Defining Riba-Historical perspective
A debate is still going on about defining riba. Though it is banned in all its forms but to define it in the current economic scenario where time value of money or inflation has become the central point of any economic system have become bit difficult. However apart from ongoing discussion let us see how the human history has come up with definition of riba.
There is no difference of opinion that Five Pillars of Islamic Finance are based on ban on interest that must not be charged or paid on any financial transaction. Further Money has no intrinsic value and consequently cannot produce returns on its own. Rather, it is a vehicle to facilitate transactions. Further ban on uncertainty or speculation Uncertainty in contractual terms and conditions is forbidden. However, risk taking is allowed when all the terms and conditions are clear and known to all parties. There is a ban on financing of certain economic sectors such as weapons, pork, and gambling. Further parties to a financial transaction must share in the risks and rewards attached to it. The asset-backing principle for each financial transaction must refer to a tangible, identifiable underlying asset.
The Holy Qur’an did not give any particular definition for the interest for the simple reason that it was well known to its immediate audience. It is like the prohibition of pork, liquor, gambling, adultery etc., which were imposed without giving any hard and fast definition because all these terms were well known and there was no ambiguity in their meaning. The case of riba was similar. It was not a term foreign to Arabs. They all used the term in their mutual transactions. Not only Arabs but all the previous societies used to practice it in their financial dealings and nobody had any confusion about its exact sense. In the verse of Surah An-Nisaa the Holy Qur’an has reproached the Jews for their taking riba whist it was prohibited for them. Here this practice is termed as riba in the same manner as it is termed in Surah Al-Imran or Surah Al-Baqarah. It means that the practice of riba prohibited for Muslims was the same as was prohibited for the Jews Christians and Hindu’s.
The oldest references to usury are found in religious manuscripts of India, dating back to 2000-1400 BC where the ‘usurer’ is associated with any interest lender. In the Hindu Sutra (700-100 BC) as well as in the Buddhist Jatakas (600-400 BC) there are many references to the payment of interest, along with expressions of disdain for the practice. Special law was made which forbade the higher class of Brahmans (Priests) and Kshatriyas (warriors) from lending at interest.
For Jews the Old Testament mentions three types of verses that deal with usury.
- One forbids usury in general, without reference to Jewish or non-Jewish
“Do not ill-treat an alien or oppress him, for you were aliens in Egypt. Do not take advantage of a widow or an orphan… If you lend money to one of my people among you who is needy, do not be like a money lender, charge him no interest” (Exodus 22:21-25).
- Another, forbids Jews taking usury from poor non-Jews living with them. “If one of your countrymen becomes poor and is unable to support himself among you, do not take interest of any kind from him but fear your God that your countryman may continue to live among you. You must not lend him money at interest or sell him food at a profit” (Leviticus, 25:35-37)
- Third set of verses forbids the Jews to take usury from other Jews, but allow them to take usury from others such as: Deuteronomy 23:19-20
The New Testament shows that Prophet Jesus (peace be upon him) not only prohibited interest, but asked his followers not to take back even the principal of the loan, and to lend not only to friends but even to enemies. Under this prohibition any Christian who dealt in interest was considered as a heretic during the Middle-Ages and was punished by the Church by not allowing his body to be buried among the tombs of Christians.
Matthew 5:42 – “Give to the one who asks you, and do not turn away from the one who wants to borrow from you.”
Luke 6:34-35 – “And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full. But love your enemies, do well to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be children of the Most High, because he is kind to the ungrateful and wicked.”
Luke 6:38 – “Give, and it will be given to you. A good measure, pressed down, shaken together and running over, will be poured into your lap. For with the measure you use, it will be measured to you. “
Deuteronomy 23:19 – “Do not charge your brother interest, whether on money or food or anything else that may earn interest.”
Leviticus 25:36 – “Do not take interest of any kind from him, but fear your God, so that your countryman may continue to live among you.”
