Page 16 - Valentino Cattelan - In the name of God: managing risk in Islamic finance

VALENTINO CATTELAN

together (commercial enterprises), since it belongs to the capitals and workforce
(mudaraba and musharaka); it is transferred in a sale (or in any other transaction,
such as lease) since it belongs to the transferred property (murabaha, salam or ijarah).
With specific reference to the ban of ‘unreasonable uncertainty’, and in
accordance with the reasoning followed in this article, El-Gamal interprets the
prohibition of bay’ al- gharar in the sense of the ban of the ‘trading of risk (of loss)’,
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as property per se.
Consequently, a conventional insurance contract, where the risk of negative
events is transferred from the beneficiary to the insurer with the contextual
payment of a premium, is deemed invalid in Islamic finance, since the amounts
exchanged by the insured and the insurer are unequal and depend upon uncertain
future events. For these reasons, the insurance contract is replaced in Islamic
finance by the takaful company, where, on the contrary, the risk is shared among
the participants in a mutual guarantee linked to an investments fund, which may
be structured as mudaraba or musharaka or according to a wakala (agency) contract
related to the administration of the fund. Once again, the criteria of primacy of
real economy, exchange equilibrium and profit-loss sharing dominate Islamic risk
management.
In this context, an example of this alternative conceptualization is given below,
with regard to the invalidity of a conventional insurance contract: «Take an
insurance contract. At T1, A, the insured, pays a premium to B, the insurer, in
exchange for B’s promise to protect A against certain losses should a
predetermined contingency occur. A pays a thaman in the form of premiums but
does not receive a muthamman, at least not immediately, in return. Likewise, B
receives a muthamman but does not immediately deliver a thaman to A. After the
parties enter into the insurance contract, one of the two scenarios is possible.
In the first scenario, the specified contingency occurs and B compensates A for
the loss. From the perspective of the jurists, the money delivered from B to A is
A’s muthamman that he receives in exchange for the premiums that he had already
paid. Similarly, the money B pays A in this scenario is the thaman that B paid in
order to receive A’s muthamman (premiums). Accordingly, they conclude that this
exchange is invalid: first, because it involves riba (the deferred exchange of
money); and second, because of uncertainty in the thaman and the muthamman.
Recall that the promise to indemnify against a loss cannot serve as the muthamman
that would complete the exchange because it is not property that can be delivered
to the insured.
In the second scenario, the term of the insurance contract is completed without
the occurrence of the specified contingency. In this case, according to the jurists,
there simply has been no exchange: although the insured has delivered property
to the insurer in the form of premiums, the insured has never delivered any

56 EL-GAMAL, An economic explication of the prohibition of gharar in classical Islamic jurisprudence,
th
Paper presented at the 4 International Conference on Islamic Economics, Leicester, UK, 2000.
162