INTRODUCING ISLAMIC INSURANCE (TAKAFUL) · Ibnu Qayyim Al Jawziyyah in his book “Shifā' al-alīl...
Transcript of INTRODUCING ISLAMIC INSURANCE (TAKAFUL) · Ibnu Qayyim Al Jawziyyah in his book “Shifā' al-alīl...
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INTRODUCING ISLAMIC INSURANCE (TAKAFUL)
Concept of Risk
Risk or uncertainty is regarded as one of the fundamental facts of life. All human
activities, be it financial, industrial or social are subject to risk and uncertainty, which
may lead to financial or physical losses arising from unexpected events.
Risk and Uncertainty are Two Different Concepts
Risk
A condition in which there is a
possibility of an adverse deviation
from a desired outcome that is
expected or hoped for.
Risk is something that can be
quantifiable by using probabilities
Uncertainty
Being uncertain to varying degrees
about everything in the future which
one does not have full information.
Uncertainty is something that cannot
be quantifiable.
Since time immemorial human society has adopted various measures and remedies for
overcoming or ameliorating the effect of risk or uncertainties. These measures are
broadly classified as Risk Avoidance, Risk Mitigation, Risk Retention, Risk Transfer and
Risk Sharing.
Type Approach
Risk
Avoidance
This is a negative approach to managing risk where the exposure to
risks is not permitted to come into existence. A relevant instance
would be abstaining from engaging in any action that may give rise
to risks. For example, to avoid risk associated with ownership to
property, an individual should only rent or lease such property,
instead of buying it. This may not be the practical option or the most
optimum way of averting possibility of risk, particularly in business,
where certain risk taking is required for the opportunities of profit.
Risk Retention Generally, certain risks that are negligible and are of little financial
value with minute and minimal negative impact can be retained. For
the same reason, insurance or takaful cover will not be provided for
these types of risk. Risks of loss of a pencil, common cough and
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cold are simple examples of negligible financial impact of which its
losses can be easily absorbed by the individual or organization
concerned.
Risk
Reduction
This may be undertaken by loss prevention and loss control
mechanisms such as by way of safety programs and loss prevention
measures of which some of its examples are the use of security
guards, burglar alarms, sprinkler systems, CCTV, use of better
building materials, work safety standards and etc. Additionally, risks
may also be reduced in the aggregate by the use of the law of large
numbers - by combining a large number of exposure units to
reasonably making accurate estimates of future losses. For example;
insurance or takaful cover warranted, or in some cases encouraged
risk reduction efforts in return for better pricing through discounts.
Risk Transfer/
Risk
Financing
Where risks are transferred to another party who is willing to bear
such risk, either for a price or voluntarily. This is a method of
providing funds to meet the pre and post cost of loss. Insurance is a
form of risk transfer/risk financing from an insured to an insurer.
Another method of risk financing is through hedging where a firm
transfers defined risks to another party (via standard agreements).
Other forms of risk transfer include hold-harmless agreements,
leases, and indemnity agreements.
Risk Sharing A mechanism under which risks are shared among two or more
parties who are willing to mutually share the consequences of the
risks either for a price or voluntarily. Takaful is a method of risk
sharing mechanism between various participants of a takaful scheme
managed by a takaful operator.
Costs of Risk
Costs of Loss
Costs of loss may be easily
identifiable such as loss or
destruction of asset.
Costs of Uncertainty
Costs of uncertainty are subjective in
nature such as fear, anxiety and worry
and most importantly, may cause
misallocation of resources, poor
decisions and unnecessary high cost of
capital/expenses.
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Concept of Risk in Islam
Fundamentally, in Islam the concept of risk and uncertainty is in the realms of the
unknown (al ghaib). It is absolutely in the knowledge of Allah (SWT) whose affairs of
the physical and metaphysical world and the world hereafter are entirely in His command
and control, as pronounced in the Holy Quran:
“…and with Him are the keys of the invisible. None but He knoweth
them. And He knoweth what is in the land and the sea. Not a leaf falleth
but He knoweth it. Not a grain amid the darkness of the earth, naught of
wet or dry but (it is noted) in a clear record (the Preserved Tablet or
Lohmahfuz)...” (Surah al An’am: Verse 59).
