Takaful and Insurance: On the meaning of "ownership"
In earlier posts, I have taken aim at the takaful, or Islamic insurance, as being really just regular insurance with a few semantic shifts. I do, however, want to point out how I get to this conclusion and how it does, in many ways, depend on American (and largely realist) conceptions of law. To do this, let me illustrate by way of example, to something far more familiar to a Western audience.
I have a friend who claims to "own" a piece of the Green Bay Packers. This is because he has this piece of paper called a "share", issued by the Packers organizations. Now it is non transferable, so he cannot sell it. It is non redeemable, so he can't get his money back. It is nonvoting, so entitles him to no rights over the Packers organization. To me, what he has done is donate $250 to the profit making venture known as the Green Bay Packers, but to him, he is now a part "owner" of the team, is proud of his ownership, and wears Packers jerseys every Sunday to root the team he "owns" on to victory.
The difference between my view and his really does come down to a conception of what ownership means. I think the Realists who drafted our UCC thought notions of having "title" to something sounded metaphysical and silly. It's not that you "own" it, that doesn't tell you anything, the real question is what bundle of rights do I have over it. Can I buy it, can I sell it, can I blow it up, can I vote with it, what does it give me. If the answer is "nothing", then title means nothing. One of the great triumphs of the UCC was to virtually obliterate notions of title, look at Llwellyn's disquistions on it. To say the risk of loss of a particular item transfers when "title" transfers is ridiculous to the Realist, what in the hell does that mean? Say something more practical. At the transit point, at the point it's loaded onto the carrier, at the point of destination, and leave the celestial metaphysics to the side. This isn't about the magical title in the sky, it's about who pays for stuff here on earth and what that entails.
Now that notion, which as I said I would describe as predominant among us American commercial lawyers, I think would strike some, not all, but perhaps some, particularly in the civil law world, and perhaps some in the nonlaw world, as odd. They might agree with my friend. I don't have to point to the practical incidents of ownership to make ownership meaningful, the argument would run. It is meaningful because it is, because the organization said I'm a shareholder, because I have this piece of paper that is framed on my wall, because all my friends see it and know I 'own' the Packers in part. Ownership is because it is, it's deeper than its incidents. I don't mean the rights associated are irrelevant to people who think this way, only that they don't think the rights define the ownership, whereas I, and most US commercial lawyers (actually all US commercial lawyers I can think of) would absolutely define ownership as no more or less than the bundle.
So what does this have to do with takaful. Well here's how regular insurance works, using whole life insurance as the model, just because I'm not reviewing the entire insurance world in one post. You pay money to a company via a premium, and then they undertake an obligation to pay out to the beneficiary when you die. In the meantime, your money paid to them is held in an account, and returns are made on it. These returns can come back to you, usually in the form of a premium that does not increase over time even though the risk of death is higher over time, and if the returns are high enough, they can lead to dividends or a higher death benefit or whatever. It's not important how they come back, suffice it to say they do. Everything else, beyond this, is the company's profit.
The Islamic financier objects to all of this. He says you can't pay out money not knowing when you receive the benefit, this is all just speculation, it's a form of gambling, you might die after one premium and win, or at 97 and lose because of all the money you paid in over so many years, and we don't gamble in Islam. I find this absurd, what kind of person is it who buys life insurance and then dances in the hall when he finds out a day later he has terminal cancer because of the relatively few premiums he is going to have to pay to get a huge death benefit?
But as noted throughout this blog, the West must be resisted. We cannot profit in gambling, and we in Islam it is said must instead share. So we don't just hand over money to some profit making company, we all get together and pay our premiums into a fund, we then pay out to our brothers in need as they need it, and then excess money is paid to the fund holders and the operator of the fund (ie the insurance company) according to some percentage. (I am assuming the murabaha model here, I'll get to the wakala model later.) So, it is argued, this is brothers sharing their needs and helping each other out, a charitable form of insurance, not your New York Life profit making heartless cruel rapacious capitalist nonsense. The insurers and the insured are one.
