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Islamic insurance risky except to sharia advisers

November 16, 2011

Wednesday word:  takaful

Sharia law bans conventional insurance policies because Muslims think insurance involves uncertainty, gambling, and interest charges.  The substitute that the sharia financiers have come up with to replace insurance is takaful.  Dar & Moghul define takaful this way:

Islamic cooperative insurance is not a contract of buying and selling, where a party offers and sells protection and the other party accepts and buys the service at a certain cost or price.  Rather, it is an arrangement, whereby a group of individuals each pay a fixed amount of money, and then compensation for losses of members of the group are paid out of the total sum.

This chart from a presentation by Islamic finance lecturer R.A. Sarjoon helps distinguish between conventional insurance and takaful in the eyes of Islamic financial experts:

Diagrams of conventional insurance & takaful

The problem with takaful is that it gives the sharia law advocates and advisers yet another opportunity to distort financial markets with awkward, inefficient models that enrich themselves while spreading sharia law concepts deeper into society and farther throughout the world.

Whenever an Islamic financial product is pitched by the men on the business side of Islamic financial firms, they have to go to their sharia advisory boards and ask the members to sign off on the proposals.  When the product is structured on the borderlines of Islamic law, it gives the sharia advisers outsized influence over the final business decision on the structure of the product.  The controversial products probably help deliver more fees to the sharia advisors as well, because their services are called upon more often to bless off on the structure.  The sharia advisers like innovation in financial products because it gives them the opportunity to meet more often to deliberate on the sharia compliance of the proposed products, they can claim more expenses, and it helps justify the payments the sharia advisors receive from the Islamic firms, etc.

Takaful is a potential bonanza for the sharia advisers.  They can offer their services not just to Islamic banks, but to insurance companies as well.

Read more background and news about takaful over at Shariah Finance Watch.

* Dar, Humayon A., and Moghul, Umar F., The Chancellor Guide to the Legal and Shari’a Aspects of Islamic Finance (Great Britain: Harriman House, 2010).

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