As a religion, Islam also seeks to free man from the shackles of ignorance (jahl) and
guides him in his fear and apprehension of the unknown to only rely on the will of Allah
(SWT) based on the principle of tawheed (unity) instead of practising polytheism (shirk)
through acts such as shamanism, astrology, superstitious beliefs, omens, beliefs in ghosts
and spirits, beliefs in oracles and soothsayers as described in the Holy Quran:
“…O you who believe, intoxicants, and gambling and sacrificing stones,
and divining arrows are an abomination… of Satan’s handiwork; eschew
this that you may prosper…” (Surah al Maidah: Verse 90).
Attitude towards risks and uncertainties is also closely related to the concept of al-
Qada’wa al-Qadar (Divine Ordainment and Predetermination) which is an article of faith
in Islam. However, many Muslims have the negative misconception of divine
ordainment and predetermination. Ibnu Qayyim Al Jawziyyah in his book “Shifā' al-alīl
fīmasā'il al-qadā' wa-al-qadar wa-al-hikma wa-al-talī” (Healing the Person with Wrong
Concept about Predetermination and Causality) indicates that in upholding the belief in
predetermination and divine ordainment, Muslims have the responsibility to exercise his
choice (ikhtiar) and will (irada), and then carries out his actions (fa’ala) accordingly.
This is in line with the concept of tawakkul (means to rely on Allah or to put complete
trust in Allah) in man’s endeavours towards fulfilling his role as khalifah and abd of
Allah (SWT) as declared in the Holy Quran:
“…I put my trust in Allah, my Lord and your Lord! There is not a moving
(living) creature but He has grasp of its forelock. Verily, my Lord is on the
Straight Path (Truth)…” (Surah Hud: Verse 56).
The concept and practice of ikhtiar, irada, fa’ala and tawakkul is evidenced in a Hadeeth
that one day the Prophet (pbuh), noticed a bedouin who left his camel untied (which
would expose the risk of the camel being stolen or getting strayed), advised the Bedouin:
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“…Why don't you tie down your camel?” The Bedouin answered, “I
placed my trust in Allah." At that, the Prophet said, “Hobble (tie) your
camel and place your trust in Allah…” (Jame Tirmidhi).
Al-Bukhari and Abu Dawud reported that Ibn `Abbas (ra) said,
“The people of Yemen used to go to Hajj without taking enough supplies
with them. They used to say, `We are those who have Tawakkul (reliance
on Allah)'. Allah (SWT) revealed in the Holy Quran: “…and take
provisions (with you) for the journey, but the best provision is At-Taqwa
(piety, righteousness)…” (Surah al Baqarah: Verse 197).
Abdul Hamid Abu Sulaiman in his book, “Crisis in the Muslim Mind” provides a lucid
distinction between the concepts of ‘tawakkul’ and ‘tawakul’. Tawakkul refers to one’s
trust in Allah after undertaking all the necessary effort ‘ikhtiar’ to avert or mitigate future
risks whilst tawakul refers to a state of inertia, carelessness, incompetence and refusal to
strive accordingly to avert or mitigate future risks and losses.
Sheikh El Gari in his definition of risk reaffirms the Shariah position that prohibits the act
of being ‘fatalistic’ without taking precautions to reduce the probability of loss or by
being reckless and ignore risks around them. It is a hallmark in Islam that a Muslim is
commanded to strive for good management which in essence calls for proper planning.
One of the dimensions to be effectively dealt with in order to attain good risk
management is through takaful.
Concept of Insurance
In its earliest form, insurance had been practiced in the various Babylonian, Greek,
Chinese, Phoenician, Indian, Egyptian, Arabs and Roman civilizations as tools of risk
management. It was primarily used to protect maritime and other trade activities at that
time, as well as for the provision of social safety net for the communities.
The history of insurance indicates that insurance mechanism germinated from financial
arrangements between bankers and merchants. This is a method involving risk transfer,
whereby the risks of sea trade are managed through loans with interest made by money
lenders to ship owners and merchants with the ship or cargo pledged as collateral. It was
further attached with an option (at a higher rate of interest) whereby the loan will be
cancelled if the ship or cargo were lost at sea. This mechanism is called bottomry.
