Islamic Finance (Finally)--A Note on Insurance
Given how much of my scholarship has been related to Islamic finance, it is unusual I guess that I've taken so long to blog on it. Part of the problem is that it is hard to talk of a hot button just off the presses issue without delving into finance arcana that hardly befit this blog, and part is that I can never think of something discrete enough to blog about. But with it being a slower news week inasmuch as the shari'a is concerned, I thought I'd give this a shot, focusing really on one instrument, the takaful, that I think betrays much of what I have been talking about concerning a reinvention of shari'a in the modern era to construct a form of social order that meets modern Muslim expectations and desires relating to what the shari'a is. But first, let's begin at the beginning.
The Qur'an looks disfavorably on forms of gambling and divination, considering them some sort of devil inspired ploy to pull the believer away from remebrance of God, akin in the verses to the consumption of alcohol. The believer is instructed to avoid such dangerous diversions. Combining these verses with a few Prophetic statements banning, among other things, the sale of the sperm of a stallion, or fish in the sea, jurists of the classical era came up with a doctrine of gharar that seems to forbid a considerable amount of speculative risk. I won't pretend to define gharar (and actually I think anyone who thinks they do have a logically consistent definition is smoking something--it's a legal doctrine and legal doctrines never seem to manage to meet very high standards of logical consistency), but suffice it to say, commercial "gambles" are prohibited. So I can't go to my Muslim brother and give him a right, for example, to catch as many fish as he can in my lake in 30 minutes for 30 bucks. I don't want to talk here about all the absurd artifices used to circumvent this and create, for example, a futures practice, that will be for another time. What I want to talk about here, is how all of this works in the context of insurance.
So at first, those well schooled in the ways of insurance (my friend and Debevoise colleague Jeff Wood being a premier example) and not as much in Islamic finance shake their head confusingly at the possible relevance of gharar to insurance. Surely the policyholder isn't gambling as he would be if he bought the right to fish in a lake for 30 minutes for 30 bucks. In the latter case, he's hoping to catch 100 fish and come out a winner and fears catching nothing and losing. But in insurance? Does anyone take out a life insurance policy, find out two weeks later they have cancer and think to themselves "cha-CHING"? And if nothing turns out to be wrong, are they depressed at paying the premium? You're protecting against risk, not trying to "win" anything.
As a result, various ideas have been floated about to permit insurance under the Muslim paradigm. Mustafa Zarqa' argued in the 1960's that purchasing insurance was like hiring a guard to protect your goods, and the service was no more or less controversial than that. Others have tried to point out that because no profit is involved, ever, the rules of gharar can't sensibly apply. Mahmoud El Gamal, poor guy, has been sitting in Rice for some years now screaming that if you just assumed a mutual insurance company, instead of for profit, then all profits on all sides disappear and no longer can any insurance be really controversial. But he's ignored, Zarqa' is marginalized, none of those enamored of Islamic finance take this all too seriously. Do check out Mahmoud's blog by the way, for more on Islamic finance should you be interested.
In any event, this is where we were for some time, with Islamic finance steadfastly insisting that God's command that gambling and speculation are the tools of Satan means that you should risk your entire business by not taking insurance on it. That doesn't mean everyone pays attention to those rules, but certainly those who say they believe in following the shari'a in financial affairs largely do.
It took some time to finally develop a complete solution to this insurance problem, but it came in the form of this thing called a takaful, or solidarity. Surely, it was argued, that while gambling is bad, if the believers decided to band together to help a brother in crisis, well that's just helping a brother, it's not gambling. It's charitable gift, and one school of Sunni thought, the Maliki, was okay with gifts having speculative risks associated with them. Or actually a few of their jurists were, not sure if it was school-wide. But no matter, what we'll do is create a "charitable institution", not an insurance company. There won't be policy holders, but charitable givers. When a qualifying event occurs to one of the givers (fire for fire insurance, death if life insurance, etc.), then money won't be paid under some form of profit contract, but "donated" as required by contract to the brother in need. And thus the magical transformation--same contracts, same terms, some cosmetic changes, lots of semantic changes, we have Islamically permissible takaful, none of your forbidden disgusting insurance, thank you very much.