Now the American commercial lawyer I think looks at this and ignores the last sentence I just wrote. Glances over it as if it didn't exist, and as I have done countless times until I just read it again yesterday, for perhaps the umpteenth time. Why? Well what the hell does it mean that the insured and the insurers are the same, or better put that the fund owns the proceeds and not the life insurance company (ie the operator in takaful speak)? Same money is used in either case to pay out as death benefits, I don't care if you say the operator owns it, the fund owns it, or the angel Gabriel owns it, what matters is it is reduced by the amount paid out in benefits, and profits accrue in the amount left over, and some go the fundholders and the rest to the company. In both cases.
What the American commercial lawyer does instead is search for a practical distinction. The most obvious is that if the fund "owns" it, then the company maybe isn't liable beyond fund proceeds, meaning if some cataclysm kills all of them, the company operator just pays out everything from the proceeds it has and then is done. Whereas if the company owns it and has the obligation to pay irrespective of the fellow brothers in need and the limited funds, it has to reach into its own pockets. But that turns out not to be a distinction, because the operator who runs the takaful, if the funds run out, has to make noninterest loans to it, to be paid from future premiums.
So then again I look at it and say this is absurd. The only difference is some silly thing you call ownership by the fund that doesn't mean anything, because the company controls the assets, distributes the assets, has to pay out beyond the assets, and so I don't know what it means to say that the fund owns the assets and the insured and insurers are one. It's New York Life with a different name.
But if you do take seriously this sense of a thing called ownership, that because you say and the company operator says and everyone says you own this money, even if in practical terms it means nothing to say that, well then maybe that difference that I dismiss as metaphysical and silly is more meaningful. Then when you say "they in the West profit and we in Islam share" the difference is in one way semantic, but in another important for some sort of reason having nothing to do with actual practical consequences but more with something deeper, almost spiritual, associated with ownership. You'd have to ask purveyors of this vision what it's all about, I'm far too much the positivist, and the Realist, to describe it as well as they would.
I don't think that makes Islamic finance sensible, because quite clearly the claim is often that practical consequences do follow when they do not. Moreover, ownership isn't the only objection, as mutual insurance companies are owned by the insured, and they don't seem to please the Islamic financiers, even as they create what are called wakala model takaful that look really similar. So it's not to let Islamic finance off the hook, only to say that, viewed differently, it isn't quite as entirely absurd in the insurance arena if looked at from a different perspective from the one with which I, and most commercial lawyers I know, are best trained to examine.
HAH
I have a friend who claims to "own" a piece of the Green Bay Packers. This is because he has this piece of paper called a "share", issued by the Packers organizations. Now it is non transferable, so he cannot sell it. It is non redeemable, so he can't get his money back. It is nonvoting, so entitles him to no rights over the Packers organization. To me, what he has done is donate $250 to the profit making venture known as the Green Bay Packers, but to him, he is now a part "owner" of the team, is proud of his ownership, and wears Packers jerseys every Sunday to root the team he "owns" on to victory.
The difference between my view and his really does come down to a conception of what ownership means. I think the Realists who drafted our UCC thought notions of having "title" to something sounded metaphysical and silly. It's not that you "own" it, that doesn't tell you anything, the real question is what bundle of rights do I have over it. Can I buy it, can I sell it, can I blow it up, can I vote with it, what does it give me. If the answer is "nothing", then title means nothing. One of the great triumphs of the UCC was to virtually obliterate notions of title, look at Llwellyn's disquistions on it. To say the risk of loss of a particular item transfers when "title" transfers is ridiculous to the Realist, what in the hell does that mean? Say something more practical. At the transit point, at the point it's loaded onto the carrier, at the point of destination, and leave the celestial metaphysics to the side. This isn't about the magical title in the sky, it's about who pays for stuff here on earth and what that entails.
Now that notion, which as I said I would describe as predominant among us American commercial lawyers, I think would strike some, not all, but perhaps some, particularly in the civil law world, and perhaps some in the nonlaw world, as odd. They might agree with my friend. I don't have to point to the practical incidents of ownership to make ownership meaningful, the argument would run. It is meaningful because it is, because the organization said I'm a shareholder, because I have this piece of paper that is framed on my wall, because all my friends see it and know I 'own' the Packers in part. Ownership is because it is, it's deeper than its incidents. I don't mean the rights associated are irrelevant to people who think this way, only that they don't think the rights define the ownership, whereas I, and most US commercial lawyers (actually all US commercial lawyers I can think of) would absolutely define ownership as no more or less than the bundle.
