Corporate Governance of a Takaful Operator
Corporate Governance, Regulation and Supervision issues related to Islamic banking have been discussed in an earlier lesson. However, it is useful to recount the general principles while also discussing issues that may specifically relate to Takaful. Traditional definition of corporate governance among economist and legal scholars, based on agency relationship between the investor and the manager, is concerned with the protection of shareholders’ or investors’ interests only. Business ethicists have generally considered this result to be ethically unacceptable because it unjustifiably neglects the rights of non-shareholder groups. Opponents of shareholder-value concept point out that this profit-maximization approach to the firm is too narrow a view for an economic analysis of corporate governance because of externalities imposed by profit maximization choices on other stakeholders. The concept of corporate governance is diverse and, over the period of time, definition of the term ‘corporate governance’ has oscillated between two extremes-from a narrow concept of a mechanism of implementing investors’ interest to a broad concept advocating protection of all internal and external stakeholders’ rights. This wide spectrum of concept stems out of two divergent views: (a) how the entity of a ‘firm’ should be perceived in an economic system, and (b) the form of the incentive system to protect rights and to preserve the obligations of economic agents in the environment in which the firm operates. Whether one views the firm as a bundle of assets and liabilities, a legal entity, an economic or social organization, a nexus of contracts, or as a combination of these elements, will influence the way in which the evolution of conceptualization of corporate governance is analyzed. Islam is not against the concept of insurance itself but against some of the means and methods that are currently used in conventional insurance. In fact, the concept of mitigation of risks by adopting the law of large numbers was widely used in Islam and especially in the practice of “al-aqilah” described in an earlier lesson. However, to be acceptable to Islam, any form of insurance should avoid the elements of riba (interest), maysir (gambling) and gharar (uncertainty), though elements of gharar may be permissible to an extent depending on the circumstances.
An Islamic view of the role of stakeholders adopts two fundamental concepts of the Islamic economic system pertaining to property rights and contracts govern the economic and social behavior of individuals, society and state. These two principles also dictate objective function of economic agents, including legal entities like firms. A firm in Islamic economic system can be viewed as ‘nexus-of-contracts’ whose objective is to minimize transaction cost to maximize profits and returns to investors subject to constraints that these objectives do not violate property rights of any party whether it interacts with the firm directly or indirectly. In the case of Takaful business, shareholders may or may not exist, non-executive directors are by no means universally employed and there may also be heightened ‘principal-agent’ challenge if the Takaful Operator does not suffer the negative consequence of poor underwriting or investment losses.
Corporate governance in Takaful
Corporate governance of a Takaful company (the Takaful Operator) has some distinct features. The founding members of the company appoint a Shari’ah Supervisory Board which is responsible for the review and supervision of the company’s activities in order to ensure compliance with Shari’ah. The Shari’ah compliance issues necessitate taking a more aligned view across Takaful businesses as user of Islamic products may be oblivious of ideological differences as well as varying perceptions and interpretation of the Shari’ah advisors or Boards and/or by regulators. Since institutions being supervised by one regulatory authority may be offering products of institutions being supervised by a different regulatory body, this could introduce complications and the challenge of ensuring uniform Shari’ah compliance across financial institutions and products. A “Shari’ah Supervisory Board” would wish to be able to also check that no speculation and illegal financing transactions had taken place. In addition it might well take an interest in the way mudarabah profits are calculated as distinct from residual equity yields. This has quite a different emphasis from the normal commercial audit required to simply see a true and fair view of a business on consolidated basis. Indeed Shari’ah compliance has been the main value proposition that Takaful operators have relied upon from the very beginning.