslim scholars have held any injunction that overrules this principle of permissibility must be decisive in meaning and transmission.
The scholars further claimed that insurance is a contract which brings maslahah 'amah (public welfare, commonweal) to the insured. According to them, the insurance contract is not a contract of mu’awadhah maaliyyah but falls under the concept of tabarru' and as assistance and guarantee by the insurer to the insured. The accumulated premium paid by insured will be considered as the savings fund and managed by insurer under the legal law. In this respect the insurer's position is that of a middleman whose collects money from insured and collectively arranges a form of assistance to them in facing collective losses . Hence, if it does so, the forbidden elements fail to destroy the contract of insurance because they fall under the concept of tabarru’ and ta’awun and the forbidden elements just occur in muawadhah maaliyyah transactions .
They further judged that insurance is perfectly legal form of business from which both the parties benefit; the insurance company and the insured. The former gains the huge profit from the accumulated premium and the latter gets the guarantee of the further loss.
Accordingly, Muhammad Yusuf Musa stressed that insurance in all its kind is an example of cooperation and helpful to society. Life insurance is beneficial to the insured as well as to the insurance company and as such there is no harm according to Islamic law if it is free from interest, that is, the insured taking only what he has paid without any increase if he survives the period of insurance and, in case he dies, his heirs getting the compensation. This is lawful under Islamic law . Again, they do this business contract by mutual good-will as mentioned in Holy Qur’an:
يآ أَيُّهَا الَّذِيْنَ أمَنُوا لاَ تَأْكُلُوا أَمْوَالَكُمْ بَيْنَكُمْ بِالبَاطِلِ إِلاَّ أَنْ تَكُوْنَ تِجَارَةً عَنْ تَرَاضٍ مِنْكُمْ
“O ye who believe! Eat not up your property among yourselves in vanities: but let there be amongst you traffic and trade by mutual good-will”.
And also the insurance contract is like the ‘aqd of mudharabah which performed by a separate department of insurance under interest free bank wherein the insured invests his capital to gain the yield with the basis of profit and loss-sharing , it will absolutely eliminate riba. Legally, scholars analogize the concept of insurance with the concept of ‘aqila (those who have to pay blood-wit) practiced in the time of Prophet -peace be upon him-.
3. The Middle Idea
Such is the conflict between the views of the two schools of thought. Clearly, it can be seen that the source of conflict is the forbidden elements of the business in Islam. Implicitly, it can be understood that the sort of forbidden insurance in the hand of the first thought is the commercial insurance (conventional) and whereas the sort of allowable insurance in the sight of the latter is social insurance with the basis of mutual and cooperative concept. Thus, this third thought takes the middle values between the both foregoing thoughts by allowing the social insurance and strictly forbidding the commercial insurance .
This though supported by Muhammad Shafi’, Jurisconsult, Dar al-‘Ulum (Islamic Institution) Karachi, Pakistan. He forbade the insurance because suspension of the payment of compensation on the occurrence of an uncertain event renders the contract of insurance a wager. The condition, in it, that the premiums already paid will be forfeited in case the insured fails to pay further premiums is opposed to Islamic law. However, in the same time, he suggested an alternative to insurance with requirements as below:
a. The amount paid towards insurance policy be invested, on the principle of mudharabah instead of pre-determined interest, profit be distributed as is generally done by commercial concerns.
b. In order to run the insurance business on cooperative lines, the policy-holders be bound, with their consent, to contribute a considerable portion of their profits towards a reserve fund in the form of a waqf (endowment), which will be utilized to provide for those who are victims of accidents.
c. The original amount of premiums together with profit is given to each insured which will be considered as his property while the reserve fund will remain a tabarru’. The insured will be entitled to be benefited by the tabarru’ in case of accidents.
d. There should be no forfeiture of the installments that are paid in case further installments are not paid .
The writer sees this third thought is wiser, in which the insurance has huge benefits and been needed by modern people in guaranteeing their risks. Islam with its universal characteristic never leaves any useful problem because of the contained forbidden elements but tries to adopt it and eliminates all the forbidden elements by modifying concept, form, nature, goal and its mechanism fund management. Then, it will come into being the newly modified concept of insurance with the basis of Islamic teachings.