So what does this have to do with takaful. Well here's how regular insurance works, using whole life insurance as the model, just because I'm not reviewing the entire insurance world in one post. You pay money to a company via a premium, and then they undertake an obligation to pay out to the beneficiary when you die. In the meantime, your money paid to them is held in an account, and returns are made on it. These returns can come back to you, usually in the form of a premium that does not increase over time even though the risk of death is higher over time, and if the returns are high enough, they can lead to dividends or a higher death benefit or whatever. It's not important how they come back, suffice it to say they do. Everything else, beyond this, is the company's profit.
The Islamic financier objects to all of this. He says you can't pay out money not knowing when you receive the benefit, this is all just speculation, it's a form of gambling, you might die after one premium and win, or at 97 and lose because of all the money you paid in over so many years, and we don't gamble in Islam. I find this absurd, what kind of person is it who buys life insurance and then dances in the hall when he finds out a day later he has terminal cancer because of the relatively few premiums he is going to have to pay to get a huge death benefit?
But as noted throughout this blog, the West must be resisted. We cannot profit in gambling, and we in Islam it is said must instead share. So we don't just hand over money to some profit making company, we all get together and pay our premiums into a fund, we then pay out to our brothers in need as they need it, and then excess money is paid to the fund holders and the operator of the fund (ie the insurance company) according to some percentage. (I am assuming the murabaha model here, I'll get to the wakala model later.) So, it is argued, this is brothers sharing their needs and helping each other out, a charitable form of insurance, not your New York Life profit making heartless cruel rapacious capitalist nonsense. The insurers and the insured are one.
Now the American commercial lawyer I think looks at this and ignores the last sentence I just wrote. Glances over it as if it didn't exist, and as I have done countless times until I just read it again yesterday, for perhaps the umpteenth time. Why? Well what the hell does it mean that the insured and the insurers are the same, or better put that the fund owns the proceeds and not the life insurance company (ie the operator in takaful speak)? Same money is used in either case to pay out as death benefits, I don't care if you say the operator owns it, the fund owns it, or the angel Gabriel owns it, what matters is it is reduced by the amount paid out in benefits, and profits accrue in the amount left over, and some go the fundholders and the rest to the company. In both cases.
What the American commercial lawyer does instead is search for a practical distinction. The most obvious is that if the fund "owns" it, then the company maybe isn't liable beyond fund proceeds, meaning if some cataclysm kills all of them, the company operator just pays out everything from the proceeds it has and then is done. Whereas if the company owns it and has the obligation to pay irrespective of the fellow brothers in need and the limited funds, it has to reach into its own pockets. But that turns out not to be a distinction, because the operator who runs the takaful, if the funds run out, has to make noninterest loans to it, to be paid from future premiums.
So then again I look at it and say this is absurd. The only difference is some silly thing you call ownership by the fund that doesn't mean anything, because the company controls the assets, distributes the assets, has to pay out beyond the assets, and so I don't know what it means to say that the fund owns the assets and the insured and insurers are one. It's New York Life with a different name.
But if you do take seriously this sense of a thing called ownership, that because you say and the company operator says and everyone says you own this money, even if in practical terms it means nothing to say that, well then maybe that difference that I dismiss as metaphysical and silly is more meaningful. Then when you say "they in the West profit and we in Islam share" the difference is in one way semantic, but in another important for some sort of reason having nothing to do with actual practical consequences but more with something deeper, almost spiritual, associated with ownership. You'd have to ask purveyors of this vision what it's all about, I'm far too much the positivist, and the Realist, to describe it as well as they would.
I don't think that makes Islamic finance sensible, because quite clearly the claim is often that practical consequences do follow when they do not. Moreover, ownership isn't the only objection, as mutual insurance companies are owned by the insured, and they don't seem to please the Islamic financiers, even as they create what are called wakala model takaful that look really similar. So it's not to let Islamic finance off the hook, only to say that, viewed differently, it isn't quite as entirely absurd in the insurance arena if looked at from a different perspective from the one with which I, and most commercial lawyers I know, are best trained to examine.
HAH
Hi,
Nice site where we find my specific answer. Really it is very nice site. good, keep up it........
