Financing and Insurance Relation

In participation banking, interest-free financing instruments such as murabahah (sale of a good with a certain profit on its purchase price or cost), musharakah (capital partnership, in which both parties participate in the capital), and mudarabah (partnership based on profit-sharing where one party provides the capital for the labour of the other party) are a set of transactions that form a bridge between the buyer in need of liquidity and the seller who provides this service.

Financing, in Islamic Banking, is an important instrument that allows people to meet their needs without the heavy burden of interest, and it is a very important concept in terms of keeping the welfare levels in balance, systematically regulating the unfair distribution in the society. Financing allows people to meet their needs without getting involved with interest and sheds light on the development of the participation finance system, which provides financial gain for depositors who want to make investments and receive an uncertain return at the maturity date.

Financing and Insurance Relation

Anyone can choose the features of the financing they may receive according to their own economic potential. Regardless of its purpose, financing is always a risky venture; it carries the risk of the death of the borrower, for example.  Such risks affect the person receiving the financing and the financial institution alike. And this is where insurance comes into play. It is used as an important tool to minimise or entirely eliminate these negative outcomes.

The Importance of Insurance for Financing

I should explain it with an example;

Let's say you have received housing finance with a ten-year maturity and only taken out a compulsory earthquake insurance policy and not fire or life insurance as they are not mandatory. In a scenario where the building and property inside suffer damages due to a fire in the house while the financing continues, the owner may experience an economic difficulty since they cannot pay the financing instalments while they are dealing with the loss as they do not have a house fire policy. This may put both the individual and the financial institution into a difficult situation.

And let's say that the person receiving the financing dies; this time, their debts will be left to their heirs as they don't have life insurance, and the heirs will get into difficulty due to these debts, and the financial institution will have to conduct many transactions with an operation burden. Insurance should not be regarded as an unnecessary detail in financing. Necessary policies should be issued by paying small premiums in order to avoid the scenarios that I've just mentioned. Participation insurance examines the insurance products linked to financing every day and fulfils its responsibility in this sense by adding many innovations to encourage policy issuance.

I would like to thank my friend Tarkan Bozkurt, who is an expert in the field of insurance, for his valuable contributions.

Salih Erbaş