Providing the current growth pattern is maintained, the global Takaful market is projected to hit the US$25 billion mark soon. However, over-concentration in certain business lines as well as the increasing number of players entering the Takaful market has resulted in less profitability for Takaful operators when compared to conventional insurance operators.
Another challenge for Takaful operators is their over-reliance on investment income. This has not deterred conventional insurance companies from launching Takaful windows in some non-Muslim countries. The Islamic Financial Services Board (IFSB) defines Islamic windows as “part of a conventional financial institution (which may be a branch or dedicated unit of that institution) that provides both fund management (investment accounts) and financing and investment that are Shariah compliant”. However, the issue of Islamic windows has raised some concerns from a Shariah perspective with respect to the co-mingling of Islamic and conventional funds.
There are two separate questions to be addressed. The first is whether Shariah law requires Islamic funds to be segregated from conventional funds for Takaful purposes. The second is whether conventional insurance operators could utilize conventional funds in providing Takaful services.
Segregation of Shariah compliant funds
One of the fundamental aims of Islamic finance is to maintain the ‘moral purity’ of all funds and transactions. This could be interpreted to mean that Islamic compliant funds should not be mixed with conventional funds. This is simply a prudent stipulation to ensure that Islamic funds are not used in non-Islamic investments and that investors, or policyholders, who are keen on Shariah compliant investments do not receive non-Islamic returns.
Conventional insurance companies offering Islamic products should guarantee and publicize that Islamic and conventional funds are segregated. In practical or operational terms, this means that conventional insurance companies may be required to set up different accounts, capital funds and reporting systems for each relevant activity.
However, some Islamic jurists have promulgated the mechanism of Takhalos, which essentially deals with a situation where Shariah compliant funds (Mubah funds) have co-mingled with non-Islamic compliant funds (Haram funds). This mechanism allows contaminated Mubah funds to be purified by ascertaining the percentage of Haram funds that have contaminated the funds and then removing an amount that equates to that percentage from the funds. This is also known as ‘cleansing’. It is built on the idea that if the Haram funds or an amount that equates to them are segregated from the Mubah funds, the Mubah funds will be pure again as the reasons that rendered them impure have been removed. However, Islamic jurists have delineated the ways in which that Haram money can be dealt with. These opinions range from the counter-intuitive, such as destroying the money, to more reasonable opinions, such as spending it on charitable or non-charitable means, for example maintaining public pathways or public toilets.
So, is Takhalos always permitted? Islamic jurists have differentiated between financial activities that are inherently non-Shariah compliant (e.g. investment in alcohol) and financial activities that involve permissible investments, but have incidental non-compliant elements (e.g. investment in land that is partly debt financed by an interest-bearing loan). If the investment is inherently non-compliant then an investor may not invest in it and, more importantly, a financial institution may not co-mingle Mubah funds with funds attributed to such investments. However, if the investments have incidental non-compliant elements, as described above, then the issue is not so clear cut. Some Islamic jurists have prohibited Mubah funds from being co-mingled with funds involved in such investments.
Opinions of jurists
It necessarily follows that this opinion does not acknowledge the concept of Takhlos with regards to dividends or income. In fact, the proponents of this opinion hold that if Mubah funds were to have the slightest co-mingling with Haram funds, then it would be necessary to perform Takhlos regarding the whole of the invested capital. Other Islamic jurists have permitted such co-mingling with the condition that the Haram percentage can be ascertained, so that the mechanism of Takhlos can be undertaken with regards to the dividends or income from the Mubah investment funds.
It could well be the case that the opinion banning any co-mingling of funds is a more robust or black letter approach to Shariah law, as the prohibition of investing in non-Islamic compliant activities has at its underpinning an intention to safeguard and uphold what Islam views as moral. When one is prohibited from receiving interest or receiving the price of alcohol, that is so because lending with interest or selling alcohol are morally wrong in an Islamic sense.
By telling someone that they may not personally charge interest but may co-mingle funds with funds that (for instance) are used to finance interest loans as long as they perform Takhlos; you are prohibiting the fruit of an act that you have effectively sanctioned, albeit implicitly.