Exodus 22:25 – “If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest”
Now finally coming to Islam the prohibition of riba is covered in a number of verses in the Qur’an. The first verse in Surat Al-Room: 39 read:
“That which you give in usury for increase through the property of (other) people, will have no increase with Allah: but which you give for charity, seeking the Countenance of Allah, (will increase): it is these who will get a recompense multiplied.”
In this verse the Qur’an does not prohibit riba explicitly, but implicitly mentions that riba cannot bring any increase and introduce it as useless.
The Second verse from Surah Nisa’:161 speak about the Jews who were instructed not to take usury but they did. The verse reads:
“…they took usury, though they were forbidden, and that they devoured men’s weal wrongfully;-We have prepared for those among them who reject faith a grievous punishment”.
Here the Qur’an shows how usury can result in sinful behavior that deserves punishment.
The third verse from Surah Al-Imran: 130 reads: “O ye who believe! Devour not usury, doubled and multiplied; but fear Allah. That you may (really) prosper.”
Here prohibition has been announced clearly for a kind of multiplied usury that was very popular in societies.
Finally, in the verses 275-277 of Surat Al-Baqarah, the strongest prohibition of usury has been announced: “Those who devour usury will not stand except as stand one whom the Satan by his touch hath driven to madness. That is because they say: Trade is like usury, but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of Fire: they will abide therein (for ever). Allah will deprive usury of all blessing, but will give increase for deeds of charity; For He loved not any ungrateful and wicked. Those who believe, and do deeds of righteousness, and establish regular prayers and regular charity, will have their reward with Lord: On them shall be no fear, nor shall they grieve. O ye who believe! Fear Allah, and give up what remains of your demand for usury, if ye are indeed believers. If ye do it not, take notice of war from Allah and His Messenger. But if ye repent, ye shall have your capital sums: Deal not unjustly, and ye shall not be dealt with unjustly.”
There are four stages of riba in the Qur’an:
First Stage (30:39) Compares riba with zakat & charity. It Praises zakat & charity and criticizes the practice of riba.
Second Stage (4:160-161) considers the practice as an iniquity (zulm).
Third Stage (3:130) prohibits the practice of charging double and multiple interests (riba).
Fourth Stage (2:275-281) conclusively prohibits all forms of interest (riba) and defines it as any excess over the principal of the loan.
Takaful Industry (Islamic Insurance) needs further support
The global Takaful market has reached US$ 19 Billion in 2017. The market is further projected to exceed US$ 40 Billion by 2023, at a CAGR of 13% during 2017-2023. But it is just a fraction of global insurance of US$ 5 trillion with a CAGR of (2011-17) 1%.
Insurance, no matter what kind, is pooling of risks and applying the law of large numbers. The peril only affects a small portion of those whose risks are pooled. Hence, if our probability calculation is accurate, a small premium from everyone in the pool will be sufficient to compensate fully the small portion who will suffer during the term of the policy.
The problem with conventional insurance is that it creates an “exchange contract” between the insurance company and the insured in the form of “policy”. It simply says: you pay a premium of $ 100, and you will be covered from the specified risk (fire for example). If your house is destroyed by fire, the company will pay; say $500,000 as compensation. This is problematic from Shari’ah point of view.
An exchange contract (such as sale contract) must be free from Gharar (contractual uncertainty). This means that the rights and obligations of the two parties must not be uncertain. If they are only probable, the contract is void. If we look at the conventional insurance contract we see that the insured will pay a “certain” premium in exchange for a “probable” payoff. Hence, the contract is void.
It is an established rule in Shari’ah that “Gharar” will only void exchange contracts and not benevolent contracts such as “Takaful”. In other words. If I sell a sealed box the content of which is not known, then such sale contract may be void for the content may turn out to be equal, much more, or much less than the paid price. This is Gharar, for one party has received a “certain” price, the other bought an “uncertain” stuff. However, it would be O.K from Shari’ah point of view to give that same box as a gift or as an altruistic contribution or donation even though the Gharar remains but it will not void the contract (in Shari’ah a gift is also considered a contract).
