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Islamic finance consists of Islamic banking, Islamic insurance and Islamic capital market. Being one of the major elements, takaful (Islamic insurance) does have a significant role in the industry. The concept of takaful is where a group of people participate in a scheme that enables them to share the burden of any misfortunes faced by any of the participants/policyholders, and where appropriate, compensation are paid using the funds contributed by the participants. As far as takaful operators are concerned, the protection of human intellect, human property and human conscience directly related to the provision of takaful service. These are in line with the principles laid down by the maqasid al-shari'ah (higher objective of Islamic law) which can be classified into: (1) protection of human life; (2) protection of human intellect; (3) protection of human property; (4) protection of human honour; and (5) protection of human conscience (El-Sheikh, 1987).
Annual Summit on Business and Entrepreneurial Studies (ASBES 2011) Proceeding
Nooraslinda Abdul Aris
Accounting Research Institute & Faculty of Accountancy
UiTM Shah Alam, 40450 Selangor, Malaysia
Roszana Tapsir
Accounting Research Institute & Faculty of Accountancy,
UiTM Malaysia.
Mohammad Kamil bin Abu Talib
Jabatan Kemajuan Islam Malaysia
Islamic finance consists of Islamic banking, Islamic insurance and Islamic capital market. Being one of the major
elements, takaful (Islamic insurance) does have a significant role in the industry. The concept of takaful is where
a group of people participate in a scheme that enables them to share the burden of any misfortunes faced by any
of the participants/policyholders, and where appropriate, compensation are paid using the funds contributed by
the participants.
As far as takaful operators are concerned, the protection of human intellect, human property and human
conscience directly related to the provision of takaful service. These are in line with the principles laid down by
the maqasid al-shari’ah (higher objective of Islamic law) which can be classified into: (1) protection of human
life; (2) protection of human intellect; (3) protection of human property; (4) protection of human honour; and (5)
protection of human conscience (El-Sheikh, 1987).
The risk profile for Islamic finance can be categorised into generic risks and unique risks. Islamic finance with its
unique characteristics give rise to a set of risk management challenges namely; (1) credit risk; (2) liquidity risk;
(3) legal and fiduciary risk; (4) financial supervision and transparency; and (5) shari’ah supervision risk
(Morisano 2009). Due to the rapid growth in Islamic finance, there is a need for a unique risk framework for
Islamic institutions, particularly for takaful operators. Therefore, this paper looks at the risk’ of takaful company.
It also identifies the management of such risk by the takaful operator. The compliance of Shari’ah should have
directs relationship with the management of risks since the unique risk for Islamic institution lies in the shari’ah
supervision risk.
Keyword: Takaful, Shari’ah, risk management
Risk management is important in Islam and Takaful provides a way to manage risks in business according to
Shari’ah principles.
Takaful or Islamic insurance is an element of Islamic finance, which is considered as the
second most important social institution in the Islamic community to counter poverty and deprivation (Patel,
2003). Over the past few years, takaful has enjoyed significant expansion with an estimated average annual
growth rate of 25% versus 10.2% for the conventional insurance between year 2004 and 2007 (Essen, 2010). This
growth is likely to remain in the coming years and should bring opportunities as the market continues to evolve
and demand for takaful products increases. With 1.5 billion Muslim population around the globe, takaful is seen
as a favourable long term market given the fact that Muslims are still characterized by low insurance penetration
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(Essen, 2010). This huge potential of takaful market gives rise to the issue of risk. Takaful operator as trustee
appointed by the policyholder faces some challenges and risks. These risks must be managed properly as the
impact may or may not be significant to the consumer.
Risk, as defined by Knechel (2002), is the likelihood that the outcome from a process will not meet expectations.
Risk management on the other hand, is a process that identifies loss exposures faced by an organization and
selects the most appropriate techniques for treating such exposures (Rejda, 2006). The literature on risk
management has been focusing on assessing risk, and providing structure to manage risk (Liebenberg & Hoyt,
2003; Dowd, 1999). However, the nature these studies are for the finance industry in general. Essen (2010) and
Karray (2010) agree that risk management has been an important issue for the takaful industry. Good risk
management and sound corporate governance are said to reinforce the investors’ and consumers’ confidence in
the sector thus enabling stimulation of growth.
In Southeast Asia, Malaysia continues to be the leader in takaful recorded has strong performance especially in
the family takaful business (Karray, 2010). The Malaysian insurance industry is expected to continue its double
digit growth rate, especially in the takaful family segment. Islamic Finance News (2010) reported that a growth of
between 15% - 20% is expected for the Family Takaful business and 10% - 12% is expected under the General
Takaful business in 2011.
