state, Saxony-Anhalt, last year issued the first ever Islamic
bond in European history. It is a $121 million, five-year
floating-rate note, which pays a rent instead
of the typical interest, in a shariah
compliant contractual agreement. (BusinessWeek, Euro Edition,
I have been asked by a small sector of readers to discuss
the relevance of insurances, and banking, in the Islamic
While I am neither an authority on Islamic economics, nor
an authority on Islamic jurisprudence, there is a simple
rule of guidance which everyone should use, in order to
determine whether something is good or not, if they are
not privy to in-depth education on the subject.
The one fundamental question is: Does this activity lead
to evil, either for the individual or for the community?
Some questions to establish an element of evil may be: Does
it exploit distress, does it employ fraud or cheating, does
the fulfilment of the contract result in disputes, or redound
to the detriment of others? Does it cause others to suffer?
And importantly, is it difficult to determine the exact
value of what is being offered in the contract?
Any answer in the affirmative would render the activity
illegal according to shariah or Islamic law.
Islam supports the conduct of business and the issue of
contracts, with witnesses. Islam forbids gambling or games
of chance and forbids riba which may be regarded as the
payment of interest on loans. How then is it possible to
issue a shariah compliant bond?
The premise of the bond instrument is that the issuer offers
a contract to repay a sum of money, which is representative
of a debt. The issuer thus owes, the purchaser of the bond.
The issuer promises to return the sum of money, in addition
to periodic payments, called interest, in exchange for use
of money which he does not have himself. It is as though
the purchaser of the bond, lends money to the issuer. Interest
therefore that derives from the bond is riba.
German state, Saxony-Anhalt, offered a contract to pay a
rental income for the use of the money, based on tangible
With respect to insurances, these are all governed by written
contracts which clearly state that a certain investment
sum, made periodically, will be expected in return for an
indemnity of loss of a specified sum. There is thus, no
uncertainty, of what is expected, in terms of value.
With respect to uncertainly of loss, that is a pure risk.
Pure Risk is inherent in every endeavour.
All human economic activity occurs in an environment of
uncertainty, and all human activity presumes a future reward.
A businessman who manufactures soft drinks has no certainty
about his plant operating, or his product fetching a good
price. A homeowner who plants a mango tree does so with
the expectation that mangoes will be reaped.
Both individuals take action to reduce the risk of loss.
The business may hire expert engineers, an accountant, and
labour, to ensure his plant is up and running. His accountant
will estimate the cost of down time, equipment failures,
transport, etc, as well as inputs into the manufacturing,
before a selling price is determined. The homeowner will
water his seedling, invest in fertilisers, etc.
The insurance contract is a response to the economics of
modern-day risk management. It is based the discovery of
a social-scientific principle, involving actual studies
of accidents and loss, peculiar to business, property, and
Without it industry will come to a near halt!
be continued next week.
* Raziah Ahmed is a registered financial consultant