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A classic definition of insurance is provided by Lord Ivamy as:
“…a contract of insurance in the widest sense of the term may be defined
as a contract whereby one person called the insurer undertakes in return
for the agreed consideration called the premium, to pay to the other person
called the assured, a sum of money or its equivalent on the happening of a
specified event…”
A pre-Roman-Dutch definition of an insurance contract was
“…an agreement by one person, having agreed with another on the price
of a risk, takes upon himself that other’s misfortune…”
Concept of Takaful
Islam is a religion that promotes solidarity, cooperation and joint-help among the
community with the objective of mitigating the burden of loss in the event of a mishap or
catastrophe. As these are universal virtues some forms of joint-help had been practiced
before Islam. This manner of joint-help took the structure of mutual help schemes among
its members.
Scholars and researchers have identified some of the practices as Al-Diyat, Al-Aqilah,
Ma’qil, Al-Qasamah, Al Tahanud, Al Diwan, Al Muwalah, Dhaman Khatar Al Tariq.
These were joint-indemnity or solidarity schemes, of which its virtues are pronounced by
Allah in the Holy Quran,
“…help one another in furthering virtue and God-consciousness, and do
not help one another in furthering evil and enmity…” (Surah al Maidah:
Verse 2).
Al-Aqilah (which literally means ‘slayer's paternal relative who undertakes to pay blood
money’) was introduced as a covenant of mutuality formed between the Meccan
immigrants (Muhajirin) and the Medinans (Ansars) whereby members paid their annual
contributions through a fund called ‘Al Kanz’. The fund then was used to pay
compensation on behalf of a member who was liable to pay a diyat.
Ma’qil’ was provided under the Constitution of the city-state of Medina. By this practice,
each member of a tribe had to contribute to a fund for the purpose of funding and settling
of ransom money in the event of any member of the tribe was made a prisoner of war by
an enemy. Other related or neighbouring tribes provided assistance for the ransom if the
fund were to be insufficient.
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‘Al-Qasamah’ was another pooling system under which a common community fund was
created. Contributions to the fund were made jointly by members of the community to
assist the family of murdered victims where the murderer could not be found.
‘Al-Muwalah’ was another scheme formed between two parties with the intention that
either one of the two will be responsible in the event of a mishap or misfortune inflicted
upon his counterpart.
‘Al-Tahanud’ was basically a food sharing and rationing programme among travelers in
view that the journey or time taken to travel from one point to another during those days
was ardous and long. All the travelling members agreed to contribute their foods to be
pooled so that it can be shared later during the journey.
‘Al-Diwan’ in essence was a register. Persons named or recorded in the ‘Diwan’ actually
owed one another mutual assistance and in consideration, were obliged to contribute to
the payment of compensation including financial aid akin to a retirement or pension
benefit, in particular those who had served for the cause of Islam and Allah. As a matter
of fact, conceptually the takaful product called ‘Maash’ (a form of annuity) was guided
by the practice of the Diwan. This system was institutionalised during the second Caliph
Umar Al Khattab.
‘Dhaman Khatar Al Tariq’ whereby the merchants of Mecca established a kind of
common fund by pooling the resources from all participating members. This form of
mutual fund was used to help the victims or survivors of natural hazards during their
journey plying their commercial ventures. It was reported that the Prophet (pbuh), who
traded with the capital provided by Khadijah (ra), contributed to such fund.
Milestones of Takaful
Prophet Muhammad (pbuh) validated a system of community
self help and financial assistance and later institutionalised
by Caliph Umar al Khattab
Early Islamic history
Seljuk Sultan Ghias al Din Kayhusraw introduced a form of
state insurance which reimburse traders if their merchandises
were stolen or robbed within the Seljuk state of Anatolia
12th Century
Ibn Abidin, a Hanafite jurist allowed a form of insurance for
marine venture
17th Century
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Fatwa of Sheikh Muhammad Abduh legalising insurance
18th Century
Fatwa issued by National Fatwa Council of Malaysia.
1972
Resolution by First International Conference on Islamic
Economics held in Makkah
1976
Incorporation of the first modern Takaful Company in
Sudan.