While Islamic banking has gained its momentum in terms of dissemination of information, Takaful is seen to be
lagging. Fewer discussions and research can be observed on the features, models, structures and regulation issues
of Takaful (S. Saaty & Ahmad Ansari, 2009). Thus, there is a lack of understanding on the Takaful operation and
risk, particularly in Malaysia
Hence this paper looks at the risk profile of the takaful industry. Next, the
management of the risk is discussed to find a conclusion that the most prominent issue in takaful lies with the
non-shari’ah compliance risk. Proper planning, control, implementation and monitoring must be put in place to
ensure the society interest is well safeguard. The justice must exist for the benefit of the society as being
commanded under the maqasid shari’ah.
Islamic insurance was first established in the early second century of the Islamic era. This was the time when
Muslim Arabs started to expand their trade to India, Malay Archipelago and other countries in Asia. Due to the
long journeys, they often had to incur huge losses because of mishaps and misfortunes or robberies along the way.
Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, they got together and
mutually agreed to contribute to a fund before they started their long journey. The fund was used to compensate
anyone in the group who suffered losses through any mishap. In fact the Europeans copied this, which was later
known as marine insurance.
Takaful originates from the Islamic word kafalah, which means guaranteeing each other’ or ‘joint guarantee’. In
principle, Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance
between groups of participants. It is a form of mutual insurance (S. Saaty & Ahmad Ansari, 2009).
Section 2 of the Malaysian Takaful Act 1984 defines ‘Takaful’ as a scheme based on brotherhood, solidarity and
mutual assistance, which provides for mutual financial aid and assistance to the participants in case of any need,
whereby the participants mutually agree to contribute for that purpose. ‘Takaful business’ is a business of Takaful
whose aims and operations do not involve any element which is not approved by Shari’ah.
Other researchers define Takaful as an Islamic system of mutual insurance built around the concept of donation
also known as Tabarru’. Each participant contributes to a fund to cover expected claims, while also benefiting
from a share of investment returns. There are some similarities between takaful and mutual or cooperative
insurance. There must be cooperative principles in takaful, but there need not necessarily be Islamic principles in
conventional mutual or cooperative insurance (Stagg-Macey, 2007).
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An overwhelming majority of the Shari’ah scholars believe that the conventional insurance is unlawful. Takaful,
the Islamic alternative to insurance is based on the concept of social solidarity, cooperation and mutual
indemnification of losses among members. It is a pact among a group of persons who agree to jointly indemnify
the loss or damage that may inflict upon any of them; out of the fund they donate collectively (Khan, 2005).
The central idea of a Takaful contract is that it is a financial transaction of a mutual co-operation between two
parties to protect anyone of them from unexpected future material risk. In a Takaful transaction, the participant
(insured) pays a particular amount of money known as the contribution (premium) to the Takaful operator
(insurer) with a mutual agreement that the insurer is under a legal responsibility to provide the participant with a
financial protection against unexpected loss, should it happen within the agreed period. However, in a case where
the loss does not occur against the insured within the specified period, the insured is entitled for the whole amount
of paid-premiums together with the share of profits made out of the cumulated paid-premiums based on the
principle of Mudharabah (profit sharing) financing technique. In such a transaction, both the insurer and the
insured are mutually helping each other for financial protection (Khan, 2003).
Takaful provides a form of indemnification in case of any tragedy in human life and loss to the business or
property. Similar to insurance, the policyholders (recognized as Takaful partners) pay premium to indemnify each
other. However, unlike most insurance, Takaful is akin to mutual insurance, where the profits earned from
business conducted by the company with the subscribed funds is shared by the Takaful partners. The tabarru'
concept governs the contribution part. Determination of such premium is based on modern tools, such as mortality
tables and other actuarial requirements and standards. The investment or management of the funds is governed by
Islamic financing instruments, particularly mudharabah. An important distinction of Takaful is that in regard to
investment of funds, based on the presumed riba’ or interest equivalence, it avoids any interest-based instruments.
Thus, Takaful companies can engage or employ only Shari’ah-compliant instruments and models and the profits
are distributed according to a pre-agreed ratio specified in the Takaful agreement. Likewise they share in any
surplus or loss from the pool collectively, minimizing the chance of any over-pricing so common to insurance
companies (Shari’ah Fortune, 2010).