THE PROSPECT OF ISLAMIC INSURANCE BEYOND THE FUTURE

Having known the superiority of Islamic Insurance’s concept, it is the purpose of this sub chapter to dwell upon the scope and prospect of the Islamic insurance. The prospect of Islamic future may be traced back to the history of the mutual insurance. The mutual insurance has been developed by people after the industrial revolution in the western world. This revolution brought with a new type of social insecurity for which social and mutual insurance was involved as at least a partial solution.
In course of time, the mutual insurance has developed. It is now wider in scope and larger in size. In Britain the main representatives of mutual insurance are Friendly Societies. They have spread all over Europe. France has several thousands of such small association and their operations have been successful. The same may be said of Switzerland, Belgium and Holland, and particularly of Italy, where large mutual associations have been greatly favoured by governments. The measure of their success may be imagined by the fact that they are most popular in Russia while in the USA there is the leadership of giant mutuals .
By this development, it is understood that the mutual insurance which constitutes the basic thought of the Islamic insurance has the auspicious prospect in future. Admittedly, also, the Islamic insurance is likely accepted by most Islamic countries in the world, especially Middle-East and other surrounding Islamic countries, and particularly countries in where the majority of Muslims live e.g. Indonesia.
Indonesia has approximately 90% Muslim citizens, who, nowadays, seemingly realize to perform their identity on the stage of economic affairs. This forms a large captive-market along with the improvement of political and economic stability. On the other hand, most of the Muslims require the device of trade on the basis of shari'a, and this requirement gets wider all along with the development of financial service industrial affairs. Furthermore, it is required to found many Islamic insurance companies as well as interest free banks to satisfy this urgent demand .
So far, PT Asuransi Takaful Keluarga is the only one of the Islamic insurance company among 52 companies of Life Insurance in Indonesia. Apparently, it is able to eliminate 42 companies in acquiring the amount of policy-holder. See at the table below :
Rank Number Name of Company Number of Policyholder
1 Bringin Jiwa Sejahtera 6,766,345
2 AJB Bumiputera 1912 4,789,062
3 Jiwasraya 3,010,210
4 Koperasi Asuransi Indonesia 2,423,672
10 Asuransi Takaful Keluarga 150,107
Total 52 Companies 20,380,574
Source: tazkia.com 2001
The writer is in no doubt that above fantastic acquisition still can more be enhanced through many strategies. Apart from that, the growth of the Islamic insurance is enormously depending on government’s and society's response, it means that the government is expected to produce the particular regulation and law institution relating to oversee the Islamic insurance operation
Meanwhile, the society is hoped to participate actively in advancing this shari’a economy system, of course, it is neither only in insurance nor banking, but also in increasing the Islamic ummah's quality.

The Mechanism of Funds Management in Islamic Insurance

1. The Mechanism of Funds Management in Islamic Insurance
To eliminate the element of riba, the mechanism of fund management and investment in Islamic Insurance is based on mudharabah system . Mudharabah is a contract of partnership on the principle of profit lost sharing whereby one person gives his capital to another to do business and both parties share in any profit or loss according to mutually agreed terms .
A. Azhar Basyir divided the mechanism of policyholders' fund management into two models, the premium with savings account and the premium without savings account .
a. The Premium with Savings Account
In this model, the first premium installment of policyholder is divided into two accounts, Participant's Account and Participant's Special Account (charity account).
The Participant's Account contains of policyholder's savings fund and the Participant's Special Account contains of tabarru' fund, this fund is providing the intention of policyholders to reciprocally guarantee each other to cover payable claims. The latter account usually ranges from 1,25% to 17,50% of premium, depends on policyholder's age and time span of policy. The more the policyholder ages the bigger tabarru' will be. The table of tabarru' can be seen in the table below :

Age Period of Agreement
5 6 7 8 9 10 11 12
18 - 30 1.25 1.25 1.25 1.75 1.75 1.75 2.25 2.25
31 - 35 1.25 1.25 1.50 1.75 2.00 2.25 2.50 2.75
36 - 40 2.00 2.00 2.25 3.00 3.25 3.50 4.25 4.50
41 - 45 3.00 3.25 3.50 4.75 5.00 5.50 7.00 7.50
46 - 50 5.00 5.50 6.00 8.00 8.75 9.50 11.75 12.75
51 – 55 8.50 9.25 10.00 13.25 14.50 15.50 - -
56 - 60 13.25 - - - - - - -

Age Period of Agreement
13 14 15 16 17 18 19 20
18 - 30 2.25 2.50 2.75 2.75 3.25 3.50 3.75 4.25
31 - 35 3.00 3.50 4.00 4.25 5.00 5.25 5.75 6.50
36 - 40 5.00 6.00 6.50 6.75 8.00 8.50 9.25 10.75
41 - 45 8.00 9.75 10.50 11.25 13.25 14.25 15.25 17.50
46 - 50 13.75 16.25 17.50 17.00 17.75 17.25 16.75 -
Source: PT Asuransi Takaful Keluarga
Furthermore, all policyholder's fund from both accounts shall be booked into the Policyholder's Fund Collection and shall be invested prudently yet to gain an optimal profit. The yield of investment is distributed between policyholders and company (shareholders), in an agreed profit lost sharing basis, for example 60% for the policyholders
40% for the shareholders.
The policyholder's yield (60%) shall be booked into Participant's Savings Account and Participant's Special Account proportionally. The Participant's Savings Account shall be paid back to the policyholder when :
1) The agreement is over,
2) The policyholder retires in the time of agreement,
3) The policyholder passes away in the time of agreement.
And the Participant's Special Account shall be paid back to the policyholder when:
1) The policyholder passes away in the time of agreement,
2) The time agreement is over with the net surplus of tabarru'.
Meanwhile, the shareholder's yield (40%) shall be used for pre-operating expenses, initial costs, and fixed assets with the portion 10 – 15% of the yield, and the rest of the yield shall be invested in time-deposits at bank, equity on stock-market, unit trust, direct investment and others with shari’a basis. The return of investment shall be re-accumulated to the principal to cover all the overhead costs disbursed by the company .
b. The Premium without Savings Account
In this model, all policyholder's premium installment shall be booked into Participant's Special Account, then allocated into Accumulated Participant's Fund and shall be invested prudently to gain an optimal profit with shari’a basis.
Furthermore, the yield of investment is allocated into Accumulated Participant's Fund decreased by Company's Operating Expenses. And the net surplus shall be distributed between policyholders and company (shareholders), in an agreed profit-sharing basis, for example 60% for the policyholders 40% for the shareholders.

