Islamic teachings prohibit certain financial practices and transactions that are considered incompatible with Shariah (Islamic law). These prohibitions are based on ethical and moral principles and aim to ensure fairness, justice, and social responsibility. Here are some key reasons why conventional insurance is considered prohibited (haram) for Muslims according to Islamic scholars:
- Riba (Usury/Interest): Conventional insurance often involves the payment or receipt of interest, which is considered usury (riba) in Islam. Shariah prohibits the payment or receipt of interest because it is seen as exploitative and unjust.
- Uncertainty (Gharar): Islamic finance avoids excessive uncertainty or ambiguity (gharar) in contracts. Conventional insurance contracts may include elements of uncertainty, such as speculative gains or losses, which are inconsistent with Islamic principles.
- Speculation (Maisir): Islamic finance discourages speculative transactions (maisir), where gains are based on chance or luck rather than productive economic activity. Some aspects of conventional insurance, such as gambling-like features, may be seen as speculative.
- Lack of Social Solidarity: Takaful, the Islamic alternative to conventional insurance, emphasizes mutual cooperation, shared responsibility, and social solidarity. Conventional insurance, in contrast, may be perceived as a for-profit business where the insurer seeks to maximize profits, potentially at the expense of policyholders.
- Investment Practices: Conventional insurance companies often invest their funds in non-Shariah-compliant activities, such as businesses involved in gambling, alcohol, or other prohibited activities. This raises concerns for Muslim investors who want their financial activities to be in line with Islamic principles.
Takaful, on the other hand, is designed to adhere to Islamic principles by avoiding interest, uncertainty, speculation, and promoting mutual cooperation and social responsibility. Takaful models involve participants contributing to a common fund, and the payouts are based on the principles of helping those in need rather than a contractual obligation.
It’s important to note that opinions on these matters may vary among Islamic scholars, and there may be differing views on the permissibility of conventional insurance within the Muslim community. Some Muslims may choose to avoid conventional insurance and opt for takaful or other Shariah-compliant financial products.