1978 Islamic Cooperative Insurance Fatwa (Sudan)

In the Name of God, the Compassionate, the Merciful

Islamic Cooperative Insurance Fatwa

(first spark of emergence of this type of insurance in the world)

In 1978 - 1398 hegira, the Legal Control Committee for the Faisal Islamic Bank, comprising a number of legal and Sharia experts, ruled against insuring the bank's assets with commercial insurance companies and forced the bank to deal with Islamic cooperative insurance companies. The Committee based its fatwa on the presence of uncertainty "Garar" in financial compensation agreements of which insurance as it includes uncertainty "Garar" and this is banned by religion in the saying of the Prophet peace be upon him told by numerous scholars. It appears in the book "Sahih Muslim" reported by Abu Hurairah may Allah bless him that the Prophet peace be upon him banned stone throwing transactions and uncertainty "Garar" transactions (Sahih Muslim, the Book of Transactions, Chapter of invalidity of stone throwing transactions and uncertainty "Garar" transactions (Hadith Number 1513)

Abu Bakir Ibn Abi Shiba reported that Abdallah Ibn Idriss and Yahia Ibn Said and Abu Ussama reported from Abid Allah and Zuhair Ibn Harb told me Yahia Ibn Said reported from Abid Allah that Abu Zined reported from Al Araj from Abu Hurairah who said: (the Prophet peace be upon him banned stone throwing transactions and uncertainty "Garar" transactions) reported by Muslim.

Definition of uncertainty "Garar": linguistically uncertainty is danger and change, risk of loss, and the origin of "Garar" is what has a likeable aspect and a dislikeable content which means its consequence is hidden. Uncertainty "Garar" is defined as outrageous ignorance. Some experts define uncertainty "Garar" as the risk where presence and absence are balanced such as selling the fish in the sea or the fruit on the tree before it ripens. Thus, if we ponder this definition, we find it totally fits insurance as both parts of the accident, the occurrence and non-occurrence, are balanced and the need for the contract is that the society reaches a situation where if its members do not enter the contract they will encounter pressure and hardship for the elapsing of an interest considered legally. It is required in the need that makes the uncertainty "Garar" non effectual in the contract:

- That the need be general or specific

- That the need be a requirement, and the meaning of requiring it is the non availability of legal means to reach the target except through the contract including uncertainty "Garar". Thus, if these two conditions are verified, the contract is authorised, but it must be limited to fulfilling the need only based on the known rule (the need is valued by its value).

And in application of these restrictions, the Legal Control Committee for the Faisal Islamic Bank considers that the Bank may not insure its money with commercial insurance companies as the need for insurance with these companies is not required for the bank can insure its money with the cooperative insurance company which creation has been suggested following approval from the Committee and it became an entity. The Islamic Insurance Company subsidiary of the Faisal Bank thus became the first company to practice cooperative insurance in the world.

And based on the above-mentioned Fatwa, the principles governing the creation of cooperative insurance companies are:

1. That the insurance is cooperative and aims for participants to help each other. Participants to the cooperative insurance system are considered as donators of all or part of payments made to the insurance fund and their compensation from payments if need be and without the founders - shareholders - seeking benefit from the insurance operation. Here lie the main differences between cooperative insurance companies and commercial insurance companies. Indeed, commercial insurance companies seek to make profit from the interest achieved from insurance payments. On the other hand, in cooperative insurance this interest is not considered as a right for shareholders but as a right for all participants retained in total or in part as a reserve and what exceeds the reserve is distributed to participants based on their payments and regardless of compensation received. This is the system used in Sudan contrary to some companies outside Sudan which deduct compensations received by participants during the year and distribute the rest if any.

