Reposted from the web

Summary: This Islamic finance article translates Ibrahim Khan’s discussion on car insurance and mortgage loans, explaining riba, necessity, transaction responsibility, and Sharia reasoning in plain English.

This is my translation of the third article in Ibrahim Khan's series on the Islamic law of insurance. The first article discussed the basic legal principles of insurance: Ibrahim Khan: Is Insurance Halal? The second article specifically discussed the unique nature of life insurance within insurance categories: Ibrahim Khan: Is Life Insurance Halal? Although this third article is titled Car Insurance, the reasoning method explained in the text applies to all financial fields. It is not limited to car insurance or home mortgage loans; it applies to any financial area involving interest or other unlawful gains.

Before starting the main text, I will briefly summarize the main point in plain language: when we trade with others, as long as the transaction itself is legal, it does not matter to us if the person we are trading with turns around and does something illegal. It is just like how we cannot refuse to let non-Muslims eat at a halal restaurant.

Is Car Insurance Equivalent to a Riba-Based Mortgage?

Author: Ibrahim Khan

Translated by Yahya

About the author: Ibrahim Khan holds a bachelor's degree in Philosophy, Politics, and Economics from the University of Oxford and a master's degree in Islamic Finance from the Al Salam Institute. He previously worked as a private equity/venture capital lawyer in New York City and is a co-founder of Islamic Finance Guru.

In a seminar I recently attended with Shaykh Akram Nadwi, the discussion turned to the Islamic stance on conventional mortgage loans. Shaykh Akram argued that he now agrees with Shaykh al-Qaradawi's famous fatwa on mortgages, which states that if long-term renting is not feasible for a family, they are permitted to apply for a conventional mortgage.

In this blog post, I do not want to discuss the specific situations where long-term renting is not possible, as I have discussed that before. I want to discuss some interesting arguments used by Shaykh Akram Nadwi that inspired me. This first set of arguments is:

1. Someone cannot rent long-term and needs to buy a house now;

2. Islamic mortgages are just a form of conventional mortgages;

3. To buy a house, someone must apply for a mortgage;

4. Therefore, someone can obtain a conventional mortgage that includes interest because it is necessary—just as car insurance is permitted because it is also necessary.

I want to focus on point 4 for further analysis.

Shaykh Akram Nadwi points out that the nature of a home mortgage is not consistent with car insurance. Buying car insurance is a necessary condition for driving a car, but a home mortgage is not a necessary condition for buying a house, even though buying a house is sometimes considered a necessity.

Some very important points

Because there are many positions on these issues, this argument is an important deciding factor for which camp you join. The second set of arguments:

1. Some say that conventional mortgages and car insurance are allowed based on life needs (for example, Sh. Akram and Sh. Suhaib Hasan).

2. Some say traditional mortgages are haram, but car insurance is allowed due to necessity (most Muslim scholars, such as the AlQalam Shariah Panel and Sh. Wahba

Zuhayli).

3. Some say both traditional mortgages and car insurance are haram (I do not know who).

4. Some say traditional mortgages are halal, but car insurance is haram (I do not know who).

So, which of these two sets of views is actually correct?

The argument for allowing car insurance is that people need cars to get around in the UK, since we cannot be expected to use public transport and taxis all the time. Therefore, we need to buy insurance for legal reasons, and under Islamic law, we are also permitted to buy car insurance.

Sheikh Akram Nadwi and some others argue that no one forces us to buy car insurance since we could walk or take public transport, so it is not strictly necessary. Likewise, we do not have to buy a house because we can just rent, so that is not strictly required either. The problem is that living without a car or a house is very difficult today, so is it appropriate for us to live that way? The second group believes car insurance is halal while mortgages are haram, but Sheikh Akram Nadwi and some scholars believe both are halal.

Let us discuss this further.

The second group might argue that because a rented property is exactly the same as a property bought with a mortgage, you would not face any major hardship if you kept renting. Public transport or taxis are very different from owning your own car, so it is difficult to get around if you have to rely on them all the time.

I think this is a good point, especially outside city centers like London. Once we talk about London, the benefits of public transport or taxis are not as clear because of the constant availability of taxis, Uber, and tube stations, plus the usual hassles of owning a car like parking and traffic jams. Even in a place like London, people still end up using cars for good reasons. They are convenient, and a woman traveling to her mother's house at night is much safer in her own car than in a taxi. These two options are still very different.

A second point the second group could make is that every form of transport in the UK must legally have some level of insurance, whether it is public transport or a taxi. Since you cannot avoid supporting insurance indirectly anyway, you might as well buy insurance for your own car. However, not every house in the UK has a mortgage. The one you happen to rent might have one, but that is not always the case. So, renting is not necessarily tied to a standard mortgage, while any type of public transport, taxi, or your own car involves insurance. This is another difference between mortgages and car insurance, and it explains why some people think mortgages are not halal, while car insurance is.

To me, this is not a new idea. In Islamic law, the business practices of a landlord, taxi driver, bus company, or subway operator generally do not concern you. You are just doing business with them, just like you would with shops like Tesco or Lidl. No one can suddenly claim that shopping at these places is haram just because the owners do something that is not permitted in Islam. In both cases, your transaction is completely halal, whether you are renting a property or paying for a transport service. I feel the same logic applies to car insurance and mortgages, as there is no fundamental difference between them.

Conclusion

The first group of scholars makes a solid point that conventional mortgages and car insurance should be allowed due to necessity in some cases, since they are similar. However, for the reasons discussed above, I think their argument is wrong, so the second group is more convincing to me.

It is important to remember that the first group of scholars was pushed toward allowing conventional mortgages because they believe Islamic mortgages are the same as or even worse than traditional ones. Therefore, to them, there is no real Islamic mortgage alternative other than leasing. However, many scholars in the second group are happy to declare that traditional mortgages are haram because there are other viable alternatives besides leasing, such as Islamic mortgages, which we will discuss in another article.

Of course, there is another school of thought: those who believe all insurance is fine, not because it is necessary, but because of the nature of insurance itself, but we will discuss that another time. view all