All economic activities are permissible as long as it conforms to the Islamic tenets, i.e. they do not in any form
contradict the Shari’ah principles and rules. According to Islam, all forms of transactions that contain any
unlawful elements (riba’, maisir and gharar) are void. However it is undisputable that risks and uncertainties,
which we inherited today, may lead to severe losses. Hence the demand of maqasid shari’ah that encompasses the
essence of peace and economic well being imposes an obligation on all Muslim to do their utmost best and seek
cover against danger (Abdul Aris & Othman, 2011).
A major ethical component of any Islamic financial transaction is to provide justice, honest and fairness and to
ensure all parties their rights and dues. In a way, Islamic finance is developed as a social discipline in response to
this environment. Although Islamic finance does perform mostly the same functions as the conventional, there is
always a distinct unique difference i.e. the principles applied. Ahmad, (2000), Mirakhor (2000) and Warde (2000)
express that Islamic business is always characterised by ethical norms and social commitments, grounded on
ethical and moral framework of the Shari’ah. Asyraf (2006) also states that these Shari’ah injunctions interweave
Islamic financial transactions with genuine concern for ethically and socially responsible activities and at the same
time prohibiting involvement in illegal activities or those which are detrimental to social and environmental well-
being. Khalifa (2003) also describes Islamic economics as Godly, ethical, humanly, and moderate and balanced.
Therefore, all forms of exploitation are prohibited in Islamic financial system and should be strengthen with the
ethical rules of Shari’ah (Abu-Tapanjeh, 2009). Thus, the primary feature of Islamic economy is to give just,
honest, fair and balanced society as envisioned in the Islamic ethical values and rules.
Risk is the probability that a chosen action will lead to a loss or undesirable outcome. Knechel (2002) defines risk
as the likelihood that the outcome from a process will not meet expectations. Risk is also defined as uncertain
future events which could influence the achievement of the business’s objectives, including strategic, operational,
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financial and compliance objectives. Potential losses themselves may also be called ‘risks’. Any human endeavour
and business carries some risk, but some are much riskier than others. In a nutshell, risk denotes losses.
An important thread leading to risk analysis is traced to an early religious idea concerning the probability of an
afterlife. Although it seems to be surprising, the salience and seriousness of the risk involved especially for the
believers have been discussed by many researchers (Covello & Mumpower, 1985). It is believed that a good
intention and act will lead to a good life now and hereafter. This is in accordance to the Islamic teaching and its
maqasid shari’ah whereby every human is required to protect themselves.
Traditionally, the concept of risk has been associated with uncertainty of events in future. The higher the
uncertainty of events, the higher is the risk. In insurance, risk is the amount of loss associated with property or
life. Risk to property can be a loss or damage to car, building, house, etc. Risk to life can be described as poor
health, premature death, bodily injuries as a result of accident etc (Rejda, 2006). “Risk is the chance of happening
of something that will have an impact upon our objectives. It is measured in terms of likelihood and
consequences” (GOWA, 2002).
Al-Jasser, the governor of the Saudi Arabian Monetary Agency (SAMA) and IFSB Chairman commented that
‘Risk has no religion’ in a conference held in Kuala Lumpur on financial stability in 2009. Risk, for a financial
institution, is indeed simply risk, even for an Islamic Financial Institution (IFI). Given that in most countries, a
dual financial systems exist (where conventional and Islamic walk on parallel basis), the IFIs will need to consider
an additional layer of risk i.e. the shari’ah non-compliance risk (Editor IFN, 2009). Notwithstanding that, the IFIs
also have to consider their moral obligations to both the shari’ah and a trusting market, whilst using solid
financial frameworks.
Risks in Islamic finance are categorised into two themes, namely the generic risks and the unique risks. The
generic risks are credit risk, market risk, liquidity risk and operational risk. While the unique risks include
shari’ah non-compliance risk, rate of return risk, displaced commercial risk and equity investment risk. Among
these unique risks, shari’ah non-compliance risk is said to be the most significant to the Islamic finance including
takaful industry.
Shari’ah non-compliance risk is the risk arising from failure to comply with shari’ah rules and principles as
determined by the shari’ah regulatory council. In Malaysia, the highest authority of shari’ah lies with the national
shari’ah advisory council of the Central Bank of Malaysia (Bank Negara Malaysia or BNM) and the Security
Commission. Shari’ah non-compliance risk is considered paramount as it is the distinguishing factor between the
Islamic and conventional systems.