The Contract of Conventional Insurance

As stated above that the purpose of all insurances is to seek protection against all kinds of risk to which man is exposed. The purpose of insured is to prepare himself against probable hazard and loss in his life and trade. He tries to shift the burden of the probable loss on to shoulders of others, who are prepared to take the risk for some financial gains to themselves.
All insurance contracts are based on the law of large numbers and the mathematics of probability. In a large homogeneous population it is possible to estimate the normal frequency of common events, such as deaths and accidents. Losses can be predicted with reasonable accuracy, and this accuracy increases as the size of group expands .
All insurance contracts are made on the principle of uncertainty, uncertain events, which involve speculation as well as risk . Both the insurer and the insured enter into contract of mutual risk, the former risking a loss and the latter risking his premiums.
The agreements between the insurer and the insured in insurance contract are embodied in a formal document, called a policy which, afterwards, the insurer is legally bound issue to the insured on the receipt of premium and the insured is legally obligated to pay the premium monthly or annually appropriate with previous agreement between the parties.
The insurance contract is not like the contract of other service companies. It has characteristics as below:
a. Future contract, because the benefits of this contract just appear when the loss is paid in next day,
b. Contingent contract, because the loss happens uncertainly and it undertakes based on probable perils,
c. Service contract, because the insurance provides the services, benefit understanding and suggestions.
d. Risk contract, the base of insurance contract is the uncertainty with the probable loss of perils. The insurance shifts the risks of this loss on to company’s shoulder as the professional risk bearer .
a. Policy
Policy is a formal document contains the agreements between the insurer and the insured in insurance contract . The policy can be the small sheet of paper contains the concise and simple agreement, or be the long and hard document. All of both documents state dues and obligations of both parties.
The policy plays an important part in the insurance contract, whether in the beginning step, during the contract or in the covering of insurance. For the insured, the policy is the basis evidence to propose the indemnity demand when the insured hazard causes the loss. And for the insurer, the policy is the basis to know the insured’s responsibility toward the hazard .
Except life insurance policy, every policies must contains of eight main points, they are:
1. The day of the insurance covering
2. The name of the insured who agrees the insurance covering
3. The clear explanation about the assured goods
4. The amount of money for how many times the insurance is held
5. The assured perils and hazards
6. The beginning time and the end of the insurance
7. The amount of premium
8. The matters that normally must be well known by insurer, and the certain promises and clauses between the insured and the insurer .
Globally, the eight main points above are divided into four parts, they are :

1. Declaration.
The declaration is a statement made by insurance applicant, who basically furnishes all such information and documentary evidences about his identity, the value of the goods, and everything related to the covering of insurance contract as the insurer may requires. This information must be appropriated with the utmost good faith principle. The insurance applicant gives this information by filling up the application form or questionnaire, and then he signs it up.
2. Insurance clause.
The insurance clause is the main part of the policy. It contains of the provision of whatsoever risks determined in the policy, the requested requirements and the column for the insurer’s liabilities.
3. Exclusions.
In the sections of the exclusions, the policy determines whatever the excluded matters, whether disasters or hazards, subjects or losses. Hence, the insured must know and understand precisely whatever excluded in the recovering of the purposed policy.


4. Conditions.
In this part of the policy, be explained all about dues and duties of the parties, whether insurer or insured. These conditions normally contains of premium payment, risks alteration, insured’s duties toward the incidents, report of losses, indemnity, etc.
Thus, except the application form, the insurer is who makes the standardization policy. Then this policy offered to the insured in order to examine the requirements and clauses carefully. If the insured agrees all terms, the policy will be finished and signed up, and after 24 hours it will be returned back to the insured.
But, practically this short time hardly can be fulfilled, because the insurer must complete the mails and process the received data. So, before the policy can be returned to the insured, temporarily the insured will receive the “cover note” or “bider”, it is a temporary contract of insurance recovering before the policy can be returned .
b. Premium
The premium is the price at which the insurer is prepared to take risks and bear the burden of the probable loss involved in the contract of insurance. The premium is the obligation of the insured against the services of the insurer in an agreed period of time .
On the basis of law of averages, the insurer finds through experience an amount of premium with calculating the details as below:
1. The reasonable amount sufficient to cover the risks,
2. Other charges, including policy and administration expenses,
3. The tip for agents, if the insurance held through the agency,
4. The profits from the investment of accumulated funds .
The contract of insurance becomes effective only when the premium is paid by the insured and received by the insurer. If it is not so, the insurance is unavailable . Thus, the premium must be paid completely during the contract. At the sort-range insurance such as travel insurance, the premium is paid on the beginning of contract. But, at the long-range insurance, the premium can be paid monthly on the previous agreed date, started on the first month periodically. The amount of premium and its payment date are clearly embodied in the policy.
Once the premium is paid by the insured and risk assumed by the insurer, there shall be no apportionment or return of premium afterwards, even though the subject-matter of the risk may vanish before the period of cover has elapsed.

