Cocept of Islamic Risk Management

8/13/2019 Cocept of Islamic Risk Management

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Risk is the possibility of an unfortunate

occurrence

Risk is a combination of hazards

Risk is unpredictability Risk is uncertainty

Risk is the possibility of loss.

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Uncertainty is in the eye of the beholderUncertainty exists regardless of whether this

doubt has been recognized by those who may be

most directly involved.

Basic of risk is lack of knowledge; regardless ofwhether the state of lack of knowledge is

recognized.

Risk exists outside the individual, it may be

recognized as existing but this is not a pre-

requisite.

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Frequency

Severity

Utility

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Financial and non financial risk

Financial Risk

Where the outcome can be measured in monetary terms

Example Material damage to property

Non Financial Risk

Where the outcome can not be measured in monetary terms

Selection of an item from restaurant menu

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Fundamental & particular Risk

Fundamental risk

Arise from causes outside control of individuals

Example: earthquakes, floods

Particular Risk

These are personal both in their cause & effect

Example : fire, theft

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Monetary Cost

Human Cost

Pain & suffering

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Work related risk

Crime losses

Road Accident

Fire

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Avoiding Risk

Managing risk

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Risk creates the hope for profit

Risk is a bar to entry into the market

Risk encourages a safety culture

The identification, analysis and economic control of

those risks which can threaten the assets or earning

capacity of an enterprise is defined as risk

management

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Risk identification

Risk analysis

Risk Control

Physical risk control Pre-loss risk reduction

Post loss risk control

Financial risk control

Risk retention Risk transfer

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A person or organization can transfer the

financial effect of the risk to some other party.

Insurance is a risk transfer mechanism by whichan individual or an organization can exchange its

certainty for certainty.

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Personal Risk

Property damage risk

Liability Risk

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For any risk to be considered insurable it has to fulfill thefollowing criterias:

It should occur by chance.

It should be definite(in terms of amount andtime).

It should bepredictable.

It should be significant.

It should not be catastrophicto the insurer.


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Since the beginning, people have tried toprotect themselves from risks and resulting

losses

What is Risk?

Risk is the potential danger that threatens to

harm or destroy an object, an event or a person


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Available Risk Mitigation Tools? Avoid Risk Mitigation: A concept generally misunderstood as Tawwakul.

Tawakkaul by definition however is employment of all

Halal available means/resources and entrusting AllahSWT with the outcome

Self-Insurance or setting aside contingencymoney for the rainy day

Conventional Insurance:

A commercially viable system but inherently flawedwith Shariah defined ills such as Riba, Gharar, andQimar/Maysir

Takaful: A Halal and Ethical alternate to conventional insurance


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concept of

Insurance?

practice of

Insurance?

?Shariah has no objections as to the concept orobjectives of insurance ; it onlyhas reservations

with the way it is being practiced


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Fiqh Council of World Muslim League (1398/1978)resolution and Fiqh Council of Organization of IslamicConference (1405/1985) in Jeddah resolved that,

conventional insurance as presently practiced is

Haram. And that, cooperative insurance (Takaful) ispermissible and fully consistent with Shariahprinciples.

Hence, conventional insurance is prohibited for Muslimsbecause it contains elements of Riba, Al Maisir, and Al

Gharar. By contrast, Takaful provides risk protection inaccordance with Shariah using principles of Taawun(mutual assistance), brotherhood, piety and ethicaloperations


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There are numerous references to Ta'awun

and Takaful in the Quran in the context of

co-operation and solidarity for the good of

society.

One widely quoted reference is from sura al-

Maidah, as follows:

"And help one another in righteousness and piety

and do not help one another in evil deeds andenmity" (Al Quran : Al Maidah 2)


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One of the approaches to social help and

assistance practiced in Islam that relates to

the first Constitution of Medina, stated that,

"the emigrants from among the Quraish shall beresponsible for their ward and shall pay the

blood money in mutual collaboration and shall

secure the release of their prisoners by paying

their ransom themselves, so that the mutual

dealings between the believers be in accordancewith the principles of recognised goodness,

justice and mutual responsibility".


