Impermissibility of Insurance Policies
It is a well-known fact and an oft-repeated phrase that Islām is not just a religion; it is a way of life. For this reason, the Prophet صلى الله عليه وسلم instructed us in all matters of our daily lives, regardless of how insignificant or menial it may seem. In addition, the Prophet صلى الله عليه وسلم compared himself to a father who teaches his children regarding different aspects of their lives.
حدثنا عبد الله بن محمد النفيلى حدثنا ابن المبارك عن محمد بن عجلان عن القعقاع بن حكيم عن أبى صالح عن أبى هريرة قال قال رسول الله -صلى الله عليه وسلم- « إنما أنا لكم بمنزلة الوالد أعلمكم فإذا أتى أحدكم الغائط فلا يستقبل القبلة ولا يستدبرها ولا يستطب بيمينه ». وكان يأمر بثلاثة أحجار وينهى عن الروث والرمة
The Prophet صلى الله عليه وسلم said, “I am like a father to you. I teach you [regarding all aspects of your life]. If anyone of you relieves himself, then he should not face the qiblah nor turn his back towards it, nor should he clean himself with his right hand.” (Abū Dāwūd)
In previous religions, people only had instructions in certain aspects of their lives. Due to this, most of their daily actions held no religious value. Therefore, those who wanted to spend their whole day in worship would confine themselves in monasteries or seclude themselves away from civilization. In this manner, they could make sure that their whole day was spent in worship. Allāh Ta’ālā mentions their act and intention in the Qur’ān:
وَجَعَلْنَا فِي قُلُوبِ الَّذِينَ اتَّبَعُوهُ رَأْفَةً وَرَحْمَةً وَرَهْبَانِيَّةً ابْتَدَعُوهَا مَا كَتَبْنَاهَا عَلَيْهِمْ إِلَّا ابْتِغَاءَ رِضْوَانِ اللَّهِ
And We ordained in the hearts of those who followed him compassion and mercy. But the monasticism which they invented for themselves, We did not prescribe for them, but [they sought it] only to please Allāh
However, Allāh Ta’ālā has blessed us with Islām which lays down instructions and principles for all aspects of our lives. This way, a Muslim could be acting upon his religion while he eats, sleeps, interacts with his family, or even when he relieves himself. Hence, a Muslim does not need to practice monasticism as he could be in the worship of his Lord even while performing the daily activities of his life.
One such aspect of our lives where the Sharī’ah has provided guidance and laws for Muslims to abide by is their financial transactions. These instructions are for the benefit of the Muslims and mankind, in general, at, both, an individual and communal level, regardless of whether we can understand the benefit or not. This paper seeks to analyze the modern-day insurance and why it does not comply with the principles laid down by the Sharī’ah.
What is Insurance?
Before analyzing the impermissibility of insurance, it is important to understand its exact definition first. The Encyclopedia Britannica defines insurance in the following manner:
Insurance is a device to handle risk. Its primary function is to substitute certainty for uncertainty as regards the economic cost of disastrous events. Insurance may be defined more formally as a system under which the insurer, for a consideration, promises to reimburse the insured or to render services to the insured in the event that certain accidental occurrences result in losses during a given time period.
Much to people’s surprise, insurance is not a new phenomenon and has been present in some form for thousands of years. In fact, insurance in the form of bottomry contracts can be traced back to Babylon as early as 4000-3000 BCE. Under these contracts, marine loans were granted on cargo with the provision of not repaying if the shipment was lost at sea. The interest charged on the loan covered for the risk of the insurance.
In the light of the Sharī’ah, insurances is impermissible due to two main reasons, namely ribā and gharar.
Each one of these concepts will be analyzed individually.
Only a few prohibitions in the Sharī’ah have received as stern as a warning as that of ribā. Allāh Ta’ālā discourages the Muslims from engaging in ribā numerous times in the Qur’ān.