The Benefits of Conventional Insurance

Insurance benefits society by allowing individuals to share the risks faced by many people. But it also serves many other important economic and societal functions . Because insurance is available and affordable, banks can make loans with the assurance that the loan’s collateral (property that can be taken as payment if a loan goes unpaid) is covered against damage. This increased availability of credit helps people buy homes and cars. Insurance also provides the capital that communities need quickly rebuild and recover economically from natural disasters, such as tornadoes or hurricanes .

Insurance itself has become a significant economic force in most industrialized countries. Employers buy insurance to cover their employees against work-related injuries and health problems . Businesses also insure their property, including technology used in production, against damage and theft. Because it makes business operations safer, insurance encourages businesses to make economic transactions, which benefits the economies of countries . In addition, millions of people work for insurance companies and related businesses. In 1996 more than 2.4 million people worked in the insurance industry in the United States and Canada .
Insurance companies perform a type of monetary redistribution they collect premiums and eventually redistribute that money as payments. Depending on the type of insurance, redistribution can take anywhere from a few months to many decades. Because of this delay between collecting and paying out funds, insurance companies invest their funds to bring in extra revenues. Such investments help businesses and governments finance their operations, and profits from those investments support the operations of insurance companies . With these investment earnings, insurance companies can keep rates much lower than would otherwise be possible.

1. The Contract of Islamic Insurance

In the contract of Islamic Insurance, the forbidden elements of business contract are eliminated; hence, the Islamic Insurance is legal on the hand of shari'a. To eliminate those elements, there are terms in Islamic Insurance, they are:
a. The Contract ('Aqd)
The clarity of contract in mu'amalah practices is principal, it fixes the legality of trading. The insurance is likewise, the contract between two parties, insured and company, must be clear. In its contract Islamic Insurance is based on takafulli (mutual responsibility) principle with tabarru' intention , it is the mutual responsibility intention between the participants of insurance to shift the burden of others. The Islamic jurists consider al-aqd at-takafuli as the safest contract to eliminate riba, gharar, maisir and jahala.
Based on this 'aqd, the Islamic Insurance divides the first year policyholder's premium into two accounts, participant's account (saving account) and participant's special account (charity account). The first is invested in profit lost sharing system and the later is contributed as the tabarru' .
b. Tabarru'
As the result of the charity account, it is accumulated amount of worship fund which called by tabarru'. Etymologically, the word Tabarru' means contribution or donation .
Tabarru' is purposed to give the virtuous fund sincerely to help each other and every participant shall agree to give away this tabarru' a certain proportion or the full amount of his or her contribution for this purpose. And the financial assistance paid to the participant resulting from the defined loss comes from this fund.

The Aims of Conventional Insurance

The main aim of insurance is not merely safeguarding the losses; it is also decreasing the uncertain and probable risk. Normally, the aims of insurance can be distinguished into two sides based on insured and insurer parties.
a. The aims of insured party:
1) To avoid the probable wider loss,
2) To get the indemnity from insurance company when the harm disaster is happening,
3) To shift the probable risk on to shoulder of other,
4) To decrease the suffered probable loss.
b. The aims of insurer party (Insurance Company)
1) To give the safeguard toward the probable loss which suffered the insured,
2) To give the support to the more advance direction of the economic development,
3) To lose the entrepreneurs’ doubts in their trade,
4) To ensure the investment,
5) To get the profit as the service repayment .

The Principles of Islamic Insurance

The goal of Islamic Insurance is protecting all members of participants by giving sum of funds to their heirs after their death, and being the savings funds for their preparation to face any losses cause of sickness, accidents and so on.
In accordance with the goal of Islamic Insurance above, the operational framework of Islamic Insurance relied on principles, which are the foundations of its operation. Perwaatmaja said that these principles are the implementation of mutual responsibility, cooperation and protection soul in society for the prosperity reaching .
Essentially the concept of Islamic Insurance is based on solidarity, responsibility and brotherhood among members of participants who have agreed to share defined losses to be paid out of defined assets.
Hence, the basic principles of Islamic Insurance are :
a. Principle of mutual responsibility
In this principle, every participant is able to feel the brotherhood of each other, and then the mutual responsibility upon someone else appears. The Messenger of Allah -peace be upon him- exampled Islamic brotherhood as a body, if part of it suffered from illness all parts of the body would join to feel that illness by sleeplessness and fever.
مَثَلُ الْمُؤْمِنِيْنَ فِي تَوَادِّهِمْ وَتَرَاحُمِهِمْ وَتَعَاطُفِهِمْ مَثَلُ الْجَسَدِ إِذَا اشْتَكَى مِنْهُ عُضْوٌ تَدَاعَى لَهُ سَائِرُ الْجَسَدِ بِالسَّهَرِ وَالحُمَّى
“Believers in their being friend, merciful and sympathy between one each other are like a body, if part of it suffered from illness all parts of the body would join to feel that illness by sleeplessness and fever”.