Islamic Financial Service Board (IFSB) classifies risk into six categories namely operational risk, credit risk,
equity investment risk, market risk, liquidity risk and rate of return risk. Operational risk is defined as risk of
losses resulting from inadequate of failed internal process, people and system or from external events, which
include legal risk and shari’ah compliance risk, but exclude strategic and operational risk (IFSB, 2004). The
shari’ah compliance risk cuts across the six categories of risk and is considered as part of the operational risk.
Therefore, shari’ah compliance is an important feature in an Islamic financial institution.
Shari’ah Compliance
Shari’ah compliance as written by Abdul Majid (2009) is any transaction and/or process which does not
contradict Islamic principles. Shari’ah compliance is a continuous end to end process and covers all aspects in an
IFI’s operations. The scope of shari’ah compliance includes the takaful model (mudharabah, wakalah or hybrid),
takaful products, investments, contract wordings, marketing collateral, surplus sharing and fee structures (Ahmed,
2010). It is the fundamental basis for having an insurance system that meets the religious requirements of Muslim
in line with their ‘aqidah (faith). Hence, IFIs need to strike a balance by implementing equally effective measures
that comply with both shari’ah requirements and sound financial practice. Shari’ah risk should be the forefront
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for the IFI including takaful companies. As the society understanding on shari’ah is generally low, they tend to
rely heavily and put their trust on the takaful’s shari’ah supervisory board decision on products and operation.
One of the aspects under shari’ah compliance is to ensure acceptance, validity and enforceability of contract
according to the shari’ah law. Breeching any shari’ah element in a contract will result in severe implications,
both financial and non-financial. From financial perspective, the contract may be invalid and result in obtaining
illegal profit from such transaction. Non-financial impacts include impediment from ALLAH’s barakah
(blessing), against the command of ALLAH, contravening the provision of legislations (Takaful Act 1984 and
Islamic Banking Act 1983) and jeopardising the reputation of the IFI. Thus, the concpet of ibadah as promoted in
islam will not materialise. This shows that shari’ah non-compliance is a real risk which may lead to serious losses
for the takaful operator.
Shari’ah non-compliance in investments may be ‘purified’ through charity (sadaqah, zakat) which results in
income loss for the shareholders. Permissible investments avenue may turn into impermissible which require the
operator to discontinue the investment by way of donation to the charity. Therefore, screening criteria to
determine permissible investment avenues increase time and cost in short term but improves corporate credibility
in longer time.
Generally, Islamic financial services market is built on a societal foundation or religious principles that may help
the institutions introduce products designed and priced based on the principle of societal (member) equality
(Kwon, 2007). Any approach to Islamic insurance must acknowledge the importance of economic growth as well
as social justice. Takaful is said to be based on the principles laid down by Islamic teachings, which is classified
into: protection of human life; protection of human intellect; protection of human property; protection of human
honour; and protection of human conscience (El-Sheikh, 1987).
In Malaysia, the IFIs are guided by their internal Shari’ah Supervisory Board which are established to advise and
ensure their products comply and adhere to the Shari’ah principles. This is a requirement by BNM to all IFIs
including takaful companies. To oversee the institutions compliance (products, services and operations), BNM
also has a Shari’ah Advisory Coucil (SAC). BNM is continuously enhancing the Shari’ah framework to be in line
with the developments in the takaful industry. This is crucial to ensure uniformity of Shari’ah interpretations in its
effort to strengthen the regulatory framework of the Islamic finance industry. The strong Shari’ah framework
enhances consumer confidence and gives greater flexibility for takaful operators to be innovative within the
boundary of Shari’ah (BNM, 2005).
The Shari’ah classifies all matters into either halal (those permitted) or haram (those prohibited). For example, it
permits takaful (shared responsibility) and strongly encourages such practice among Muslims. It also permits
zakat, which obliges the rich to help the destitute and weaker members of society. In contrast, the Shari’ah
prohibits exploitation and risky investments because Muslim jurists generally view that these activities are gharar
(contracts in which results are unknown, hidden or speculative in nature) (Ismail, 1997) and the market must be a
place for exchange of products and services where all parties in each contract explicitly know the prices. Riba
(charging predetermined interest) is also forbidden in Islam regardless of the purpose for which such a loan is
made and the rates at which interest is charged. As a result, Islamic financial transactions are, at least in principle;
interest free (Ahmad, 1967).