1979
Shariah Background of Takaful
Whilst fully appreciating the great service and importance of insurance as a risk
management tool to individuals, businesses and society, contemporary Islamic scholars
are not in agreement with the contractual nature of buying-and-selling transaction of
insurance which is not in line with the precepts of Shariah. They have identified a number
of traits of the insurance contract as well as its practices which they have concluded
contravening the Shariah principles and requirements namely, the presence of the
elements of gambling (maisir and qimar), uncertainty (gharar fahish), interest (riba). As
consequent, they further resolved the whole transaction is shrouded with fraud and
cheating (ghish wa ghabn), ignorance and uncertainty (al-jahala).
From the various fatawas and research works by scholars and jurists, the alternative form
of ‘insurance’ which is permissible under Shariah should be based on the concept of
takaful. In this manner its operation will be structured on the contract of donation (uqud
tabarruat), instead of the conventional commercial contract of exchange (uqud
muawadhah) as the latter contains major elements of riba, maisir and gharar which
invalidates the conventional insurance contract.
Gharar in Insurance
Gharar literally means risk. It is derived from the word tagheer which refers to
unknowingly exposing oneself or one’s property to jeopardy. Gharar may arise where:
(i) The parties are unaware whether such an event will take place or not
(ii) The subject matter is not within the knowledge of the parties
(iii) There is no certainty over the existence of the subject matter
(iv) Its acquisition is in doubt
(v) Its quantum is unknown.
This principle can be derived by the command of Allah (SWT) that in dealing with one
another or muamalah, it must be based on mutual acceptance, fairness and justice:
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…O ye who believe! Eat not up your property among yourselves in
vanities: but let there be amongst you traffic and trade by mutual good-
will: nor kill (or destroy) yourselves: for verily God hath been to you Most
Merciful... (Al Quran, Surah an-Nisa: Verse 29).
It is obvious that in an insurance arrangement, there are major elements of uncertainty
and lopsidedness in a contract known as ‘gharar fahish’. For example, both the insured
and insurer do not know:
(i) With any degree of certainty of the insured events which is integral to any insurance
transaction
(ii) Its liability and obligations as they relate to future, unknowable events.
(iii) When and how much the claim under the insurance agreement will be paid or
whether payable at all?
Riba in Insurance
Riba (usury) is forbidden in the Quran and the Hadith of the Prophet (pbuh). Riba
originally means “increase and growth” (see Al Quran, Surah Al Hajj verse 5). Increase
here means the hike over capital or nominal amount: irrespective of whether the increase
is large or small. Therefore, in Islamic jurisprudence the presence of riba in a contract
will render the contract invalid and void,
…those who devour usury cannot arise except as one whom Shaitan has
prostrated by (his) touch does rise. That is because they say, trading is
only like usury; and Allah has allowed trading and forbidden usury. To
whomsoever then the admonition has come from his Lord, then he desists,
he shall have what has already passed, and his affair is in the hands of
Allah; and whoever repeats (the offense) - these are the inmates of the fire;
they shall abide in it (forever). Allah will deprive usury of all blessings
and He will give increase for deeds of charity. For He loves not creatures
ungrateful and wicked. O ye who believe! Fear Allah, and give up what
remains of your demand for usury if ye are indeed believers. If ye do not
(give up usury), take notice of a war from Allah, and His Messenger, but if
ye turn back ye shall have your capital sums, without increase or
diminution… (Surah al Baqarah: Verse 275-279).
“…The Prophet (pbuh) said, “Gold is to be paid for by gold, silver by
silver, wheat by wheat, barley by barley, dates by dates, salt by salt, like
for like and equal for equal, payment being made hand to hand. If these
classes differ, then sell as you wish if payment is made hand to hand…”
(Sahih Muslim in Kitab al-Musaqah, Hadith No.1587).
There are basically four kinds of riba:
1) Riba al fadhl - an increase which occurs in exchanging riba goods not due to a
postponement
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2) Riba al nasiah - an increase which occurs in exchanging riba goods because of
postponement.
3) Riba al qard - a loan granted on condition that the borrower gives something
beneficial or useful to the lender.
4) Riba al yad - a deferment or postponement in the delivery or receipt of goods
which to be exchanged.