b. Principle of mutual cooperation and helping
It means, every participant of insurance has to cooperate each other in lightening other's burden, hence will be created the strong brotherhood. Prophet -peace be upon him- supposed such this activity as a building, which is one part sustaining other shares, so that will be created the strong and sturdy building.
الْمُؤْمِنُ لِلْمُؤْمِنِ كَالبُنْيَانِ يَشُدُّ بَعْضُهُمْ بَعْضًا
“One believer to other believer is like a building, which is one part sustaining other shares”

Besides that, every participant also has to progressively improve his care in effort of lightening the other's burden. Prophet -peace be upon him- taught that who lightens others' life needs, Allah will lighten his life burden in the world and eternity hereafter. He said in his Hadith:
عَنْ أَبِي هُرَيْرَةَ رضي الله عنه أن رسول الله صَلَّى اللَّه عَلَيْهِ وَسَلَّمَ قَالَ: مَنْ نَفَّسَ عَنْ مُسْلِمٍ كُرْبَةً مِنْ كُرَبِ الدُّنْيَا نَفَّسَ اللَّهُ عَنْهُ كُرْبَةً مِنْ كُرَبِ يَوْمِ الْقِيَامَةِ وَمَنْ يَسَّرَ عَلَى مُعْسِرٍ يَسَّرَ اللَّهُ عَلَيْهِ فِي الدُّنْيَا وَالْآخِرَةِ وَمَنْ سَتَرَ مُسْلِما سَتَرَ اللَّهُ عَلَيْهِ فِي الدُّنْيَا وَالْآخِرَةِ وَاللَّهُ فِي عَوْنِ الْعَبْدِ مَا كَانَ الْعَبْدُ فِي عَوْنِ أَخِيهِ
From Abi Huraira -may Allah be pleased with him- verily, Prophet -peace be upon him- said: “whosoever relieved muslim’s grieves in the world, Allah would relieve his grieves in Doomsday and whosoever facilitated bother, Allah would facilitate him in the world and hereafter, and whosoever hid muslim’s disgrace, Allah would hide his disgrace in the world and hereafter. And Allah helps His servant as long as he helps his brother”.

c. Principle of mutual protecting
Where all participants have principles that someone's belief is imperfect; who can asleep with fully filled stomach soundly, meanwhile his neighbors live in hunger. It means that the commitment to gain prosperity collectively is absolutely recommended to be created through his participation in Islamic Insurance.
Those three principles above are impossible to be formulated, unless based on godly value and sturdy belief. The sincere intention to help others suffered by disaster is really the basic foundation of Islamic Insurance.