Islamic transactions have more levels of authorization compared to conventional insurance. The transaction
between takaful operator and the participant for example uses the contract of either mudharabah (profit-sharing)
or wakalah (agent). The conventional insurance is based on selling of policy. The transactions performed must
comply with the conditions outlined by the Shari’ah. Abd Rahman (2010) reports that there are issues that need
careful inspection by the takaful operators to ensure that the takaful products and operations conform to the
shari’ah principles. Among the inspection include the shari’ah concept applied to the product and getting
approval from the company’s SAB and also the SAC of BNM. After the approval, a training program and briefing
on the concepts and implementation of the product will be conducted for all officials in charge directly with the
marketing and consumer to ensure right information are being disseminated. This process, although seems to be
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simple but there exist significant problems as most of the employees are ex-conventional staff. They are faced
with the problem of understanding the products and thus, deliver inaccurate information to the takaful customers
when in fact, all products, contracts and transactions have been examined carefully and approved by the Shari’ah
advisor. This is an operational risk to the takaful operators.
Risks will always exist despite firms’ efforts to manage risks effectively and put precautionary measures in place.
Identifying risks is easier than calculating the magnitude of losses that firms suffer. Management, from an Islamic
perspective includes treating human life as an organic whole, where there is no demarcation between matters,
secular, and religious. All human activities are ibadah provided they follow the guidance and the principles of
shari’ah (Kazmi, 2004). Men have choices, freewill and freedom of action and are therefore, responsible and
accountable for their actions. As Muslim managers in business organizations, any actions and decisions made are
actually ibadah if they fulfil and comply with the principles of shari’ah. Thus, it is their responsibility to provide
insurance service to Muslims in particular. In doing so, they are fulfilling their obligations as Muslims.
According to New Zealand standard of Risk Management (2004), It is the culture, processes and structures that
are directed towards the effective management of potential opportunities and adverse effects”. In fact, risk
management is an ongoing process that encompasses all aspects of our life.
Risk management systems and procedures are not new (Liu et al., 2007). Managing risk involves creating
awareness of uncertainty, qualifying the risks, managing the controllable risks, and minimizing the impact of
uncontrollable risks by risk allocation/apportionment (Liu et al., 2003). Ineffective risk management is often
caused by lack of formalized risk management procedures, including risk identification, analysis and control (Tah
and Carr, 2001); lack of continuity of risk management in the different stages in the project life cycle; poor
integration between risk management and other key processes; and a lack of interaction among different parties
(Liu et al., 2007).
Key areas of risk management in takaful are shari’ah compliance, investment management and human resources.
The shari’ah compliance as mentioned earlier is a continuous process and the takaful operator must at all times
ensure its adherence. Non-compliant to shari’ah will result in serious losses not only to the customer but also to
the shareholders, company and the industry as a whole.
Risk profiles and risk preferences are different among organisations. The introduction of risk management
committee at the board level emphasises the importance of managing risk (Mendoza, Supangco, & Tolosa, 2005).
There is a need for a separate board to review risk assessment and management although the CEO initiates and
implements corporate strategies which include risk.
Risk management in takaful industry is a process to identify potential losses of an operator and to select the most
appropriate techniques for treating such potential losses. To ensure the effectiveness of overall management,
takaful operators are required to observe the Guidelines on Directorship for Takaful Operators, which govern the
appointment of directors and chief executives and the setting up of board committees, including risk management
committee. In addition, takaful operators are also required to observe prudential limits and conditions imposed on
the outsourcing of the management of takaful funds so as to ensure that the funds are properly managed within the
accepted risk management framework (BNM, 2005). Although Takaful operators has a Chief Risk Officer (CRO)
in the organisation to foresee the overall risk including the operational risk, it is also vital for them to assess and
ensure its compliance with Shari’ah requirements. One of the major roles of CRO is to integrate procedures to
report on major risks, ensure the most significant risk compliance and risk identification (Yazid, Wan Daud, &
Hussin, 2008).
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BNM places great importance in ensuring that the overall Islamic financial system operates in accordance with
Shari’ah principles. This is to be achieved through the two-tier Shari’ah governance infrastructure comprising of
two vital components, which are a centralised Shari’ah advisory body at the Bank and an internal Shari’ah
Committee formed in each respective Islamic financial institution (IFI). The shari’ah governance framework
introduced by BNM is designed to ensure the IFIs structure, processes and arrangement of their operations and
business activities are in accordance with Shari’ah. It also acts as a guide to the board, Shari’ah Committee and
management of the IFI in discharging its duties in matters relating to Shari’ah as well outlines the functions
relating to Shari’ah review, Shari’ah audit, Shari’ah risk management and Shari’ah research (BNM, 2010).
