The Case for Takaful (mutual insurance) on the blockchain - Part 1

Full whitepaper with references here.

Islamic Finance and Insurance

Islamic finance is most easily understood in contrast to conventional finance. The global financial system is underpinned by interest-based principles that result in inflationary systems. These systems reward spending today and penalize saving for tomorrow. Islamic finance eschews riba, or interest, in favor of wealth preservation and growth through equity investments and the sharing of risk. While it is not within the scope of this paper, it is arguable that Islamic finance offers the answer to today’s social justice issues, stemming from widening financial inequality both within and across nations.?

When it comes to finance, the shariah is a prohibitive code that is focused on defining what is prohibited, instead of legislating what is not prohibited. As such, anything that is not specifically prohibited is therefore allowed. The main shariah prohibitions in finance are:?

• Prohibition of Riba (interest)
• Prohibition of Gharar (uncertainty)
• Prohibition of Maisir/Qimar (gambling)

We’ll explain these prohibitions in more detail in the following section on Islamic insurance, or Takaful.?

Islamic banking constitutes 6% of global banking today, making incredible strides from its modest beginnings in the late 1970s. And yet, room for growth is enormous. Muslims today comprise 24% of the global population and are projected to grow to 31% by 2060. Even if Islamic finance served only the “niche” Muslim audience, it should still grow to catch up with the population. Currently, Islamic finance boasts an annual growth rate of 14%, accelerating much faster than traditional finance.

Considering the advent of bitcoin, cryptocurrencies and blockchain technologies, it appears that Islamic finance is poised to grow beyond expectations. The anti-inflationary fundamentals of bitcoin and the ethos of decentralization are giving new tools upon which to build Islamic finance. Never has there been a better time to start reformulating global finance according to Islamic principles, that promise a return to social justice and happier societies.??

Why is conventional insurance not shariah-compliant??

Islamic insurance is a touchy subject among Muslims. Because conventional insurance is widely understood to be prohibited, the very idea of insurance has been conflated with the prohibition on conventional insurance; as a result, many Muslims think that insurance as a concept is prohibited by Islam completely. Some say that everything happens by the will of Allah and by insuring against them, one is trying to go against the will of Allah.?

Such a position has not been confirmed by the words and actions of Prophet Muhammad (pbuh) himself, who not only instructed Muslims to “tie your camel first, then put your trust in Allah,” but approved the practice of Aqilah, common in early Islamic societies where members of a tribe contributed to a joint fund used to relieve hardships from disasters.?

In fact, there is no disagreement among scholars that the practice of preparing against known risks is permissible, the only prohibition is on the way insurance is practiced when it incorporates riba, gharar and maysir.?

Riba, commonly known as interest, is the profit generated on loaning money. This profit includes monetary and non-monetary profits, as long as they have financial value. Conventional insurance companies invest customer premiums into interest bearing instruments and therefore are riba-based and impermissible. In addition, scholars highlight the insurance contract itself as including riba since a small sum of money (premiums) is exchanged for a large sum of money (claims payment). The excess amount of the claims payment over the premiums is considered a form of riba.?

Gharar refers to uncertainty in commercial contracts and what each party to the contract should receive. In the case of conventional insurance, it is often the case that the insurance benefit is undefined and dependent on many factors, including subjective factors. For instance, car insurance has an undefined benefit. The amount that is paid by the insurance company is dependent on the extent of the damage and the insurance company may not approve the costs quoted by certain repair shops. There is a high level of uncertainty as to what the insured actually receives from the insurance contract.

Finally, conventional insurance is based on the transfer of risk, a concept in itself inconsistent with shariah principles. In such contracts, the insured/customer is paying the insurer/company to take on all the risk associated with the occurrence of a specific adverse event. If tragedy strikes, the insured/customer will receive a payout and is the winner of the contract. If nothing happens, the insurer/company keeps all the premiums and is the winner of the contract. This is a zero-sum game where either the insured wins or the insurer does; the interests of the insured and insurer are not aligned. This kind of contract invalidates conventional insurance on the prohibition of maisir, or gambling.

Why we came up with Takasure

It is not difficult to see why Islamic scholars have prohibited conventional insurance. Even from a non-Muslim point of view, conventional insurance is a raw deal. Insurance is commonly viewed as a necessary evil, and insurance companies “are needed, but not liked; relied on, but not trusted”.

Fortunately, shariah principles have provided us with a better model of “insurance”, commonly practiced as Takaful, a form of cooperative insurance practiced in many Muslim countries today. The underlying principle of Takaful is one of mutual cooperation and aid.?

We believe that there is a need for Takaful worldwide; not only for Muslims, but for every person who does not agree with the way conventional insurance is managed today. The blockchain, crypto and DAOs have given us an unprecedented way of building a truly cooperative insurance company based on Takaful, ensuring transparency and fairness and empowering the community to mutually aid and assist one another.?

(Stay tuned for part 2...in the meantime, check out https://takasure.io, the first global takaful life insurance on the blockchain)