Prudential American Branches Out with Sharia-Compliant Life Insurance

SHARIA INSURANCE -Earlier this week, Prudential American announced that it would start selling Sharia-compliant life insurance products in the U.S., becoming the second insurance company in the country to do so and opening up an entirely new business opportunity for the company, which is already one of the world's largest life insurers. 

Here’s what you need to know about Prudential’s new business venture and why this announcement makes sense from an industry perspective (hint: because there’s big money involved).

The History of Islamic Finance

In the early centuries of Islamic history, Muslim traders and merchants routinely used financial products such as the Murabaha, Ijara, and Salam. 

The Murabaha is a sale in which a customer pays for an item at an agreed price and then does not pay the balance until later. The Ijara is a lease where an individual leases an asset for a specified time period in exchange for regular payments. 

With this contract, there are three different parties involved: the lessee (who receives use of the asset), the lessor (who grants use of the asset), and a third party—often times a bank or other financial institution. 

To ensure that all parties are satisfied, one party may be given collateral against any future liabilities to ensure all parties’ needs are met. 

Lastly, the Salam involves two partners who buy and sell commodities on equal terms to each other. For example, if Bob agrees to sell 100 barrels of oil to Alice at $10 per barrel, he must find someone else willing to buy 100 barrels of oil from Alice at $10 per barrel. 

If he can't find someone else willing to do this trade before his agreement expires, Bob will have made a loss on the deal. 

Conversely, if he manages to make a trade before the deadline, he will make money on the deal. All these transactions are done without using currency as they're instead traded by bartering goods and services.

Key Islamic Finance Institutions

Many people are unfamiliar with the Islamic financial industry, but it has been steadily growing for more than two decades. 

A key driver of this expansion is that it provides a way for Muslims to diversify their investments without violating their religious beliefs. 

For example, interest on loans is forbidden under Islamic law, which means that Muslim investors need to find other ways to grow their money. 

These restrictions also mean that Islamic banks cannot offer mortgages and credit cards. However, many Muslims who have come to America in recent years have found traditional banking services inadequate because they don't offer products compliant with their faith and values. 

That's where Sharia life insurance comes in: It's designed to meet the specific needs of Muslims living abroad or outside countries where Shari'ah-compliant insurance exists. 

The most common type of coverage offered by such companies is takaful, an Arabic word meaning cooperation that reflects the cooperative ownership structure of these types of insurance contracts. 

They work differently from regular policies, using a shared pool of funds rather than individual premiums to pay out death benefits when someone dies. 

Takaful firms typically require participants to put in cash up front as well as make regular contributions to maintain their participation level.

Types of Shari'ah-compliant financial products

There are a number of financial products that are typically not Shari'ah-compliant. These include but are not limited to interest bearing accounts, bonds, and insurance policies. 

There is no prohibition against non-Shari'ah compliant life insurance policies as long as they do not offer a return on premiums or dividends. 

However, if the policyholder pays an additional cost for an investment fund and the profit generated from the fund exceeds the premium paid by the policyholder then it becomes unlawful. 

Prudential American has created Sharia-compliant investment funds in order to comply with this law. The funds are also designed to meet all Shariah requirements for investments such as ensuring that only halal sources of revenue can be invested in stocks or other investments. 

Investments in the United States, for example, may not include funding from alcohol sales or companies involved in certain industries such as gambling. 

Additionally, investors are required to avoid profiting from harmful activities such as tobacco production or pornography. Another requirement of these funds is that they must ensure compliance with Islamic bans on certain types of transactions. 

For instance, short selling securities would be prohibited under these guidelines because it involves borrowing and selling assets to produce profits at the expense of someone else's losses. 

In addition, commodities trading will also be restricted because speculation is forbidden according to Islamic principles.

Benefits of Islamic Finance to the U.S. Economy

Islamic banking and finance has been a growing sector in the Middle East, Africa and Asia. In recent years, there has been increased demand for Islamic finance from Muslim communities in the United States as well. 

Even without this demand, the benefits of Islamic finance are clear: not only does it adhere to religious principles but it also helps to create a more inclusive society by offering financial services to those who are excluded from traditional banking. 

Furthermore, Islamic finance is built on principles that emphasize transparency and social responsibility. 

According to Bloomberg News, the Financial Stability Board believes that investment models rooted in specific religious beliefs can help bridge America’s economic divide. 

It's an important piece of what we need to think about, John Taylor, president and CEO of the National Association of Federally Insured Credit Unions said. The current regulatory framework doesn't fit very well with Sharia. 

In response to this challenge, Prudential launches its dedicated business serving the needs of U.S.-based customers interested in Islamic life insurance products based on their faith and practices. 

The move marks a major step in Prudential's efforts to expand its international presence, said Rob Snyder, head of international operations at the company. 

We're eager to bring our full suite of retirement, savings and wealth management solutions to Muslims across the world. 

Products will include standard life insurance policies such as whole life or term policies with both fixed premiums and renewable term options as well as specialized offerings such as Waqf Ijara or Murabaha.

The Future of Islamic Finance

Islamic finance is a booming industry, and the sectors' rapid growth has caught the attention of many financial players. 

Recently, Prudential American announced that it is launching its first dedicated Sharia life insurance business to be sold in America. The company plans to offer products such as Takaful and Mudaraba (profit sharing) life insurance policies. 

Unlike some other forms of Islamic finance, these investments are permissible under American law so long as they are not being used for speculation or prohibited uses like pornography or gambling. 

We have been evaluating this area for some time, said Edward DeMarco, president and CEO of Prudential Financial Inc., which owns the United States operations of Prudential American. 

We have seen a lot of demand in this market. In response to customers who want more options than what's currently available, we are excited about being able to provide Prudential's expertise and extensive product offerings. 

We will also work closely with clients to identify the type of investment that best fits their needs. Some people may be interested in an annuity-based product while others may prefer a traditional term life policy. 

But before making any decisions, prospective customers should consult their own advisors and do plenty of research before investing. 

For those looking for Sharia-compliant financial services, you can now turn to Prudential America. Interested investors can choose from Takaful and Mudaraba (profit-sharing) life insurance policies that abide by all rules set forth by Islam. With such support, Prudential hopes to help revitalize the stagnant industry.