The billion-shilling question: Is insurance compatible with Islam?

 By Anna Tibaijuka

This week, Tanzanian social media has been filled with debate after a Muslim cleric declared on KHIDMA Online TV that health insurance is haram, arguing that it is equivalent to gambling. He urged Muslims to avoid health insurance and instead pay directly for services.

This position comes at a critical time, when the government is actively promoting universal health insurance for all citizens. It is therefore important that public debate is informed by facts, not misconceptions.

This is not a new issue to me. As far back as 1989, while at the University of Dar es Salaam, I prepared a consultancy paper for the Planning Commission proposing the introduction of universal health insurance.

At that time, Tanzania was facing a severe economic crisis, and public resources were no longer sufficient to sustain free social services.

Although the idea was not adopted then, it is encouraging that, 36 years later, the country is finally moving in that direction. It is therefore essential that misunderstandings do not derail this long-overdue reform.

In this series, I will explain the basic principles of insurance in simple terms, starting with the current debate on its position in Islam. I write as an economist, not a religious scholar, and I rely on established views of Islamic scholars.

It is true that some Islamic scholars consider conventional insurance problematic because it may involve three elements discouraged in Sharia: uncertainty (gharar), gambling (maysir), and interest (riba).

The argument is that when you pay a premium, you may never receive anything in return, and the insurer does not know when or whether they will pay. Others argue that insurance resembles gambling because one party may gain much more than they contributed, while another may gain nothing.

In addition, insurance companies often invest funds in interest-bearing instruments, which raises concerns under Islamic law.

To address these concerns, an alternative system known as Takaful was developed. Under Takaful, participants contribute to a common fund to support each other. Claims are paid from this shared pool, and any surplus may be distributed among members or retained as reserves.

For example, if 1,000 people each contribute $100, the fund will have $100,000. If some members suffer losses, compensation is paid from this pool.

However, an important practical question arises: what happens if claims exceed the available funds?

In conventional insurance, this problem is managed through reinsurance, where risks are spread globally so that even very large losses can be covered. In Takaful, this challenge remains more difficult because the system relies mainly on the contributions within the pool and, in many cases, still depends on conventional reinsurance.

It is also important to note that not all Islamic scholars consider insurance to be forbidden. Some argue that insurance is not gambling but a form of risk management, and that it serves the public good by protecting individuals, families, and businesses.

This more pragmatic view has influenced many Muslim countries.

Indeed, many Muslim-majority countries continue to use conventional insurance. This is because insurance is economically essential. No modern economy can function without it. It supports bank lending, construction, trade, transport, and investment. Without insurance, economic activity would slow down significantly.

Consider the Islamic Republic of Iran. After the 1979 revolution, Iran reformed its financial system to align with Islamic principles. However, it did not abolish insurance. Instead, it retained and regulated it. Iranian scholars concluded that insurance is a valid contract that supports economic stability.

At the same time, countries such as Malaysia, Saudi Arabia, and Sudan have promoted Takaful systems, but these have not replaced conventional insurance globally. In practice, both systems often operate side by side.

For Tanzania and East Africa, the real issue is not whether insurance is Islamic or not. The real issue is whether citizens are protected against risk.

Insurance is not about gambling. It is about protection.

And for a country seeking inclusive development, that protection is not optional—it is essential.

Next week I will examine why insurance coverage remains low and what can be done to expand it.

Prof Anna Kajumulo Tibaijuka is a retired Tanzanian Minister and former United Nations Under-Secretary-General and Executive Director of UN-HABITAT in Nairobi