Shari’ah risk management is a function to systematically monitor and control the identification and assessment of
Shari’ah risk to avoid any Shari’ah non-compliances. The systematic approach of managing Shari’ah risk will
enable the IFI to continue its operations and activities effectively without exposing the IFI to unacceptable level of
Managing the Risk of Takaful Operator
The objectives of risk management in takaful, among others are (1) to protect the safety of the takaful fund; (2) to
ensure the fund is able to pay claims and obligations; (3) to achieve a required rate of return on investment if
possible; (4) ability to withstand an adverse conditions; and (5) to ensure continuity as a going concern.
Most of the takaful operators classified their risks into three headings namely the takaful (business) risk, financial
risk and operational risk. Identifying and classifying the risk in takaful business is important as it will enable them
to manage the risk more effectively.
Approaches to risk management may include having a common language in terms of concepts, definition and
classification; adopt a wide disciplined approach; creating and instil a strong risk governance; focused on aspects
that is quantifiable and seek for continuous improvement. In this sense, the industry is able to share the best
practice among the takaful operators. Adopting the appropriate approach will make risk management more
relevant, practical and acceptable. The important techniques of risk management adopted by the takaful operator
are self assessment risk, asset liability management (ALM), solvency capital, retakaful or risk transfer program,
key risk indicators (KRI) warning the business on possibility of risk and any losses and business continuity
management. The recent trend for the takaful operator is to adopt the Enterprise Risk Management (ERM). There
is a growing demand from the shareholders and senior management to implement ERM in their organisation as
this means formalising the essential connection between the business operations and its overall risk management
program (Shimpi & Lowe, 2006). The initial stage of ERM is mostly about compliance and corporate governance
and this may include the shari’ah compliance.
Enterprise risk management (ERM) has emerged as a new paradigm for managing the portfolio of risks that face
the organisations and policy makers continue to focus on mechanisms to improve corporate governance and risk
management. ERM is the process of planning, organizing, leading, and controlling the activities of an
organization in order to minimize the effects of risk on an organization's capital and earnings. ERM expands the
process to include not just risks associated with accidental losses, but also financial, strategic, operational, and
other risks. ERM could be considered as a systematic approach for managing risk (Mikes, 2005). If the risk were
to be managed effectively, companies may possibly achieve their corporate objectives and eventually create value
for their stakeholders. Despite these developments, there is little research on factors associated with the
implementation of ERM. Research is needed to provide insights as to why some organizations are responding to
changing risk profiles by embracing ERM and others are not (Beasly, Clune, & Hermanson, 2005). It is not
known whether ERM can mitigate the risks associated with the takaful industry. As discussed, the prominent issue
in takaful is the shari’ah non-compliance risk. If the takaful categorised shari’ah compliance as part of its
operational risk, then ERM may be a valid and strategic tool in managing the risk of takaful operators. Whatever
classification given to the shari’ah compliance risk, the issue is pertinent in the overall takaful operations.
Annual Summit on Business and Entrepreneurial Studies (ASBES 2011) Proceeding
In line with shari’ah requirements and the concept of takaful, risk management practice and management of a
takaful operator should be better off than a conventional insurance operator. Protection that is in accordance with
maqasid shari’ah needs to be integrated into the Islamic finance activities. Takaful operators need to be proactive
in managing their risks as part of good governance and best practice code. Self regulatory is needed rather than
depending on regulatory requirements. As risk is an on-going process, continuous development of knowledge is
required in order to understand and manage the risks effectively. Irrespective of the business model adopted by
the takaful operators (mudharabah or wakalah or hybrid), the risk management will be the same since the basis is
Although it is arguable that the Islamic financial system (including takaful) has significant impact on the
economics for the past three decades, a small impact is better than nothing (Abd Rahman, 2010) since we are
living under constraints (dual economic systems). It is at least a sign of change to ensure that we are working
towards changing the mind of the society in general and Muslims in particular.
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... themes based on suggestion of the previous research and various sources (guidelines and standards). The themes are; a) Shariah Compliance and Governance (El-Halaby et al., 2018); b) Corporate Governance (IFSB & IAIS, 2006); c) Takaful Policy Requirements (Archer et al., 2009); d) Family Takaful (IFSB, 2009); e) Solvency Requirements of Takaful Undertakings (Archer et al., 2009); f) Risks (AbdulAris et al., 2012;Akhter, 2010) and h) Enterprise Risk Management (AbdulAris et al., 2012;Akhter, 2010). ...