2. Members of the Legal Control Committee comprises Sharia, law and economy scholars. The Committee supervises activities of the company and ensures compliance with Islamic legal rulings. In case of liquidation of the company, participants receive their share of money and the rest is distributed to charity. The experience of cooperative insurance in Sudan started with the Islamic Insurance Company for insuring the assets of the Faisal Islamic Bank in 1979 as the first company in the world to apply this type of insurance for all branches of insurance used on the Sudanese market in addition to Takaful (the Islamic alternative to life insurance). This was followed by establishing the Baraka Insurance Company then the Shikan Insurance and Reinsurance Company Limited and the National Cooperative Insurance Company until 1992 when the Insurance Activities Supervision and Control Law was issued.

The 1992 Insurance Activities Supervision and Control Law

In application of this new law, all insurance companies operating on the Sudanese became required to operate within the Islamic cooperative insurance system and companies were given the alternative to comply with the new law or liquidate their operations. All companies agreed to comply with the new law in application of which the Insurance Activities Supervision and Control Committee (presently Insurance Activities Supervision Committee) and the experience was successful from the start. This was followed by opening of a branch in the Kingdom of Saudi Arabia still operating today, then the opening of other companies on the cooperative model in the Kingdom of Saudi Arabia namely the Cooperative Insurance Company and the Arab Islamic Insurance Company and the Rajihi Company and the Salama Company.

1. The company should invest the funds from the document campaign following Islamic Sharia and it is possible to give shareholders a certain rate from the benefits of investment in return for their management.

2. Allowing cooperative insurance companies to deal with commercial reinsurance companies is required because of the absence of Islamic reinsurance companies based on the following requirements:

a. Deal with commercial reinsurance companies on the net share system and not to deal in commissions.

b. Avoid all interest activities with reinsurers.

c. Do not keep the reserve of reinsurance payments in reinsurance accounts to avoid paying commissions.

d. The cooperative insurance company must increase its reserves yearly at rates to effectively take part in losses.

The 1985Islamic Fiqh Academy ruling
Resolution No. (9) Concerning Insurance And Re-Insurance
The Islamic Fiqh Academy, emanating from the organisation of Islamic Conference, meeting in its Second Session in Jeddah, Kingdom of Saudi Arabia, from 10 to 16 Rabiul Thani, 1406 H (corresponding to December 22-28, 1985).

• And after reviewing the presentations made by the participating scholars during the Session on the subject of 'Insurance reinsurance';
• And after discussing the same;
• And after closely examining all types and forms of insurances and deeply examining the basic principles upon which they are founded and their goal and objectives;
• And having looked into what has been issued by the Fiqh Academics and other institutions in this regard;

RESOLVES

1. The Commercial Insurance Contract, with a fixed periodical premium, which is commonly used by commercial insurance companies, is a contract, which contains major element of risk, which voids the contract and, therefore, is prohibited (Haram) according to the Sharia.
2. The alternative contract, which conforms, to the principles of Islamic dealings is the contract of co-operative insurance, which is founded on the basis of charity and co-operation.Similarly is the case of re-insurance based on the principles of co-operative insurance.
3. The Academy invites the Muslim countries to work on establishing co-operative insurance institutions and co-operative entities for the re-insurance, in order to liberate the Islamic economy from the exploitation and violation of the system, which Allah has chosen for this Ummah.

Source: Taylor, Dawood, To be or not to be (Takaful), that is the question?

European Council for Fatwa and Research ruling
Cooperative and mutual insurance
"Commercial insurance is originally haram as agreed upon by most contemporary scholars. It is well known that in most non-Islamic countries there are co-operative and mutual insurance companies. There is no harm from the Shari`ah point of view to participate in these services. So, it is unlawful for a Muslim living in a country where there is such a co-operative insurance company to make an agreement with a commercial insurance company. But, if a co-operative insurance company is not found one may enter into a contract with a commercial insurance company only by way of necessity. If a person is forced by law to insurance or by way of need, it is obligatory for him to be content with the minimum proportion of insurance that covers his need or to the minimum of such transaction he's being forced to carry out."

Sheikh Faysal Mawlawi,
Deputy chairman
European Council for Fatwa and Research

Source: islamonline.net