الَّذِينَ يَأْكُلُونَ الرِّبَا لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ الَّذِي يَتَخَبَّطُهُ الشَّيْطَانُ مِنَ الْمَسِّ ذَلِكَ بِأَنَّهُمْ قَالُوا إِنَّمَا الْبَيْعُ مِثْلُ الرِّبَا وَأَحَلَّ اللَّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا فَمَنْ جَاءَهُ مَوْعِظَةٌ مِنْ رَبِّهِ فَانْتَهَى فَلَهُ مَا سَلَفَ وَأَمْرُهُ إِلَى اللَّهِ وَمَنْ عَادَ فَأُولَئِكَ أَصْحَابُ النَّارِ هُمْ فِيهَا خَالِدُونَ
Those who eat ribā will not stand [on the Day of Judgment] except like the standing of a person beaten by Shaytān leading him to insanity. That is because they say, “Trading is just like ribā.” [However,] Allāh has permitted trading and forbidden ribā. So, whosoever receives an admonition from his Lord and stops [his involvement in] ribā, he is allowed what has passed, and his matter is for Allāh [to decide]. And whoever returns to ribā, they are the people of the Hellfire [and] they will abide therein .
يَمْحَقُ اللَّهُ الرِّبَا وَيُرْبِي الصَّدَقَاتِ وَاللَّهُ لَا يُحِبُّ كُلَّ كَفَّارٍ أَثِيمٍ
Allāh destroys ribā and increases charity. And Allāh does not like the disbelievers, sinners.
يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَذَرُوا مَا بَقِيَ مِنَ الرِّبَا إِنْ كُنْتُمْ مُؤْمِنِينَ
O you who believe! Fear Allāh and leave whatever remains of ribā if you are believers.
يَا أَيُّهَا الَّذِينَ آمَنُوا لَا تَأْكُلُوا الرِّبَا أَضْعَافًا مُضَاعَفَةً وَاتَّقُوا اللَّهَ لَعَلَّكُمْ تُفْلِحُونَ
O you who believe! Do not consume ribā doubled and multiplied. And fear Allāh so you may be successful.
وَمَا آتَيْتُمْ مِنْ رِبًا لِيَرْبُوَ فِي أَمْوَالِ النَّاسِ فَلَا يَرْبُو عِنْدَ اللَّهِ وَمَا آتَيْتُمْ مِنْ زَكَاةٍ تُرِيدُونَ وَجْهَ اللَّهِ فَأُولَئِكَ هُمُ الْمُضْعِفُونَ
And that which you give in usury so that it increases from [other] people’s wealth, it has no increase with Allāh. And that which you give in zakāh seeking Allāh’s pleasure, then those shall have manifold increase.
Eventually, Allāh Ta’ālā gave the ultimate warning by declaring a war from Him and His messenger صلى الله عليه وسلم against those who continue to engage in ribā.
فَإِنْ لَمْ تَفْعَلُوا فَأْذَنُوا بِحَرْبٍ مِنَ اللَّهِ وَرَسُولِهِ وَإِنْ تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَالِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ
And if you do not do it (i.e. leave ribā), then take note of a war from Allāh and His messenger. But, if you repent, you shall have your capital. You should not deal unjustly nor will you be dealt with unjustly.
In addition to a war from Allāh Ta’ālā and His messenger صلى الله عليه وسلم, the Prophet صلى الله عليه وسلم has cursed those directly involved with ribā in any of several different ways.
حدثنا محمد بن الصباح وزهير بن حرب وعثمان بن أبى شيبة قالوا حدثنا هشيم أخبرنا أبو الزبير عن جابر قال لعن رسول الله -صلى الله عليه وسلم- آكل الربا وموكله وكاتبه وشاهديه وقال هم سواء
Rasūlullāh صلى الله عليه وسلم cursed the one who takes, gives, writes, and witnesses’ the interest transaction. And he said, “They are all equal.”
Ribā is of two different types: ribā al-fadl and ribā al-nasī’ah. In a very famous hadīth, the Prophet صلى الله عليه وسلم said:
حدثنا أبو بكر بن أبى شيبة حدثنا وكيع حدثنا إسماعيل بن مسلم العبدى حدثنا أبو المتوكل الناجى عن أبى سعيد الخدرى قال قال رسول الله صلى الله عليه وسلم- «الذهب بالذهب والفضة بالفضة والبر بالبر والشعير بالشعير والتمر بالتمر والملح بالملح مثلا بمثل يدا بيد فمن زاد أو استزاد فقد أربى الآخذ والمعطى فيه سواء ».