The nature of the insurance contract is such that money is exchanged for money (i.e.
insurance premiums for claims). Riba in insurance involves both riba al fadhl and riba al
nasiah:
(i) Riba al fadhl - since the amounts exchanged are not equal – insurance premiums
paid and the claims payout
(ii) Riba al nasiah - since the exchange is not spot – between paying the insurance
premium and receiving the insurance claim payout.
(iii) Investment - undertaken by insurance companies comprising of
elements/portfolios not compliant with Shariah.
Maisir in Insurance
Qimar and Maisir (Gambling and Wagering) which literally means ‘getting a profit
without working for it, or earning something too easily’ is clearly prohibited in Islam as
stipulated in the Holy Quran
“…They ask you about wine and gambling. Say, “In them is great sin and
(yet, some) benefit for people. But their sin is greater than their benefit”.
And they ask you what they should spend. Say, “The excess (beyond
needs)”. Thus Allah makes clear to you the verses (of revelation) that you
might give thought...” (Surah al Baqarah: Verse 219)
Essentially, Qimar and Maisir are acts involving the acquisition and distribution of
property based on a zero sum game whereby the winner takes all and the loser losses all,
contingent upon an uncertain event. Jurists also regard gambling as a form of gharar and
at the same time a form of qimar because the gambler is ignorant of the result of the
gamble he had undertaken.
Maisir in insurance contract happens where:
(i) as a consequence of excessive gharar upon receipt by the insurer of the insurance
premium although no claim is paid – no actual exchange took place.
(ii) insurer loses if the amount of claims paid to the insured is larger than the premium
collected
(iii) if the insurance premium collected exceeds the claims - the insurer makes profits.
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Takaful
Takaful is derived from the root word ‘kafala’. In Arabic it means responsibility,
guarantee, amenability or surety. In practice, takaful takes the meaning of joint guarantee,
shared responsibility, solidarity, mutual undertaking among its participants against
certain or defined financial loss as a result of being inflicted with specific or defined
misfortunes. In line with its meaning takaful participants agree to contribute to a defined
fund. Simply put, takaful is the creation of a common defined fund by way of defined
contributions from all its participants for the purpose of relieving their financial burden in
the event of a defined loss. Insurance in Islam according to Yusuf Al Qaradawi is:
“…in my view insurance against hazards can be modified in a manner
which would bring it closer to the Islamic principle by means of a contract
of donation with a condition of compensation…”
In that perspective takaful can be visualised as a pact among its participants to remove
damage or harm when it occurs on any of them, by way of the payment of compensation
from common takaful contributions, described in the Islamic legal maxim as ‘al darar
yuzal’ (damage or harm is removed). Therefore, takaful is a system that manifests a
sense of brotherhood and solidarity among participants. The Prophet (pbuh) in the
following Hadeeth declared the importance of this virtue:
Narrated by Abu Hurairah (r.a) from the Prophet (pbuh) “…Whosoever
removes a worldly hardship from a believer, Allah will remove from him
one of the hardships of the hereafter. Whosoever alleviates the needy
person, Allah will alleviate him in this world and the next…” (Sahih
Muslim, Kitab al-Birr).
AAOIFI Shariah Standard 26(2) of 2007 provides a comprehensive definition of takaful
business as:
“…Islamic Insurance is an agreement between persons who are exposed to
risks to protect themselves against harms arising from the risks by paying
contributions on the basis of ‘commitment to donate’ (iltizam bi al-
tabarru’). Following from that, the insurance fund is established and it is
treated as a separate legal entity (shaksiyyah i’tibariyyah) which has
independent financial liability. The fund will cover the compensation
against harms that befall any of the participants due to the occurrence of
the insured risks (perils) in accordance with the terms of the policy…”
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The practice of takaful can be summarised as follows:
1) A contract of donation between defined takaful participants to share their respective
takaful risks and liabilities based on solidarity and mutual assistance (taawun)
2) By voluntarily contributing defined takaful contributions into a defined takaful fund,
3) By jointly agreeing to cover defined takaful risks,
4) In a defined takaful period,
5) Under the trusteeship and management of a defined takaful operator based in
accordance with the selected business model – al-Mudharabah, al-Wakalah or
hybrid.