I suppose one explanation would run that the jurists were just commercially unsophisticated and it took them time to work this through. They couldn't understand what insurance was or why it was necessary or why it was so far from speculation or how the whole position was ridiculous, but at some point it became painfully clear how absurd this was, and the takaful was the face saving grace. Certainly this semantic takaful nonsense is hardly as good a justification as just saying insurance isn't about gambling and making money from risk, it's the precise opposite. But it took some time to get to that position, and by then, it might be argued, it was too late to backtrack, better to just adopt insurance without saying so. Maybe that's part of it. I think there is more, however.
Remember once more that Islamic finance and Islamic economics is as modern as any other part of the shari'a, it is the vehicle for protest against the rapacious cruel and colonizing West. In the context of economics and finance, therefore, it is supposed to be consumed with Muslim solidarity, social justice, kindness and mutuality. Sayyid Qutb's work on the subject is entitled "Social Justice in Islam." Other works refer to social justice repeatedly. So when jurists are evaluating the Islamicity of various financial vehicles, these ideas are around, always, at least in the background.
So the argument that insurance is okay because it's not speculation. Unacceptable! That rapacious, colonizing dog eat dog world of the West consistently gambles, and makes money off the backs of the poor, and abuses and exploits. What about it's like hiring a guard? Again, justfying that old rapacious West again, thinks the pious hypothetical policyholder.
Now let's try something else. That insurance thing those Western financiers do, that's barbarous and cruel, and we'll have none of it. But let's not do it that way. Let's do it via "solidairty". Let's change everything to a gift, and make its basis charity. Let's make it a repudiation and rejection of Western insurance, and instead adopt Islamic insurance, consumed with social justice and fairness. THAT is so much more compelling to a jurist, a scholar, or even a lay person who is looking for Islam to reject the ways of the West, to respond to the broad Muslim dissatisfaction with the contemporary economic order,as an alternative to and not a legitimization of Western economic practice. You do insurance, we do solidarity. You do premiums, we do gifts. You pay, we donate.
And the funny thing is, all that had to be done was change a few names. A lesson that any financier interested in Muslim finance might be wise to heed.
HAH
The Qur'an looks disfavorably on forms of gambling and divination, considering them some sort of devil inspired ploy to pull the believer away from remebrance of God, akin in the verses to the consumption of alcohol. The believer is instructed to avoid such dangerous diversions. Combining these verses with a few Prophetic statements banning, among other things, the sale of the sperm of a stallion, or fish in the sea, jurists of the classical era came up with a doctrine of gharar that seems to forbid a considerable amount of speculative risk. I won't pretend to define gharar (and actually I think anyone who thinks they do have a logically consistent definition is smoking something--it's a legal doctrine and legal doctrines never seem to manage to meet very high standards of logical consistency), but suffice it to say, commercial "gambles" are prohibited. So I can't go to my Muslim brother and give him a right, for example, to catch as many fish as he can in my lake in 30 minutes for 30 bucks. I don't want to talk here about all the absurd artifices used to circumvent this and create, for example, a futures practice, that will be for another time. What I want to talk about here, is how all of this works in the context of insurance.
So at first, those well schooled in the ways of insurance (my friend and Debevoise colleague Jeff Wood being a premier example) and not as much in Islamic finance shake their head confusingly at the possible relevance of gharar to insurance. Surely the policyholder isn't gambling as he would be if he bought the right to fish in a lake for 30 minutes for 30 bucks. In the latter case, he's hoping to catch 100 fish and come out a winner and fears catching nothing and losing. But in insurance? Does anyone take out a life insurance policy, find out two weeks later they have cancer and think to themselves "cha-CHING"? And if nothing turns out to be wrong, are they depressed at paying the premium? You're protecting against risk, not trying to "win" anything.
