Introduction
Well, here we are going to take a deeper analysis into whether insurance-based investments are Halal or Haram. Halal refers to acceptable while Haram refers to forbidden.
According to Islamic complaint guidelines, followers of the Islamic religion can only sign up for investment options that are compliant with their religious sentiments.
Those investment options or finances are named ‘Halal Options’.
On the contrary, when certain types of investments are curated against Islamic principles, then these investments are not Shariah-compliant. Meaning, that the investment options do not comply with Islamic sentiments deeming such investments as ‘Haramic’ Options. Meaning Forbidden options.
Let us take a further dig at some of the key terms that are used by Islamic financiers and Investment houses and then deep dive into the blog topic ‘Are Insurance Stocks Halal’. Helping you get started further on the same:
How are investment-based terms considered in the Islamic Law of Finance?
These are investment terms that are for or against the Islamic laws or Principles of financing. Therefore, let us have a look into what these terms mean:
Interest Component- also known as Ribba in Islamic Law
According to the Shariah Compliant Norms, the concept of lending money to someone and receiving interest in lieu of the same is actually considered Haramic.
This is primarily because Islamic finance treats interest remittance as being an exploitative act.
However, most of the traditional insurance products allow the policyholder to pay premium sums against the coverage policies. The insurance industry remits interest payouts to investors or policyholders at a nominal rate of interest.
Cashbacks or discounts are given away as rewards to insurance subscribers while the lumpsum payouts are utilized by insurance companies wherein they invest via interest-bearing instruments.
Therefore, traditional insurance investments or insurance stocks are Haramic according to the Shariah-compliant laws of the Islamic religion.
Uncertainty leading to speculation
Trading transactions that are usually speculative in nature have a specific term that is attached according to the Islamic nomenclature. Here, we call speculation as Gharar.
Investment options are based on speculation and therefore are considered Haramic according to Shariah-compliant or Islamic norms indeed.
How does the insurance industry work here? In a traditional insurance domain, the insurer and insured play with a gamut of uncertain moves and unforeseen outcomes.
For instance, an insured never knows if the policy coverage event will hit him in real-time or not. He does not know what is the claim amount that must be filed in account of damages suffered from the policy coverage. At the same time, the insured firm or company does not know how much portion of premiums collected goes for risk exposure.
Therefore, the insurance industry is highly speculative indeed. This degree of uncertainty that is prevalent in insurance-aided transactions is prohibited according to Islamic law due to the degree of risk that is involved while you invest here.
Speculation or Maysir
Islamic Law purely prohibits trading or financial activities that are based on gambling or speculation.
However, most of the investments are based on an element of luck or chance.
The price of a share or stock might go higher or plummet inside the market and you never know when spikes or downfalls happen and this can impact the value of your investment wallet to a greater extent indeed.
Similarly, most types of insurance policies are diced along an element of speculation or what if. In a health policy, if the person does not get hospitalized or meet with a terminal illness or accident., then he is not going to receive the consolidated payout of the health policy.
Therefore, the insured effectively gambles with the insurer. In traditional parlance, this is not something Islamic finance teams can approve of.
On the contrary, Islamic law accepts investment options that work on real or tangible assets that operate using shared risks and responsibilities from the lender as well as the investor.
What are the types of insurance stocks that are acceptable by Islamic Law?
We have seen the type of investment options that are not accepted by Islamic Laws and therefore are not Shariah-compliant.
Now, let us have a run-down into types of alternative insurance options that are accepted by Islamic laws and are Shariah-compliant.
Here they are for your understanding:
Takaful Insurance or the Islamic Insurance
As we have already seen, the traditional type of insurance that typically works with interest, premiums, and speculation, you cannot identify them as viable forms of investments under the Islamic law of Finance. Now, comes the important question that lies ahead of us.
Do you have an alternative form of insurance that complies with Islamic or Shariah-complaint laws or regulations?
Yes, we do have and this is called the takaful Insurance. Takaful Insurance is also known as Islamic insurance as it is specifically designed or tailormade with Islamic principles in mind.
Takaful Insurance is primarily based on mutual cooperation, shared responsibility, and risk sharing.
The participants here share a pool of funds that are utilized for payment of property damages, hospital bills, etc for the needy ones. This system is primarily designed to ensure fairness, legality, and compliance with Islamic or Shariah-compliant rules and regulations without including interest rates, speculation, or volatility of prices that traditional investment options primarily make use of.
Therefore, when you have insurance stocks that belong to the Islamic market, then these options can safely be considered halal or permissible options under the Islamic Nomenclature.
Investment options that are used by Islamic Investors
Suppose you run a conventional Investment House or deal with stocks that are regularly bought or sold, you might as well include a Shariah-compliant wing that deals with Islamic investment options on the whole.
Here, the Islamic population avoids stocks or interest-bearing components of firms that deal with Haramic products as deemed by Islamic laws. These include shares of alcohol-based firms, lottery firms, or gambling and betting firms.
The stocks should belong to Takaful Investment firms and have the approval of Shariah Advisory boards to be accepted or considered ‘Halal Investments’.
What is the role of insurance stocks in the Shariah world?
When it comes to dealing with investment-based stock options or insurance-based stocks, the same set of principles would apply if you are looking for Sharia-compliant portfolios.
For insurance stocks that work on interests, speculation, and excessive forms of risks and uncertainty, then these insurance stocks would be deemed Haramic and would not be handled in Shariah firms.
On the contrary, when the investment firm deals with Takaful insurance products that are ethical and free from risk or uncertainty, then these are insurance stocks a Shariah board would approve of for investors.
What is the role of Shariah Advisory Boards at investment houses?
Shariah Advisory Boards have quite an important role to play when you deploy them at major Investment Houses or introduce them to biggie financial corporations.
These boards form an integral part of the Shariah wing that specifically caters to Islamic investors. Here, the board checks for the authenticity of investment options that follow Islamic principles of financing and gives red flags to traditional investment options.
This way, Islamic investors get what they are looking for and make sure that their investment options safely follow Shariah complaint laws and are considered Halal.
The Bottom Line
Traditional insurance stocks are not considered halal as they have an interest component and are subject to market risks or speculation.
On the contrary, you must get in touch with Takaful Insurance companies or Shariah-compliant investment firms to look for stocks or investments that are not Haramic but Halal in nature.
What are your thoughts on this? Do mention it in the comments below!
Frequently Asked Questions or FAQs
How do you identify Shariah compliance investments from the non-Shariah-based investments?
Answer: Well, it is quite simple here. The standard investment options primarily are based on risk, speculation, and interest components whether you deal with stocks, shares, or insurance products. These are non-Shariah-based investment options. On the contrary, those investments that comply with Islamic laws of finance and ensure fairness or screen equality, then these investments are Shariah-complaint investment options.
Do you have a comprehensive guide or a scholar book that tells us what Islam investments are all about?
Answer: Shariah Advisory boards tell you what Shariah-compliant investments are and what are not. Global firms manage revenue and investment options for Islamic investors by having a Shariah Advisory wing as against dealing with individuals who thrive on general insurance or rely on interest income from regular investment options.
How is commercial insurance different in the source of criterion or management principles? Explain.
Answer: Commercial insurance plans pay interest or coupon payments to investors periodically. It is primarily based on speculation of a contingency event that may or may not happen. If the event happens and if your policy covers it, only then can you avail of lumpsum payouts from the insurance service provider. These factors go against Shariah principles or Shariah standards that deem interest, risk, and speculation as Haramic elements of finances.