The History Of Islamic Insurance

Muslim scholars agree that the Islamic Insurance is the new study in
the shari’a discourse , but the concept of blood-money which can be considered as embryo of Islamic Insurance was practiced in the era of Jahiliyyah and Islamic caliphate.
a. The Era Before Islam
Peninsula of Arabia, where Arab’s tribes live is the large desert area and small fertile land . In olden days, the desert land of Arabia was inhabited by Bedouin tribes who often had quarrels and family feuds, sometimes lasting for years. Raids by one tribe on another were very common. Sometimes, the raiding tribe would steal camels, women and children of the other tribes, because women and children could be ransomed. The ransom money was collected from all the members of the plundered tribe and paid to the head of the raiding tribe who shared it with the rest of his tribe.
In the case of murder, blood money (monetary compensation) was paid by killer or the tribe of killer to the relative of the killed. Sometimes the individual killer could not pay the blood-money, so, to avoid blood-shed and blood-feud between the tribes, the money was collected from all the members of the tribe and paid to the relatives or the tribe of the killed. This could be called the beginning of mutual insurance which is a device to reduce the burden of any member of the tribe on the basis of mutual sharing .
In short, the object of blood-money is to secure protection against the danger to which all the members of the tribe are equally exposed, and to eliminate a common danger which may fall upon any member of the tribe at any time. Accordingly, the tribe jointly contributed to meet the loss (in blood-money) which might fall upon any of them.
The usual price paid for a killing was a hundred she-camels; for deep wound, a blow penetrating the brain or abdomen at one-third of the amount, for the loss of an eye or hand or foot at half, for a tooth or for a wound exposing the bone at five camels. When the blood-money was paid in cash, it was 1.000 dinars (gold coins) or, sometimes, 1.200 dirhems (silver coins) and the payment being spread over three or four years .
The principle of compensation in kind or cash for the death or injury to any person greatly helped to eliminate or, at least, reduce the tribal warfare and family feuds which lasted for years and caused enormous loss of life and property. This custom had four outstanding benefits for the people of Arabia:
1) It reduced blood-shed and blood-feuds in the country.
2) It replaced individual responsibility with the ultimate collective responsibility of the tribe for the action of its members, and thus helped to achieve social security for individual members of each tribe.
3) It lessened the financial burden of the individual by transferring it to the group or the tribe.
4) It developed a spirit of co-operation and brotherhood among the members as reflected in mutually to share the individual burden amongst the group .
This mutual cooperation between the members of group in amends (blood-money) to the killed family or tribe found on Arab tradition was called by 'aqila . And this concept was representing the starting points of mutual Insurance growth .
b. The Era of Islam
After the advent of Islam, the indiscriminate killing in tribal feuds which followed the murder of one member of a group in the pre-Islamic period was stopped by the commandment of the Qur’an:
يأَيُّهَا الَّذِيْنَ آمَنُوا كُتِبَ عَلَيْكُمُ القِصَاصُ فِي القَتْلَى الْحُرُّ بِالْحُرِّ وَالْعَبْدُ بِالعَبْدِ وَالأُنْثَى بِالأُنْثى، فَمَنْ عُفِيَ لَهُ مِنْ أَخِيْهِ شَيْءٌ فَاتِّبَاعٌ بِالْمَعْرُوْفِ وَأَدَاءٌ إِلَيْهِ بِإِحْسَانٍ، ذلِكَ تَخْفِيْفٌ مِنْ رَبِّكُمْ وَرَحْمَةٌ فَمَن اعْتَدَىْ بَعْدَ ذلِكَ فَلَهُ عَذَابٌ أَلِيْمٌ
“Oye who believe, the law of equality (retaliation) is prescribed to you in cases of murder: the free for the free, the slave for the slave, the woman for the woman. But if any remission is made by the brother of the slain, then grant any reasonable demand, and compensate him with this whoever exceeds the limits shall be in grave penalty”.
The word qisas in above verse rendered as retaliation, it’s derived from qassa meaning to cut or to follow someone’s tracks . Then qisas is used for the punishment for which the criminal is found guilty. This may take any of the two forms : Firstly, life for life, an eye for eye, or an ear for an ear, etc., secondly, diyah or blood-money as financial compensation for the family or relatives of the murdered or injured in case they make a remission.
Another case in which blood-money takes the place of a death sentence is that of unintentional killing. The Qur’an says:
وَمَا كَانَ لِمُؤْمِنٍ أَنْ يَقْتُلَ مُؤْمِنًا إِلاَّ خَطَأً، وَمَنْ قَتَلَ مُؤْمِنًا خَطَأً فَتَحْرِيْرُ رَقَبَةٍ مُؤْمِنَةٍ وَدِيَةٌ مُسَلَّمَةٌ إِلَى أَهْلِهِ إِلاَّ أَنْ يَصَّدَّقُوْا
“Never should a believer kill a believer; but (if it so happens) by mistake, (compensation is due); if one (so) kills a believer, it is ordained that he should free a believing slave, and pay compensation to the deceased’s family, unless they remit it freely”.
This indicates that ‘aqila system was still practiced by Islam as a part of law . In Hadith, the Holy Prophet -peace be upon him- fixed the amount of blood-money for life at one hundred camels, and fixed five camels as the price of compensation for bone-deep wounds. Prophet also fixed ten camels for the loss of every finger or toe. .
c. The Modern Era
In the end of twentieth century, the Islamic economists began to produce and renovate the concept of Islamic Economy . Insurance was one of the economic institutes which become the attention focus of all Muslim experts, so that the concept which was using the form of gambling, usury and probability of risk developed by western experts must be altered to become sharing holder system and mutual helping by motivating the exploiting of tabarru'.
Once around year 1970th, Muslim scholars whom were gathered in the Islamic Council of Jurisprudence League, Mecca, Saudi Arabia agreed the insurance concept based on mutual and cooperative system.
And finally in 1979, the Islamic concept of Islamic Insurance based on mutual and cooperative was actualized through the opening of the first company in Sudan , initiated by Faisal Islamic Bank of Sudan. The company has made many progresses within five years and has been able to found some branches in Saudi Arabia .
In the very year, it was established also Islamic Arab Insurance C. Ltd. in Saudi Arabia, then at 1983, Dar Al-Maal Al-Islami, Geneva, had an eye to broaden its operation in the field of cooperative insurance.
Since than, Islamic Insurance companies have been established in several countries , some of them thriving, especially in Malaysia, Indonesia, Saudi Arabia and other countries. In Indonesia, the Islamic Insurance (PT Asuransi Takaful Indonesia) has been established since 1994.

