Gharar

According to scholars, Gharar is defined as a contract where the results are not known or hidden, or one of two possibilities where the frequent occurrence is the one that is more feared. The insurance contract is a contract of exchange whereby the insured pays the price (premium) and the insurer provides compensation. In a contract of exchange, the Gharar element that can nullify the validity of the sale is consent. The Qur’an [4:29] says:

“O who you believe, do not eat property among you in a false way, except through trade by mutual consent.”

However, knowing the subject matter in a contract is required in determining consent because it is not logical to say that one gives consent to something that he does not know. The scholars further said that in the insurance contract there are four types of Gharar present. These are:

Uncertainty in the Outcome

When the contract is made, neither the insurer nor the insured knows the outcome of the contract. The insured does not clearly know whether he will get compensation or not as an exchange to the premium that he has paid. Similarly, the insurer does not know the outcome.

Uncertainty in the Existence

In the insurance contract the insured does not know the existence of the compensation since it depends on the outcome that may or may not happen.

Uncertainty in the Results of the Exchange

When the contract is made, neither the insurer nor the insured knows the outcome of the exchange. The insured does not know whether he or she will get the compensation as exchange to the premium that he pays. Similarly, the insurer does not know how much premium it gets. Sometimes he will receive the premium only once or a few times, but has to indemnify an amount that does not commensurate with the premium.

Uncertainty in Contract Period

According to the principle of the Islamic Mu’amalah, when a contract is deferred, the period must be made known. If not, the contract is considered void. The same situation arises in the insurance contract whereby compensation is based on a time frame that is not known and cannot be known, especially in life insurance.

Maisir

Maisir is akin to gambling. The insurance contract is equated with gambling where if the peril happened, the insurer will lose. On the other hand, if the peril does not occur, the insured will lose. Furthermore, some scholars argued that the source of the money that is being paid as compensation is not determined.

Riba

There are many verses that prohibit Riba. What exactly constitute Riba has always been a disagreement among scholars. However, it is generally agreed that interest whether on principal or late payment is Riba. Other forms of Riba established by the Sunnah of the Prophet (s.a.w.) is the exchange of Ribawi elements where there is a difference in time and/or quantity. The Ribawi elements mentioned by the Prophet (s.a.w.) are gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt. By making an analogy, money is similar to gold and silver where it is a medium of exchange. Therefore, it is a Ribawi element and in the contract of exchange between the insurer and the insured there is difference both in quantity and amount. Furthermore, the scholars argued that insurance companies give out loans and charge interest and this is Riba.

Now that it is generally agreed that insurance is Haram, what can be done about it? Is there such a thing as insurance that conforms to Shari’ah?

Our scholars gave some thoughts and suggest that the principle of Takaful can be a basis of “Islamic” insurance. Takaful comes from the word Kafala meaning guarantee. So Takaful means mutual guarantee. Under this principle, the participants to the scheme would give their money to the company on the basis of Tabarru’ with the stipulation that the company would compensate them with an amount should he be struck by an calamity. They further stipulated that the company must not be involved in Haram activities like Riba, gambling, liquor and the like.