... themes based on suggestion of the previous research and various sources (guidelines and standards). The themes are; a) Shariah Compliance and Governance (El-Halaby et al., 2018); b) Corporate Governance (IFSB & IAIS, 2006); c) Takaful Policy Requirements (Archer et al., 2009); d) Family Takaful (IFSB, 2009); e) Solvency Requirements of Takaful Undertakings (Archer et al., 2009); f) Risks (AbdulAris et al., 2012;Akhter, 2010) and h) Enterprise Risk Management (AbdulAris et al., 2012;Akhter, 2010). ...
... It includes effective management of risk according to the objectives of Shariah that promotes peace and harmony among the Ummah through protection and prevention from harm and disaster for the contentment of their lives now and the hereafter. Risk management concept of takaful is placed within the maqasid of Shariah framework to protect life, wealth, and dignity against any catastrophe (Akhter, 2010;Abdul Aris, Tapsir, & Abu Talib, 2012;S. Abdullah, 2012). ...
... The basis of takaful risk management is Shariah. Therefore, it will be applied to all business models (Mudarabah, Wakalah and hybrid) adopted by takaful operators (Abdul Aris et al., 2012). From the lens of Islamic finance, risks are classified into generic risks and the unique risks. ...
Takaful is still in its early stages as compared to conventional insurance with regard to regulatory maturity and market penetration (EY, 2013). In Malaysia, Bank Negara Malaysia has issued guidelines to ensure the operational efficiency of takaful operators, safeguard the interests of participants and promote uniform practices between operators. From a reporting perspective, in the Financial Stability and Payment Systems Report 2013, Bank Negara Malaysia (2014) mentioned the importance of having meaningful disclosure to protect participants. However, it did not provide details of the elements of meaningful disclosure. There is no specific guidelines or standards of what should be disclosed and how detailed the items should be disclosed. Takaful operators have more knowledge in the operational aspect of takaful, compared to the participants. Authorities try to harmonise all the possible variations and gaps between takaful operators (preparers) and participants (users) for the benefit of the industry. Any gap between what is expected to be disclosed (desirable) and what is actually disclosed needs to be analysed in order to provide more information relevant to the users and to standardise the disclosure level. There are four objectives of the study. The first is to examine what meaningful disclosure is to authorities. The second is to examine what meaningful disclosure is to users (the desired). The third is to examine what meaningful disclosure is to preparers (the actual) and the fourth objective is to analyse the gaps between the desirable and the desired (authorities and users); the desired and the actual (users and preparers) and between the desirable and the actual (authorities and preparers). A checklist was developed to represent the desirable level of disclosure based on various requirements and standards guided by accountability theory. To measure the desired level of meaningful disclosure, the checklist was distributed to takaful agents to examine their perception of meaningful disclosure based on decision usefulness theory. The disclosure checklist was employed as a benchmark to evaluate the actual level of meaningful disclosure in takaful operators' annual reports and websites. The gap analysis was conducted among the desirable, the desired and actual level of meaningful disclosure based on institutional theory. There are significant differences among all the gaps. Additionally, the average level of actual mandatory disclosure is 95% while average level of voluntary disclosure is 38%. It is hoped that the findings will assist authorities in formulating guideline or policy pertaining to meaningful disclosure in takaful industry in Malaysia.
... They further concluded and recommended a collaboration among the standards setter, the authorities, the academicians, the auditors and the accountant to develop a comprehensive Takaful Accounting Standards and resolved the issues of zakat accounting. However, compared to banking industry, dissemination of information by takaful industry was still lacking (Aris & Tapsir, 2012). Research on takaful reporting is indeed limited. ...
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Takaful also known as Islamic insurance industry has been growing rapidly across the globe. The unique organizational structures of takaful operators, their products' and participants' rights have increased the demand for transparency and put additional pressure to voluntarily disclosed more information. This study focuses on disclosure of takaful information from user's perspective. A checklist was developed to represent desirable level of disclosure based on various requirements and standards. To measure the voluntary disclosure level, the checklist was distributed to takaful agents to examine their perception of the disclosure on takaful information. The findings show that majority of the users (86.14%) agreed that all disclosure items on takaful policy requirements are meaningful. It is hoped that the findings will assist authorities in formulating guideline or policy pertaining to meaningful disclosure for the users in the future.
... Risk management is a process in the Takaful sector that involves recognizing prospective losses for an operator and selecting the most appropriate strategies for dealing with those potential losses when they arise (Aris, Tapsir, & Talib, 2012). Among the most critical areas of risk management for takaful operations are Shariah compliance, investment activities management, and human resources administration. ...