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One of the approaches to social help and

assistance practiced in Islam that relates to the

first Constitution of Medina, stated that,

"the emigrants from among the Quraish shall be

responsible for their ward and shall pay the bloodmoney in mutual collaboration and shall secure the

release of their prisoners by paying their ransom

themselves, so that the mutual dealings between the

believers be in accordance with the principles of

recognized goodness, justice and mutualresponsibility".


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Where a person inflicts bodily injury or homicide

it becomes incumbent upon him or, as mutual

responsibility, upon a group of people

representing him, to compensate the injured

party in cash or kind.

This compensation is called "diya". Where

homicide is intentional, the diya or blood money

is payable by the person committing that act. A

third party (aqila) pays blood money only wherethe act is unintentional or where it is offered by

the aqila on voluntary basis. (Malik Al-Muwatta)


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A fatwa by Dr. Yusuf Al-Qardhawi states that Islamic

insurance may exist in a condition where each participant

contributes into a fund used to support one another.

Islam aims at establishing a social order under universal

brotherhood. The underlying concept is that of mutual co-

operation and help. The Prophet (pbuh) stressed:

In mutual compassion, love and kindness you will find the

faithful like a body, so that if one part feels pain, the

whole body responds with wakefulness and fever.

A Muslim is the brother of another Muslim; he neitherwrongs him, nor leaves him without help, nor humiliates

him'


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Protection

"(Allah) who prepares nourishment to prevent the fear of

hunger and saves / puts at peace those who fear"

(Al Quran : Al-Quraisy 106:4)

Co-operation

A Muslim is brother of a fellow-Muslim. He should neither

commit oppression upon him nor ruin him and he who

meets the needs of a brother, Allah would meet his needs

and he who relieves his brother from hardship, Allah willrelieve him from the hardships to which he could be put on

the Day of Resurrection.

(Sahih Muslim)


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The similitude of believers in regard to mutual love,

affection, fellow-feeling is like that of a body, when any

limb of it aches, the whole body aches because of

sleeplessness and fever . (Sahih Muslim)

A believer is like a brick for another believer, the one

supporting the other. (Sahih Muslim)

And hold fast, all together, by the rope which Allah

(stretches out for you), and be not divided among

yourselves; and remember with gratitude Allah's favour on

you; for you were enemies and He joined your hearts in

love, so that by His grace you became brethren; and you

were on the brink of the pit of fire, and he saved you from

it thus does Allah make His signs clear to you; that you

may be guided. (AlQuran - Al Imran 103)


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The believers are but a single brotherhood: so make peace

and reconciliation between your two (contending)

brothers; and fear Allah, that you may receive mercy.

(AlQuran - Al Hujurat 10)

(Their bearings) on this life and the hereafter they ask you

concerning orphans. Say: the best thing to do is what is for

their good; if you mix their affairs with yours, they are

your brethren; but Allah knows the man who means

mischief from the man who means good. And if Allah had

wished He could have put you into difficulties: he is indeed

exalted in power, wise. (AlQuran - Al Baqarah 220)


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But those who before them had homes (in Medina) and had

adopted the faith, show their affection to such as come to

them for refuge, and entertain no desire in their hearts for

things given to the (latter), but give them preference over

themselves, even though poverty was their (own lot) and

those saved from the covetousness of their own souls; theyare the ones that achieve prosperity. (AlQuran - Al Hashr 9)

Serve Allah and join not any partners with him and do good

to parents, kinsfolk, orphans, those in need, neighbours

who are near, neighbours who are strangers, the

companion by your side, they wayfarer (you meet) andwhat your right hands possess: for Allah loves not the

arrogant, the conceited. (AlQuran - An Nisaa 36)

Cocept of Islamic Risk Management

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