However, it may be that Takhlos could be a pragmatic alternative to the black letter approach where no other option is viable.
Conventional insurance companies offering Islamic products
To determine whether Shariah law allows conventional insurance companies to reimburse claims to policy holders in a Shariah compliant method, we must first briefly understand how Islamic property law views money. Does a person have a property right or a property interest with regards to money? A property right means that a person owns the particular notes and coins and a property interest means that a person owns an interest in the value of the notes and coins. For example, property rights do attach to land in Islamic property law and, therefore, land that was acquired unlawfully (contrary to Islamic law) would be inherently unlawful and, as such, Islamic jurists have concluded that it would be unlawful to possess or purchase such land. If property rights attach to money it would ultimately mean that the term Haram (not permissible) would attach to specific notes and coins. That is the opinion of some classical Islamic jurists, such as Alshafee and Ibn Hanbal.
However, most contemporary Islamic jurists as well as some classical jurists hold that a person may only have a property interest with regards to money (unless the coin itself has a high sentimental value of course). This difference in classification is vital, since if people were seen to have a property interest in money, the Haram element would be attached to the person using the money in a Haram way and not to the money itself; or at least the Haram element would not be amenable to transfer when the money itself changes hands – unless, of course, it is transferred in a Haram way. In other words, by carrying out non-Islamic compliant finance the person will have committed a Haram, not the money. It follows that money can never really inherently be labelled as Haram; only its use can.
Based on the theory above, conventional insurance companies are allowed to reimburse policy holders from conventional funds provided the contract between the insurance company and the policy holder is a Takaful or a co-operative insurance contract, which is permissible under Shariah law. To better understand why, it would help to view each transaction as independent and not to trace back all preceding transactions. Shariah law acknowledges that undue hardship would be caused if investors were required to trace back the source of all funds (preceding the current fund provider) to determine whether or not the funds are Mubah. Therefore, a fund provider may fund Islamic compliant projects if the fund provider is providing funds in a Mubah way — regardless of who the fund provider is and what his previous activities were.
So why is co-mingling of funds Haram if money can never inherently be Haram? The basic answer is that co-mingling involves forwarding Mubah funds to be used in conjunction with Haram funds for non-Islamic compliant activities. The Haram element allows the Mubah funds to be used in such activities and, therefore, to render Haram returns. As a result, one’s Mubah property interest in the funds co-mingle with a new Haram property interest that results from the allowance for Haram use and the receipt of Haram returns.
Conventional insurance companies using Islamic windows
As can be seen from the analysis above, it is not necessary to create an Islamic window for Islamic funding. However, such windows could potentially be used to manage Shariah compliant funds.
Pursuant to the IFSB guidelines, the window will have to be operated as “a virtual branch of the institution of which it is part. If this institution’s accounting system is not designed to produce this information, any requisite changes to the institution’s accounting system will need to be made”. Further: “The institution shall comply with those disclosure requirements that relate to the risk management of the Shariah compliant assets and the appropriate risk weightings of those assets for capital adequacy purposes.”
Finally: “Information on the appropriate mechanism established to provide Shariah oversight of the activities of an Islamic window, as recommended in the IFSB’s guiding principles of corporate governance for IIFS, shall be disclosed.”
Under Shariah law, conventional insurance companies may offer their services to Muslim customers or companies incorporated in accordance with Shariah, provided those services are imparted under a Takaful contract.
However, conventional insurance companies should not mingle Islamic insurance funds with conventional commercial insurance funds as this is prohibited under Shariah law and, therefore, would bring the insurance companies’ Shariah compliance into question.
The best way to overcome this obstacle is to set up Islamic windows within the IFSB guidelines. This allows conventional insurance companies to genuinely claim Shariah compliance, which increases confidence in their products ultimately causing the sector to grow even further.
Hamid Harasani is a special advisor to Taylor Wessing. He is a PhD law researcher at King’s College London and can be contacted at