Business Models of Takaful
Some Takaful operations are established as profit-making entities based on pure
mudarabah and wakalah principles:
Mudarabah: Mudarabah principles involve profit sharing where the investment income is shared between the participants and the Takaful Operator in pre-agreed ratios and any distributable underwriting surplus is shared by the participants. The expenses for the investment activities are borne by the shareholders of the TakafulOperator; while the expenses for the underwriting operations are borne by the takafulparticipants.
Wakalah: Wakalah principles involve payment of an agency fee where a Takaful Operator earns only a fee for services as a wakeel or agent for managing the business.A combination of mudarabah and wakalah provide returns to the shareholders of theTakaful Operator and the Takaful participants.Other Takaful operations may be established as non-profit entities based on 100% tabarru, as in a waqf model, where 100% of the Takaful contributions are in the form of a donation, without the expectation of any return to the promoters and participants. In the pure waqf model, in contrast to mudarabah and wakalah, the waqf entity operates as an endowment trust. Whereas in the mudarabah and wakalah models the Participants Takaful Funds is owned by the participants; in waqfthe participants fund belongs to the waqf.
Currently, Takaful is offered through the following business forms:
Commercial: whereby a commercial entity (Takaful Operator) undertakes to manage the Takaful business (underwriting and investment operations) on behalf of the participants (the policyholders) in a Takaful scheme. The participants are entitled to receive the surplus generated from the underwriting operations and a share of the income from their funds invested by the Takaful Operator, on the basis of mudarabah. An important principle for all profit-based models is the segregation between the participants’ contributions (Participants Takaful Fund) and the capital contribution of the Takaful Operator representing the paid-capital of the company, (Shareholders Fund) provided to develop the business; this is because the TakafulOperator role is only to manage the takaful business with the participants contributions, therefore it is necessary to distinguish the shareholders funds from the participants funds.
The shareholders of a Takaful Operator expect to receive a return on their investment in the takaful business through sharing in the profit in the income from investing the Participants Takaful Funds; all expenses of the underwriting operations are borne by the participants while the expenses for the investment activities are borne by the shareholders.
The main sources of income for the Takaful Operator are:
- income from the investment of the Shareholders Fund;
- wakalah fees in accordance with agency arrangement of wakalah for underwriting operations, and/or
- share of income from investing the Participants Takaful Funds (on the basis
- of mudarabah);
Non-Profit: whereby regardless of the formal legal structure, the business is run on a purely mutual and co-operative basis for the participants in the Takaful scheme. There are no shareholders in the commercial sense and the participants which may include any of the founders and promoters who willingly pay their contribution as 100% tabarru to give to the less fortunate members in the community and not intending to receive any commercial return arising from the business. Any surplus may be distributed for charitable purposes. Non-profit models include social governmental owned enterprises and programmes as well as endowment-like trusts operated on a non-profit basis. The business may be managed by a board elected by the participants and/or the founder(s), alternatively by a separate entity (the Takaful Operator) appointed by the participants and/or the founder(s) to operate and manage the takaful business on a wakalah agency basis. The sources of income for the Takaful Operator may be from one of both, as under:
(i) Fee for managing the underwriting operations
(ii) Sharing of income from investing the Participants Takaful Funds
There is no single “best” model that exists for Takaful. The Shari’ah scholars worldwide concur on fundamental components that characterise a Takaful scheme, yet in their judicial opinions (fatwas), operational differences are tolerated as long as they do not contradict essential Islam religious tenets. Unlike its Islamic banking counterpart, Takaful has been covered less in the literature on Islamic finance, and its workings are still not fully understood. Two business models most commonly used in the industry – namely, the takaful business model based on the modified mudarabah developed by the Malaysians and the Takafulwakalah (agency) business model that is being used by most Takaful Operators have been received wide acceptance in recent years even in countries where the mudarabah model was previously implemented. However, in both the approaches the Shari’ah scholars have expressed differences in opinions relating to charging of expenses (marketing v. administration and also the fee structure/basis).
It is argued that a wakalah with waqf fund, that seeks to remain within the wakalah framework while incorporating modifications may render it more acceptable from aShari’ah perspective. Senior Shari’ah scholar, Ret’d) Justice Muhammad TaqiUsmani, who has vast knowledge in the interpretation of Islamic jurisprudence, inparticular relating to the Shari’ah laws governing finance and economics, believesstrongly in the waqf model as the concept of waqf is more compatible with the cooperativeconcept of takaful and also according to Islamic jurisprudence; waqf is anindependent entity which has no shareholders seeking a return on their donations /contributions.
The adoption of the wakalah contract in underwriting activities is considered more transparent and reduces elements of conflict of interest between the two contracting parties (the participants as the owners of the capital and the Takaful Operator as the agent.
Wakalah – Waqf Business Model
The wakalah business model with waqf element involves the appointment of a Takaful Operator as an agent (wakeel) of the waqf under a wakalah contract of agency. Unlike in the pure waqf model where the participants are their own managers, in the wakalah-waqf model, the waqf will employ a Takaful Operator with the necessary skills to manage the Takaful business. The Takaful Operator as wakeel (agent) for the waqf entity will collect the donations on behalf of the waqffund, and administer the underwriting operations and invest the participants’ funds. For providing the services the Takaful Operator, as wakeel, will be entitled to payment of a defined fee as wakalah for managing the underwriting operations and share as, a mudarib, in the income of the participants funds invested on the basis of mudarabah. In the pure wakalah model is applied, then the Takaful Operator will receive a defined fee for both activities.
While the waqf fund rules may define the distribution of the underwriting surplus, there is no obligation to do so. However, to differentiate it from the conventional insurance, the rules for distribution of the surplus by the Takaful operator might be on the following basis:
(i) A part kept as a reserve to mitigate future losses.
(ii) A part distributed among the participants (to differentiate it from the conventional insurance).
(iii) A part distributed for charitable purposes every year.