Editor’s notes
Article Type: Editorial From: International Journal of Islamic and Middle Eastern Finance and Management, Volume 5, Issue 3
Since the 1970s there has been a large growth in Muslim population in many countries around the world, due to this there has been an increase in the number of Islamic financial institutions in these countries. There has been an increase in Islamic insurance companies that are founded to provide their services to Muslim families and businesses in accordance with Shari’a law. These companies offer life and non-life insurance to individuals and groups.
According to Shari’a law insurance is acceptable only if the people who require the insurance are themselves the owners of the fund, which is not how regular insurance companies operate. Takaful is founded to increase camaraderie and responsibility among the participants, since they agree to share defined losses which will be paid out of defined assets. In Islam there is a great emphasis on the Qur’anic notion of mutual assistance, on which the principle of insurance is based.
People who take part in this type of insurance are required to assist each other for the benefit of everyone. Everyone is required to pay their share of dues to help all the members. If one member bears an adversity then she will receive financial assistance from the fund to cover their losses. Since the amount is taken out of a common pool fund the losses are divided and liabilities are spread across all members, therefore, no one takes advantage at the cost of others.
The basis of traditional insurance companies is that they, the insurer, will cover the insured persons from liabilities for any losses that are covered within the contract, as long as the insured person pays a premium to be covered from losses by the insurance company. The opposition of Islamic law to this form of insurance is that it is a wager on the possibility of an event taking place and the two parties are on completely opposite sides when such an event occurs. Also neither party knows their rights nor legal accountability until an event arises which has been insured against.
There are three major problems with traditional insurance according to Islamic scholars. First, the issue Islam has with insurance is that it is based on uncertainty. The benefits of insurance are paid dependent on the outcome of future events, unknown at the time of signing the contract and thus weakening the component of consent for the contract to be valid. There cannot be mutual consent if the insured party does not know if they will receive the payments they were assured. Mutual consent and honesty of both parties is a duty and requirement for a legitimate contract in Islam. Second, conventional insurance is viewed as gambling because people who are insured are betting premiums on the stipulation that the insurer will reimburse the consumer once the said event has occurred. For instance, when a pure endowment policy is taken out by a consumer,they are betting that they will still be alive at the end of the term of the policy to obtain the profits declared in the contract. Third, Islamic law prohibits riba (interest). Insurance companies employ investment strategies that are contrary to Islamic law. The companies invest policyholders’ premiums in interest-based investment vehicle and reinsure with other insurers who also follow the same principle. Therefore, traditional insurance companies break at least three kinds of Islamic laws, gains from interest, gambling, and contracts based on uncertainty.
Many Muslims deem any form of insurance to be uncertain. There are some scholars that have even declared that a life insurance is prohibited under Shari’a law. Other scholars have suggested that there is a way for life insurance to be permissible without the inclusion of uncertainty, interest and gambling. Each policyholder has to collaborate with the others for everyone’s mutual benefit, they have to pay their dues to help the others who need help, spreading the liability and dividing the losses throughout the community, therefore,uncertainty is eradicated and there are no gains at the cost of others.
The first paper by Professor Masudul Alam Choudhury presents the central problem of Islamic economics and finance. The problem comes up when modern Islamic thinking fails to plan its methods based on the fundamental principles of Shari’a law, trying to unify divine knowledge and worldly knowledge. These are very complex and without this there cannot be a truly Islamic methodological worldview. Therefore, they are stuck in between the two worlds. These problems are explained in the paper using Impossibility Theorems.
The second paper by Dr Rasem N. Kayed uses PLS modes to examine whether the relationship between theory and practice is converging in Islamic finance. Based on data collected, the author provides evidence that the theoretical view and practical implementation of PLS is diverging to a shocking level. He claims that the divergence is not due to the concept of the PLS instruments, but it is because there is not the right type of infrastructure in most of the Islamic financial institutions and they are unwilling to promote entrepreneurship through the real execution of PLS instruments. The research proposes that future research should focus on decreasing the gap between the roles of PLS instruments and IFI’s actually promoting entrepreneurship.
The third paper by Dr Waheed Akhter and Tajammal Hussain is a study in Pakistan where two different questionnaires were sent out, one to Islamic insurance companies and the other to insurance customers. The survey showed that insurance customers were not educated about the Takaful concept. However, this survey was taken from one city in Pakistan and was used to generalize for the whole country. The results may vary if a larger sample is taken across many cities in the country. The study would help policy makers regulate Takaful more carefully, as well as educate the public, and promote Takaful business throughout Pakistan (Hassan and Lewis, 2012).
The fourth paper by Dr Suraya Ahmad and Professor Abdul Rahim Abdul Rahman takes place in Malaysia studying the difference in efficiencies of Islamic commercial banks and conventional commercial banks from 2003 to 2007. The study uses data envelopment method to estimate relative efficiencies of Islamic and conventional banks and then compares the difference in the efficiency scores using the Mann-Whitney U-test. The results from the Mann-Whitney U-test show that the conventional commercial banks are more efficient than Islamic commercial banks, because of their better managerial efficiency and superior technological advancement. The study also shows that the conventional commercial banks are better organized and are more technologically advanced but they suffer from scale inefficiency. The Islamic commercial banks in Malaysia are much smaller in size than the conventional commercial banks, and therefore, may not be able to fully exploit their capabilities.
The fifth paper by Dr Vafa Moayedi and Dr Matin Aminfard studies the Islamic financial system in Iran and its development post Iran-Iraq war in 1988. They analyzed financial data from 1993 to 2007 from Iran as well as 39 other countries, taking data from the World Bank’s Financial Dataset. Using the activity, efficiency, and size of Iran’s financial sector, the authors computed three indices and fourth one combining the first three. Such method allows the authors to compare Iran to those of other countries. Iran’s financial system is mostly bank-based, and it is trying to reduce its dependency on banks only for many years. Iran’s financial market is growing at a reasonable rate, but it is still lagging behind from international standard, and therefore very much weak and underdeveloped.
I hope the readers will enjoy the five articles of this issue.
Sincerely,
M. Kabir Hassan
