All perfect praise be to Allah the Lord of the Worlds. May His peace and blessings be upon our Prophet Mohammad and upon all his family and companions.
Reciprocal insurance of debts is either cooperative (Religiously lawful) or commercial (Religiously unlawful):
In cooperative insurance, the insured persons cooperate in settling debt in case of delinquency or death through deducting a specific percentage from the value of the contract. This type of insurance is permissible so long as important conditions are met: It is intended as donation and an act of cooperation amongst participants and not as a commutative contract. In addition, the insurance funds are kept in a separate account and aren`t owned by a particular party; rather, they are endowed to be given as Sadaqah (Voluntary charity) in case of insolvency or death.
In commercial insurance, deducted funds are deposited in a particular account of the institution in question in return for guaranteeing debt in case of inability to pay. This type of insurance is unlawful to deal in, because it is a form of gambling.
When "Reciprocal insurance" used by Islamic banks meets the aforementioned conditions, it becomes permissible to deal in. The AAOIFI standard (No. 5, 4/7, P.52) states: "Islamic insurance of debts is permissible while commercial insurance isn`t." More details have been given in Resolutions (
44 &
155) of the Iftaa` Board. And Allah The Almighty Knows Best.