The whole concept of Takaful is based on the idea of moving the insurance program from the realm of exchange contracts to that of benevolent giving. The proposed structure does include that same idea of pooling risks and applying the law of larger numbers.
However, the form of contract is different. The insurance company will now manage this pool, and the insurance policy is simply a certificate through which the holder participates in the pool. What he pays is not a price but a contribution which may be considered a donation to this Takaful scheme. As a manager, the insurance company needs to manage the pool for the benefit of the participants. Insurance Company is only an agent and not an owner of the pool. It is compensated either by a charge on the net asset value of the pool, or a portion of profit generated from investing the same (or both). Hence, we have two contractual arrangements. One between the insurance company and the totality of the participants represented by this pool. This is an agency contract, the other between the insured themselves being partners in the pool.
Contributions are collected by the manager (insurance company), compensations are paid to those who are victims of the peril and then at the end of every year the manager will see the pool. If there is extra money, it should be paid back to the participants for this is their pool. If funds are not sufficient, then the manager should re-asses these basic contributions and go back to all participants for payment of more in the pool.
Thus Takaful program is capable of serving every insurance need. It can be a substitute for life, auto, and fire etc insurance. This is now marketed by some Islamic banks and Takaful companies in Saudi Arabia and in other Muslim countries.
By Types, the Takaful Market can be Split into, Life/Family Takaful, and General Takaful. By Applications, the Takaful Market can be Split into, Family, Government, Business market segment by Regions/Countries,
The general Takaful operators in the early years failed to adopt a joint approach in promoting the cause of Takaful as a Shariah-compliant risk-coverage mechanism. Overlooking the desired Islamic spirit of transparency in dealings, they harshly competed. This created an unethical image of the Takaful industry.
As regard to human resource factor generally, opportunism has been the deciding factor for individuals with conventional insurance background, to join newly-formed Takaful operators at senior/middle management levels.
Initially the required incitement to acknowledge the Shariah requirements and to obediently contribute for the cause of Takaful on strong and careful commercial practices within the Shariah framework was missing. The fundamental of Islamic principles, were lacking on the part of general Takaful operators to basically incite attraction for devoted Muslims to opt for Takaful as a system to meet their risk-protection needs in a Shariah-compliant manner.
In Pakistan the cause and sprit of Takaful in Takaful Rules 2012 (the Rules) was not sufficiently addressed to up-held the writ of the Shariah. The Rules presented Takaful as a product rather a true reflection of a legal frame work featuring supremacy of Shariah, distinctly distinguishing Takaful from conventional insurance. The non existence of a Shariah Advisory Board, leaving Shariah Advisor of each company at the helm of Shariah matters of respective companies, which understandably created confusion chaos, thereby generating/promoting corrupt practices.
In 2016, the Securities and Exchange Commission of Pakistan (SECP) specifically mandated through an amendment, for regulating and facilitating the growth of Shariah-compliant financial products. A new concept of Shariah Compliant Company has now been introduced through the Companies Act 2017 under the enabling provision of the Companies Act, 2017
Recently, Securities Exchange Commission of Pakistan (SECP) has accepted a 4-member Shariah advisory board to oversee Islamic financial products in Pakistan, as the regulator looks to address credibility concerns, which still haunt the industry. It is predicted that the new board would be instrumental in harmonizing the Shariah-related business, operations and structure of the tools of the Islamic capital market in the country
In 2018 the Securities and Exchange Commission of Pakistan (SECP) has also introduced a new set of accounting regulations for Takaful Operators or Window Takaful Operators to ensure strict monitoring/scrutiny of regulatory returns and published financial statements filed by operators
However still Capacity in non-motor Takaful is serious issues as ‘A’ rated Retakaful Operators are few and highly demanding. Further underdeveloped Bond and Sukuk markets, which can provide opportunities to Takaful industry are still not sufficient.
Hence the Islamic insurance, or Takaful, industry still stands somehow in the shadow of the Islamic banking sector, partly because it doesn’t have such prevalence even in Muslim countries, and also because its business strategies and product offerings still have a lot to overtake.