Differences between Insurance and Takaful
Points Insurance Takaful
Risk
Management
mechanism
Risk transfer from insured to
insurance company
Risk sharing among takaful
participants
Underlying
principles and
practices
Conventional principles and
practices
Shariah principles and practices
Essence of
intention
Intention to create legal
relationship only based on
individual needs
Intention to create both spiritual &
legal relations and as a form of
ibadah (worship to Allah) based on
solidarity and cooperation between
the takaful participants.
Contract Commercial (buying and
selling) contract or
Uqud al-Muawadhah
Donation contract or
Uqud al-Tabarruat as well as other
Shariah approved contracts such as
al-mudharabah, al-wakalah, al-
waqf
Company Guarantor of insurance fund Trustee and manager of takaful
fund based on Shariah approved
contracts of al-mudharabah, al-
wakalah or al-waqf
Guarantee Given by insurance company Takaful participants mutually
guarantee each other
Investment No restriction – as long as
sound investment in both riba or
Shariah based instruments
Strictly in Shariah compliant
instruments as well as sound
investment
Shariah Advisory
Council
Not required under the law Required under the law
Source of
regulatory
framework
Man-made laws:
statutes, legislation,
case laws, based on common
Divine justified principles : Quran,
Sunnah, juristic opinions,
legislation, based on Shariah
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law principles principles
Legitimacy of
Funds
Insurance funds belong to the
company though separation of
assets is maintained between
the shareholders and the
policyholders
Funds belong to the participants and
managed by the operator for a
legitimate consideration for the
services rendered. Shareholders
funds are accounted for separately
Justified risk Pure risk Defined pure risk
Subject matter Common law justified Shariah justified (mal
mutaqawwim)
Operating
expenses
From insurance fund (premium) Shareholders’ fund (mudharabah
model) / defined from contribution
as fixed up-front charges (wakalah
model)
Operating/
mortality
surplus/deficit
Surplus belongs to the
insurance company whilst the
deficit shall be the
responsibility of the insurance
company
Principally shared between
participants. Takaful operators may
share profit based on profit-sharing
principles of mudharabah or
jualah. Deficit on the other hand
shall in principle be the
responsibility of the takaful
participants
Reinsurance No restriction whether
conventional or retakaful
companies as long as sound
reinsurance basis.
Strictly with retakaful operators
unless insufficient retakaful
capacity as a temporary hajah as
well as sound retakaful basis
Reinsurance
contract
Based on risk transfer
mechanism from insurer to
reinsurer on commercial
(buying & selling) terms.
Based on risk sharing mechanism
between takaful operator and
retakaful operator on Shariah
approved contracts of tabarru’, al-
mudharabah or al-wakalah.
Reinsurance
Commission/Reta
kaful Service Fee
Treated as income to the
insurance company
Belongs to the takaful fund.
Damages (claims) The Courts of justice are in
some cases empowered to
award unlimited damages
There is no justification to award
unlimited or unreasonable damages,
but only justified one.
Payment of
premium/contribu
tion
Paid premium creates an
obligation against the insurer on
a sale and purchase relationship.
Paid contribution is treated as both
donation (tabarru’) and investment
(mudarabah).
Intermediary
(brokers and
agents)
Contract based on principal and
agent relationship where
commissions are paid from
insurance fund
Contract based on Shariah
approved contract of al-
mudharabah, al-wakalah and al-
jualah where commissions are paid
either from shareholders fund or
takaful fund.
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Zakat on business Not required Mandatory once the haul and nisb
criteria are met.
Historical Developed from contract of
Bottomry in Medieval Europe
based on interest/usury
Developed from system of al-
Aqilah in traditional Arab custom
(approved by the Prophet pbuh),
practiced on the basis of mutual
cooperation and brotherhood
Hukm (religious
edict) in Islam
Forbidden (Haram) Permissible (Halal) and
encouraged.
Capital No restriction, except through
legal sources
Preferably from Shariah compliant
sources and legal under the law.
Mr. IDRIS JIBRIN
ISLAMIC FINANCIAL ADVISORY UNIT,
AHMED ZAKARI & Co (Chartered Accountants),
5th FLOOR, AFRICAN ALLAINCE BUILDING,
SANI ABACHA WAY, KANO,
NIGERIA.
PHONE: +234-64-892449
E-Mail: [email protected]
Web Site: www.ahmedzakari.com