The History of Conventional Insurance Development

The concept of insurance is closely related to group life. It originated from the human need to find safeguards against the problem risks to himself and his property, but when, how and by what people it was started is shrouded in mystery and obscurity.
All historians agreed that the concept of insurance didn’t appear in primitive era yet. With assumption, in primitive society, people lived together in families or tribe in which their needs fully met and protected through cooperation and mutual. They, therefore, did not feel the need for insurance because they were fully protected against all sorts of risks by community.
The appearance of insurance is closely related to human civilization. The historians have marked Egypt and Mesopotamia as the oldest centers of civilization , with its fertile valleys of Nile, the Euphrates and the Tigris, where men would cease to wander and settle down almost unawares, forgetting all about their nomadic group life . Traders in that territory used the basic of insurance concept since around 4.000 years B.C. They implemented this concept because they felt uncertain accidents would against their security and safety in trading, cause of nature or non-nature factors .
Yet, however the written insurance concept regulation just comes to be known at era of Hammurabi, the fourth king of Babylon (1782-1682 B.C), with archaeological discoveries which shown a law book contained 300 sections. One of these sections contained one of insurance principles; it was “One for all” . The contract found in this book, was the embryo of a concept later to be known the whole world over as the contract of Bottomry or Respondentia. Bottomry is, or rather was, a commercial contract whereby money (or goods) was advanced for trade purposes either as:
a. True loans at a certain fixed rate of interest, under which the lender had no right to any share in the proceeding of the trading venture,
b. Mixed loans and partnerships which, in addition to the payment of a fixed rate of interest to the lender irrespective of the result of the trading, entitled him to receive a share of the profits, if such profits exceeded a certain sum .
The next stage in the evolution of Bottomry was its development by the Greeks during the ninth and tenth centuries B.C., it was not merely adopted, it was also adapted and perfected. Romans, whose adopted business concepts from Babylon, Phoenicia and Greek, developed these concepts to be insurance form.
But the economists are sharply divided on the concept of bottomry; did it can be called as insurance concept. Anyhow, the though kernel of Bottomry was the beginning of modern insurance development.
Any early signs of modern insurance in scientific form and on premium basis seemed to appear in the European countries in the middle of the thirteenth century . This insurance was known as marine insurance. This form was undoubtedly associated with the merchants of the cities of Lombardy and notably Florence in Italy, 1250. Dinsadle said that in the Middle Ages, trade was mainly centered in the Mediterranean, with well-known trade routes to the East; Constantinople and India, and to the North; Florence, Genoa, Palermo and Venice which became the centers for banking, commerce and insurance at that time .
From Italy, then marine insurance spread to Spain, France, England and other countries of Europe. The intensive trading by Barcelona since the end of fourteenth century caused marine insurance to flourish early in Spain. The earliest agreement known bears the date of the April 12th 1428. On November 21st 1435, by the insurance Ordinance of the Magistrates of Barcelona, Marine Insurance was for the first time, regulated by legal confirmation of existing practice . Marine insurance was practiced in London, England and Le Rochele and Merseilles, France on the beginning of fifteenth century. They practiced the same style with the insurance in Italy.
At the sixteenth century, marine insurance contract grew up steadier than before. At that time, the insurance contract has used the printed policies . Those policies were still written in Italian language, cause of Italian traders' domination. In this century, the practice of marine insurance resembled the practice of modern insurance that applied nowadays. Beside policies, they also used the insurance covering system which done collectively. And this collective covering system dominated entire practices of sea transportation insurance during ten years, up to the beginning of nineteenth century.
Specifically, the insurance companies appeared since eighteenth century. And on nineteenth century they developed rapidly in Europe, for instance in France with “Compagnie d’Assurances Generales” on 1753, and in England with “The Sun Fire” on 1710. Meanwhile in USA, were established “Mutual Relief Association” on 1752 and “Insurance Corporation” on 1772 as the first insurance company in Philadelphia .
The insurance arrived in Indonesia far before independent day, brought by Dutch who more than 350 years colonized this country. With proof, on 1845 was established a life insurance “N.V. Levens Verzekering Maatschappy van de Nederlande van” and fire insurance “Bataviasche See” . But, formally, the insurance and its institution be included in agenda of Indonesia law on 1848, herewith the legalization of Dutch Trading Laws in Indonesia.
Furthermore, in the second decade of the beginning of twentieth century, were established many indigene insurance companies, one of the oldest was “Onderlinge Levernverzekering Maatschappy Bumi Putra” established on February 2nd 1912 in Magelang, Central Java. Four years later, the group of Chinese ethnic in Semarang established also a loss insurance company, named by “NV. Indische Llyod, Algemene Verzekering Maatschappy” .
After the independent day on 1945, up toward 1950, the political situation in Indonesia did not give opportunity for insurance to develop. On 1950, Indonesian Government Banking established the insurance company, named by “Maskapai Asuransi Indonesia”, and on the years later came afterward many insurance companies in Indonesia . Up to now, on 2003, hundred insurance companies were established in Indonesia, for only life insurance companies found more that 53 companies. One of them was PT. Asuransi Takaful Keluarga, the only one of life insurance company based on Islamic law .

The Principles of Conventional Insurance

As the other many profit oriented businesses, insurance has principles, they are:
a. Principle of Indemnity
Except life and personal accident insurance, every contract of insurance is normally a contract of indemnity because it insures compensation for loss to the insured. The insurance company agrees to recover this loss as the change of the receipt premium. The purpose of this agreement is to shift the burden of the probable risk from the insured on to the shoulders of insurance company .
The maximum limit of the insurer obligation is to take the insured on to his economic position as well as before the loss happening . According to this principle, the insured is indemnified according to the limit of his loss and no more. He cannot receive any sum of money from insurer more than the value of his loss under any circumstances. In this matter, the insured is not allowed to make a profit.

