Wan Hafizi Wan Halim on “Why Conventional Insurance is not compatible in Islam”

Let us start by understanding some of the “main” elements which are prohibited from the Shariah point of view.

Let us discuss here just three of them which are riba, gharar and maysir.

What is riba?

Riba occurs in 2 different scenarios. In trading, which is “riba buyu’”, and in lending, which is “riba duyun”. 

Riba buyu’ is when you pay someone 10 dollar today, in exchange of 10,000 dollar that you will receive in the future. First this transaction does not involve similar amount of money. Second, it does not happen on spot, or at the same time. So it is considered as riba buyu’.

On the other hand, riba duyun happens in a loan transaction. For example if someone lends money to you and he or she charges a portion of interest on top of the loan amount.

That is also riba, under the category of riba duyun.

Next, is gharar.

What is gharar?

Gharar is basically uncertainty. Islam prohibits any financial transaction which involves a clear element of uncertainty. For example, you cannot sell fish which are still in the sea, or fish which are still in the river.

You have to catch the fish first and be sure that you have the fish in your hand or in your possession, before you are allowed to sell it. You also are prohibited from buying for example one big black box which you are not sure what is inside it.

So that is gharar.

So the third one is Maysir.

Maysir is basically gambling.

Everyone knows what gambling is. It is prohibited, not only in Islam, but in many other religions as well, because it is considered as one of the unethical ways of producing return. So if any financial transaction involves the element of gambling in it, then it is not allowed.

Now let’s come back to the original question of why Conventional Insurance is not compatible in Islam.

Why conventional insurance is not permissible in Islam

Unfortunately conventional insurance involves in all these 3 elements. Riba, gharar and maysir.

When someone purchases the insurance policy, the premium that he or she pays in exchange for the payment that he or she will receive in the future will usually be more or will usually not be the same, because the payment that is given by the Insurance company will be more than the amount of premium that he or she pays as the premium.

And the transaction does not happen on spot. It will happen somewhere in the future. So this is the clear riba buyu’.

Second, there is also the element of uncertainty, where the policyholder is unsure whether or not that he or she will receive the protection or the coverage that he or she is paying for. Last but not least, the gambling element.

Of course, in any insurance policy, there is a clear element of gambling where the policyholder is also unsure whether or not he will get the premium or the payment for the premium that he has paid for the coverage.

Beyond all these 3 elements, I would also add one more point, which is also important, with regards to the management of the fund by the insurance company to the collection of the premium from the policyholders.

Because in Insurance company, these funds may perhaps be invested or managed or operated not according to the Shariah principles.

So there you go, how and why a Conventional Insurance is not compatible from the Islamic perspective.


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