The Prophet صلى الله عليه وسلم said, “Gold for gold, silver for silver, wheat for wheat, barley for barley, date for date, and salt for salt must be equal on both sides and hand for hand (i.e. on the spot). Whoever pays more or demands more indulges in ribā. The one who takes ribā and the one who gives it are the same.”
From this hadīth, we understand that the only way for a money transaction of the same currency to be valid is if it is in exchange for an equal amount and the physical exchange takes place on the spot and not in the future. If the money is not exchanged in equal amounts, then it constitutes as ribā al-fadl. But, if it is exchanged in equal amounts but the physical exchange does not take place right away, then it is known as ribā al-nasī’ah.
This could be understood better with an example. For instance, if two people were to exchange $10 for:
1. $10, then
a. If it is done on the spot, it is permissible
b. If it is not done on the spot, then it is ribā al-nasī’ah
2. $20, then
a. If it is done on the spot, it is ribā al-fadl
b. If it is not done on the spot, then it is ribā al-fadl and ribā al-nasī’ah
This prohibition of ribā, however, is not specific to Islām. In fact, the Old Testament contains several references to and prohibitions of ribā, translated as “usury.” A few examples are as follows:
1. “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of anything that is lent upon usury.” [Deuteronomy 23:19] 2. “Lord, who shall abide in thy tabernacle? Who shall dwell in thy holy hill? He that walketh uprightly, and worketh righteousness and speaketh the truth in his heart. He that putteth not out of his money to usury, nor taketh reward against the innocent.” [Psalms 15:1, 2, 5] 3. “He that by usury and unjust gain increaseth his substance, he shall gather it for him that will pity the poor.” [Proverbs 28:8] 4. “Then I consulted with myself, and I rebuked the nobles, and rules and said unto them, Ye exact usury, every one of his brother. And I set a great assembly against them.” [Nehemiah 5:7] 5. “He that hath not given forth upon usury, neither hath taken any increase, that hath withdrawn his hand from iniguity, hath executed true judgment between man and man, hath walked in my statues, and hath kept my judgments, to deal truly; he is just. He shall surely live, said the Lord God.” [Ezekiel 18:8.9] 6. “In thee have they taken gifts to shed blood; thou hast taken usury and increase, and though hast greedily gained of thy neighbors by extortion, and hast forgotten me, said the Lord God.” [Ezekiel 22:12]
The financial and economic harms of ribā are too many to count. Due to ribā, people attempt to make profit on money without an attachment to any actual commodity. Rather, money itself is taken to be a commodity. This advances no real benefit to the real needs of the society. Rather, transactions are purely speculative and independent of any commodity. James Robertson mentions in Transforming Economic Life that “95% of the billions of dollars transferred daily around the world are for purely financial transactions, unlinked to transactions in the real economy.”
As a result, those blessed with wealth become satisfied in making profit based on advancing loans and exploiting the financial difficulties of the poor, instead of actual investment into the economy. This leads to a society sunken in debt, both at the government and individual level. This is clear when looking at the national debts of various countries and how the household debt in those countries surpasses the total income.
Furthermore, in interest-based transactions, an enormous imbalance exists in the distribution of profits. For instance, a company invests 10% of the capital into a business while taking a loan for the other 90% from the bank. The bank advances the loan from the depositors’ money. If the company makes huge profits, they maintain the vast majority of the profits and only pay a small interest to the bank, which pays an even smaller interest to the depositors. Therefore, it is possible that the company might retain 90% of the profits while investing only 10% of the capital, while those who contributed 90% of the capital might only earn 10% of the profits.
