I want to start a business that involves providing coverage for cars for a specified amount based on the car's value, following Islamic principles. For example, a fund where members benefit from repairs for any issues that might occur during a specified period (one, two, or three years). The fund compensates any affected individuals during the coverage period. After the coverage period ends, part of the collected amount is refunded to the non-affected participants or donated to charitable organizations after deducting administrative expenses and costs for the affected individuals. What is the Islamic ruling on this transaction?

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.

It is permissible to establish companies or funds for cooperative Islamic insurance, which operate on the principle of participants paying a sum of money as a donation to cover the costs of car maintenance or other risks covered by the fund. According to the [Shari'ah Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions, p. 364]: "Islamic insurance is an agreement among individuals exposed to certain risks to mitigate the damage arising from these risks by paying contributions on a basis of mutual donation. It consists of an insurance fund with a legal personality and an independent financial liability. This fund is used to compensate for damages that occur to any participant due to the covered risks, according to the regulations and documents. The fund is managed by a board selected from among the policyholders or by a company that manages the insurance operations and invests the fund's assets for a fee."

Islamic insurance operates on the following Shari'ah principles and foundations, which should be included in the company's articles of association, regulations, or documents:

1- Commitment to Donation: Participants contribute by donating their subscriptions and returns to the insurance fund to cover compensations. They may also agree to bear any shortfall as per the approved regulations.

2- Separate Accounts: The insurance company should establish two separate accounts: one for the company’s own rights and obligations, and the other for the insurance fund (policyholders’) rights and obligations.

3- Agency Role: The company acts as an agent in managing the insurance account and as an agent or partner in investing the insurance assets.

4- Insurance Account Management: The insurance account should handle the insurance assets and returns from investments, as well as cover its obligations.

5- Excess Fund Management: The regulations may allow for the allocation of any surplus in a manner beneficial to the fund, provided the managing company does not claim any part of this surplus.

6- Allocation of Surplus: All allocations related to insurance and accumulated surpluses should be directed towards charitable causes upon liquidation of the company.

7- Policyholder Participation: It is preferable for policyholders to participate in the management of insurance operations.

8- Compliance with Shari'ah: The company must adhere to Islamic principles in all its activities and investments, particularly avoiding insurance on prohibited items.

9- Shari'ah Supervisory Board: A Shari'ah board should be appointed, whose rulings (fatwas) are binding on the company, along with a Shari'ah audit and oversight management.

In conclusion, it is permissible to establish Islamic insurance funds to cover potential risks, provided that the aforementioned principles and foundations are observed. And Allah the Almighty knows best.