As a result, various ideas have been floated about to permit insurance under the Muslim paradigm. Mustafa Zarqa' argued in the 1960's that purchasing insurance was like hiring a guard to protect your goods, and the service was no more or less controversial than that. Others have tried to point out that because no profit is involved, ever, the rules of gharar can't sensibly apply. Mahmoud El Gamal, poor guy, has been sitting in Rice for some years now screaming that if you just assumed a mutual insurance company, instead of for profit, then all profits on all sides disappear and no longer can any insurance be really controversial. But he's ignored, Zarqa' is marginalized, none of those enamored of Islamic finance take this all too seriously. Do check out Mahmoud's blog by the way, for more on Islamic finance should you be interested.
In any event, this is where we were for some time, with Islamic finance steadfastly insisting that God's command that gambling and speculation are the tools of Satan means that you should risk your entire business by not taking insurance on it. That doesn't mean everyone pays attention to those rules, but certainly those who say they believe in following the shari'a in financial affairs largely do.
It took some time to finally develop a complete solution to this insurance problem, but it came in the form of this thing called a takaful, or solidarity. Surely, it was argued, that while gambling is bad, if the believers decided to band together to help a brother in crisis, well that's just helping a brother, it's not gambling. It's charitable gift, and one school of Sunni thought, the Maliki, was okay with gifts having speculative risks associated with them. Or actually a few of their jurists were, not sure if it was school-wide. But no matter, what we'll do is create a "charitable institution", not an insurance company. There won't be policy holders, but charitable givers. When a qualifying event occurs to one of the givers (fire for fire insurance, death if life insurance, etc.), then money won't be paid under some form of profit contract, but "donated" as required by contract to the brother in need. And thus the magical transformation--same contracts, same terms, some cosmetic changes, lots of semantic changes, we have Islamically permissible takaful, none of your forbidden disgusting insurance, thank you very much.
I suppose one explanation would run that the jurists were just commercially unsophisticated and it took them time to work this through. They couldn't understand what insurance was or why it was necessary or why it was so far from speculation or how the whole position was ridiculous, but at some point it became painfully clear how absurd this was, and the takaful was the face saving grace. Certainly this semantic takaful nonsense is hardly as good a justification as just saying insurance isn't about gambling and making money from risk, it's the precise opposite. But it took some time to get to that position, and by then, it might be argued, it was too late to backtrack, better to just adopt insurance without saying so. Maybe that's part of it. I think there is more, however.
Remember once more that Islamic finance and Islamic economics is as modern as any other part of the shari'a, it is the vehicle for protest against the rapacious cruel and colonizing West. In the context of economics and finance, therefore, it is supposed to be consumed with Muslim solidarity, social justice, kindness and mutuality. Sayyid Qutb's work on the subject is entitled "Social Justice in Islam." Other works refer to social justice repeatedly. So when jurists are evaluating the Islamicity of various financial vehicles, these ideas are around, always, at least in the background.
So the argument that insurance is okay because it's not speculation. Unacceptable! That rapacious, colonizing dog eat dog world of the West consistently gambles, and makes money off the backs of the poor, and abuses and exploits. What about it's like hiring a guard? Again, justfying that old rapacious West again, thinks the pious hypothetical policyholder.
Now let's try something else. That insurance thing those Western financiers do, that's barbarous and cruel, and we'll have none of it. But let's not do it that way. Let's do it via "solidairty". Let's change everything to a gift, and make its basis charity. Let's make it a repudiation and rejection of Western insurance, and instead adopt Islamic insurance, consumed with social justice and fairness. THAT is so much more compelling to a jurist, a scholar, or even a lay person who is looking for Islam to reject the ways of the West, to respond to the broad Muslim dissatisfaction with the contemporary economic order,as an alternative to and not a legitimization of Western economic practice. You do insurance, we do solidarity. You do premiums, we do gifts. You pay, we donate.
And the funny thing is, all that had to be done was change a few names. A lesson that any financier interested in Muslim finance might be wise to heed.
HAH
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