When a transaction has an uncertainty or vagueness, it is said to have gharar. Some definitions of gharar are:
قال السرخسي للحنفية: الغرر: ما يكون مستور العاقبة
Al-Sarakhsī said for the Hanafis: “Gharar is that [thing] the outcome of which is unknown”
وقال القرافي من المالكية: أصل الغرر: هو الذي لا يدرى هل يحصل أم لا
Al-Qarāfī said for the Malikīs: “Gharar is that which is not known whether it will be gained or not”
وقال الشيرازي الشافعي: الغرر: ما انطوى عنه أمره وخفي عليه عاقبته
Al-Shīrāzī said for the Shāfi’īs: “Gharar is that [thing] the nature and outcome of which is unknown”
وقال ابن تيمية: الغرر هو المجهول العاقبةً
Ibn Taymiyyah (of the Hanbalī school) said: “Gharar is that [thing] the outcome of which is unknown”
A few examples of transactions help explain gharar better:
1. Selling goods that one does not possess since there is no guarantee whether the seller will be able to get a hold of the item in order to sell it to the purchaser
2. Selling goods without a proper description or a known price such that the purchases is not sure of what exactly he is buying or for how much
3. Making a contract without unknown conditions where performance by one party depends on the occurrence of an uncertain contingent event. For example, the buyer tells the seller that he will pay him when his friend arrives. The seller does not know for sure whether the buyer’s friend will really arrive or not, and if he does, then when. Therefore, the sale and the seller’s receipt of payment are contingent upon the arrival of the friend which is not clear or definitive.
The Prophet صلى الله عليه وسلم clearly mentioned the impermissibility of such a sale involving gharar.
وحدثنا أبو بكر بن أبى شيبة حدثنا عبد الله بن إدريس ويحيى بن سعيد وأبو أسامة عن عبيد الله ح وحدثنى زهير بن حرب واللفظ له حدثنا يحيى بن سعيد عن عبيد الله حدثنى أبو الزناد عن الأعرج عن أبى هريرة قال نهى رسول الله صلى الله عليه وسلم عن بيع الحصاة وعن بيع الغرر
The Prophet صلى الله عليه وسلم forbade…transactions involving gharar.
Due to the vagueness and lack of certainty in such transactions, they tend to lead to disputes amongst the parties. In principle, all transactions that lead to disputes are impermissible. To avoid this, the Sharī’ah has mandated that all details of the transaction be clear and that the sale of the item must not be contingent on any uncertain events.
After understanding the basic concepts of ribā and gharar, one can apply them to insurance and notice its clear impermissibility.
Interest is the backbone of the current insurance schemes. Money, under the title of premiums, is exchanged for money, termed as compensation, but not on the spot. As mentioned earlier, this is by definition ribā al-nasī’ah. In addition, the money paid as premium is usually not the same as the amount of money received in compensation. Therefore, this would also constitute ribā al-fadl. Hence, in an insurance contract, not just one but both forms of ribā are present.
In addition, when one buys insurance, he/she assists in the insurance company and their interest based transactions and investments. Allāh Ta’ālā commanded us in the Qur’ān:
وَتَعَاوَنُوا عَلَى الْبِرِّ وَالتَّقْوَى وَلَا تَعَاوَنُوا عَلَى الْإِثْمِ وَالْعُدْوَانِ (المائدة: 2)
And assist one another in righteousness and piety, but do not assist one another in sin and transgression
Furthermore, insurance contracts contain gharar in the sense that the insured pays monthly premiums, but neither he nor the insurer knows whether, when, and how much compensation will be paid. This ambiguity is nothing other than gharar.
For example, in a car insurance contract, the insured pays a set monthly premium. However, neither the insured nor the insurer knows whether the insured will be involved in an accident. If the insured is involved in an accident, then neither knows when that will occur. Also, they do not know the extent of the damages which will be compensated by the insurer.
Due to the presence of ribā and gharar in the prevalent forms of insurance, it is not permissible to take out such policies. The harms of ribā and gharar have also been mentioned in the relevant sections above. However, it is important to note that these are just some of the harms of ribā and gharar, not all.
More importantly, the prohibition of ribā and gharar is not dependent on our understanding of its individual and societal harms. Rather, regardless of whether we fully understand the harms or not, as Muslims, the command of Allāh Ta’ālā and the Prophet صلى الله عليه وسلم are sufficient for us to abstain from all transactions involving them.
And Allāh Ta῾āla Knows Best
Checked and Approved by:
Mufti Ebrahim Desai