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i am afraid but the author seems to lack the knowledge of the fundamentals of takaful. (with all due respect)
takaful differs from conventional insurance black and white.
whereas this is not the appropriate place to exchange in-depth arguments, an idea of it can however initiate introspection
the author being a commercial lawyer needs to understand the nature of the contract in the two forms of insurance.
In conventional, risks are being traded (bought and sold). Islamic Shari'ah does not recognize risk as a commodity
again, you being a commercial lawyer, would know that there are different types of contracts in Islamic Shari'ah. The conventional insurance contract is a contract of Muawizah.
Whereas in Takaful, the nature of a contract is that of Taburru - ring any bells?
Due to the difference in the nature of the contracts, Riba is eliminated in Takaful and gharrar and qimar is rendered ineffective.
the details of course cannot be explained here.
contact me for further information -
Farhan.
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My friend, you are simply wrong. You are just attaching different labels to things you don't like. I was in San Francisco the other day and there was an event that I was asked to pay a $10 donation to enter. If I didn't pay, I couldn't get in. If I did, I got in. If it eases your conscience to call that a donation, then fine, but it's the price of admission, I don't care what you want to call it. Any Realist would take that position. Judging by the EFFECTS, it's the same as admission but a different word.
Also, I'm very distrustful of people who think they need a hundred pages to explain to a practiced commercial lawyer who has done extensive insurance work the difference between takaful and insurance. To me, it's the standard Islamic financier's trick. Confuse through lots of explanation what is perfectly obvious, to make a distinction that does not exist. You finish the hundred pages,a nd you are where you started. The guy pretended there was a difference that does not exist. Shameful really.
So yes tabarru' rings bells. I actually know what a tabarru is, believe it or not. And this aint one. Here to me is the difference between a tabarru and a purchase.
1. A tabarru is optional. A purchase is a contractual obligation. Your tabarru' is the latter, my friend, when I sign on to takaful, I have to pay.
2. A tabarru doesn't get me anything of value relative to the amount donated. A purchase does, as a matter of contractual right. Your tabarru', my friend, gets you precisely what a conventional insurance product does in terms of coverage.
Now if you want to tell me that a tabarru can be contractually obligated, and then it can lead to the creation of contractually obligated rights of coverage, then dude, your tabarru is the trade in risk you decry. That's exactly what it is. I have to pay it, if I want to get the coverage, and the coverage is, in entire practical effect, a coverage against risk. I traded in risk. To pretend it's not a risk trade when you pay, and are required to pay, and when they cover, and they are required to cover, is just silly. Of course it is.
You can elaborate (or really obfuscate) as much as you wish, I am happy to post your comments. But really, when someone cannot actually point to real differences, not differences in words (ie I "donate", I don't "trade" in risk when in fact it's a trade by a different name), in a paragraph or two, it's hard to take seriously. Seriously, point me to one practical difference between your donation and a contractual obligation to pay a premium in exchange for coverage from risk, and we'll be able to move. But longwinded explanations of how I don't understand are really a waste of your time. I'll post them, but really, I wouldn't waste the breath.
No interest in contacting you, you don't sound any different than anyone else who has tried to defend the practice essentially by covering up its reality. I find it dishonest and unscrupulous quite frankly.
HAH
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Great information. Insurance can sometimes be confusing. It's good to have as much info as possible.
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Fascinating discussion. I think there are plenty of very real, practical ways to make Islamic insurance more in line with the instruction not to gamble. For example, why wouldn’t payouts be based on whatever funds are available, rather than guaranteeing a certain amount? Why not make the group completely non-profit? If the ‘human foibles’ can be overcome, it would be an excellent example to the West.
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Very interesting post - it does seem that a few semantic shifts are all that has been changed. People can actually do a lot themselves to make insurance more ethically congruent with Islamic law - how about only insuring until you have saved up enough money to provide for your family on your own?
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I am wondering if your friend who owns a share of the Green Bay Packers is a muslim, since as I understand it Shariah Law forbids any such dabbling in a gambling enterprise - which a sports franchise certainly is.
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Great info. I like all your post. I will keep visiting this blog very often. It is good to see you verbalize from the heart and your clarity on this important subject can be easily observed..
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just browsed myself back here...
I would prefer if you can contact me via email so that this issue [difference between conventional and takaful] may be resolved.
I would love to learn/share thoughts on takaful with you
my apologies if I have sounded negative earlier.
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No offense taken, no worries.
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