b. Principle of insurable interest
The insured must has an insurable interest; where a man is so circumstanced with respect to matter exposed to certain risks or damages, or to have a moral certainly of advantage or benefit, but for those risks or dangers, he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing, is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction .
In his book, T.J. Dorhout Mess explained that the definition of interest is a pure economic factor, so it is absolutely difficult to give its law limitation . A man can has the insurable interest because of value decreasing of own subjective due. A burning house, for instance. This burning cause the house’s owner loses the interest that he has before the happening. Also, the man may have the interest because of his missing hope to gain something. Based on some cases above, it can be concluded that the definition of insurable interest, normally, is the risk.
The principle of insurable interest is important for policyholder because it can decide whether the insured is able to propose the claim. Therefore, the insured must know exactly the sources of insurable interest, whether it has the quality of article or the quality of due.
c. Utmost Good Faith Principle
The insured is required to state all facts accurately and in good faith. He must not make any misrepresentation with regard any facts. Any facts known to him must be disclosed, and he cannot escape the consequences of not revealing them by saying that he did not know. Failure to do so will render the contract voidable . And finally, the insured cannot claim the insurer to fulfill the contract, and to compensate the loss, because the happening risk is different with the assured risk in the previous agreement.

The Definition of Conventional Insurance

Terminologically, insurance is contract made by a company or society, or by a state, to provide a guarantee of compensation for loss, damage, sickness, death, etc in return for regular payment .
According to Fuad Mohd Fachruddin the commercial insurance is a contract between two parties, insured and insurer, with the policy, the insurer receives the premium; it’s one of the regular sum of paid, in cash or credit, from the insured and the insurer promises to indemnify all of losses may be suffered him .
Afzalur Rahman provided the similar definition with Fuad Mohd Fakhruddin; he defined the insurance as a contract whereby one person, called the insurer, undertakes, in return for agreed consideration, called the premium to pay to another person, called the insured, a sum of money, or its equivalent, on the happening of a specified event . The specified event must have some element of uncertainty about it; the uncertainty may be either as the case of life insurance, in the fact that, although the event is bound to happen in the ordinary course of nature, the time of its happening is uncertain, or in the fact that the happening of the event depends upon accidental causes, and the event, therefore, may never happen at all.
Willet, Kulp, Riegel, Miller and Peffer, all provide similar definition that insurance is the concept of risk pooling-of group sharing of losses. That is, persons exposed to loss from a particular source combine their risk and agree to share losses on some equitable basis .
Thus, in very simple word, a contract of insurance is a contract between two parties, the insurer and the insured, the former promises to compensate the latter on the happening of a definite event in return for his contribution.
Based on some ideas of economic experts toward the definition of insurance above, it can be concluded that an insurance agreement involves five essential conditions:
a. There must be a contract of insurance between the parties,
b. The event should involve some amount of uncertainty,
c. There must be contract for the payment of some amount of money, or some benefit which becomes payable to the insured person on the happening of an event,
d. Compensation is promised by the insurer in return for the payment of contributions of premiums by the insured,
e. The event must be against the interest of the insured.

Definition and Basic Concept of Islamic Insurance

1.      The Definition of Islamic Insurance

Islamic Insurance is defined as a mutual guarantee of the risks among the members of insurance, with the result; everyone is being the insurer of others and vice versa. It is done, based on mutual helping of kindness, with the policy, everyone has to pay a tabarru’ (donation) for indemnifying for that risks

The other definition of Islamic Insurance is descriptive of a pact or practice among a group of members, called participants, who agree to jointly guarantee themselves against any loss or damage that may fall upon any of them as defined in the pact. In the event of any member or participant suffer a loss due to the defined mishap or disaster, he or she would receive a certain sum of money or financial benefit from tabarru’ as defined under the pact to help meet or mitigate that loss.

2.      The Basic Concept of Islamic Insurance

Based on some foregone definitions, the writer can conclude that the concept of Islamic Insurance is taken from the concept of mutual and co-operative insurance. This form of insurance is the alternative available to Muslims to replace modern commercial insurance.

In the Islamic teaching, helping the orphans, the people who suffer the disaster, death, and loss is absolutely recommended. It means that the mutual contribution to shift the burden of others in Islam is hoped, and here it is the real brotherhood called by ta’awun (mutual helping), itsar (selflessness) and ukhuwah (Islamic brotherhood). The concept of mutual helping mentioned in His verse:

وَتَعَاوَنُوا عَلَى البِرِّ وَالتَّقْوَى وَلاَ تَعَاوَنُوْا عَلَى الإِثْمِ وَالْعُدْوَانِ   

“Help you one another in Al­Birr and At­Taqwa (virtue, righteousness and piety); but do not help one another in sin and transgression”.

Intrinsically, this concept is applied by Islamic Insurance transparently, so that the deception elements must be eliminated. With consequences, every participant of insurance has to cast aside partly its money for tabarru’ with intention for mutual helping. This fund represents the mutual fund for participants, the company is only as organizer and owner of trust; it means that the function of company is performing the trust from all participants to manage their deposits according to shari’a and expected to make a profit. Whereas the fund of tabarru’ managed to overcome the possibility of everyone’s accidents humanly.