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Takaful is a financial planning tool that can be used as an alternative for conventional insurance. Generally, takaful products are divided into general Takaful and family takaful. A feature of the General Takaful is that it has a short-term policy and that its liabilities coverage is limited to material losses only. On the other hand, family takaful is a long-term policy that includes savings and an investing component. Although the tabarru' fund protects them, the participants can also benefit from the investment returns and savings generated by Shariah-compliant assets. The primary objective of this article is to identify the many types of risks that Family Takaful operators in Malaysia are exposed to and their methods of dealing with and managing these risks. This article is based on a method of library research. In addition, the article highlights the difficulties that Family Takaful operators in Malaysia are confronted with. The hazards associated with running a family takaful business are usually related to operations and investment. Non-compliance risk with Shariah laws, underwriting risk, human resource risks, and fiduciary risks are all risks that exist on the operational side of the business. These risks might occur at any point during the business process. The takaful operator may encounter market, credit, liquidity concerns, and other risks commonly associated with investment on the investment side of the equation. In addition, the researcher offered suggestions on how to mitigate these dangers.
... Indeed, as we know, conventional insurance in Tunisia is more successful than Islamic insurance in Tunisia. However, Islamic insurance has been comforted with many risks (Aris et al., 2012), and has prudent underwriting practices to reduce information asymmetry (gharar, maysir). Unsurprisingly, information asymmetry hinders the development of a market. ...
... Takaful is one of the protection schemes under Islamic wealth management. The objective of the takaful is to provide protection and assurance against a specific risk that befalls an individual's life or possessions (Aris et al., 2012;Abdullah, 2012;Ahmed, 2013). Besides from that, takaful also counter poverty and deprivation (Fisher, 1999;Patel, 2004;Erlbeck, 2010;Bakhtiari, 2013;Hasim, 2014;Sheila et al., 2015). ...
... Takaful is one of the security systems under Islamic wealth management. The purpose of the takaful is to provide safety and assurance in the life or belongings of an individual against a specific danger (Aris et al., 2012;Abdullah, 2012;Ahmed, 2013). In addition, takaful also counters poverty and deprivation (Fisher, 1999;Patel, 2004;Erlbeck, 2010;Bakhtiari, 2013;Hasim, 2014;Sheila et al., 2015). ...
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In addition to heart disease, other Malaysian extensive illnesses are mental health disorders. 29.2 per cent of Malaysians have recently suffered from mental illness, which has increased threefold compared to the previous year. The lowest income group accounts for the bulk of Malaysians suffering from mental illness. Currently, Singapore list among the countries has operative providing mental health insurance together with Australia, the United Kingdom and the United States of America. Malaysia is still far behind on offering mental health coverage with such a scheme only provided by AIA Malaysia. Therefore, through the takaful product, the purpose of this study is to address the risk of mental health disorders by hybrid takaful. The paper concluded that in order to maintain the promoting coverage and minimizing damage to mental health patients to human well-being, takaful mental health is needed in Malaysia market. In addition, this research would provide insight into the takaful industry for the development of a new and competitive product that could assist patients with a mental health disorder.
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The Nigerian business environment is currently beclouded with various kinds of risks, fear, and uncertainty that culminate into the collapsing of so many businesses and the relocation of several multinational and local firms to other countries. The business and the environment are in a social contract that leaves them with both opportunities and threats hence the business cannot take place in a vacuum. The interconnectivity between businesses and their environment is that of mutuality. Mutual in the sense that the business influences its environment and the environment as well guarantees the legitimacy of the business considering the interest of all relevant stakeholders. That is, a business is influenced by its environment of operation such that its success depends on the ability to adapt to its immediate and entire environment to make the environment of businesses favorable. Therefore, the objective of this study is to explore conceptually the Nigerian Business Environment (NBE) considering the roles of risk management, sustainability disclosure practices, and Islamic finance. The method adopted by the study is the review of past investigations to gain insight into the NBE. Based on the insight from extant literature and in consonance with assumptions of legitimacy theory, the study concludes that risk management, sustainability disclosure practices, and Islamic finance promote the NBE. The study added to existing literature looking at the NBE from the present perspective (i.e. risk management, sustainability disclosure practices and Islamic finance). The study has implications for the government and policy-makers, companies, the business community, and other stakeholders in terms of creating a conducive business environment in Nigeria through the provision of infrastructure, effective corporate governance mechanisms, good stakeholder management.
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Islam attaches great importance to insurance, as an instrument of protection of the individual and the community, and considers it an indispensable element of the process of achieving socio-economic justice in society. Consequently, in the Islamic concept of insurance, the social component dominates over the commercial component. However, requirements of the modern environment have made it necessary to have Shariah-acceptable commercial insurance. Given that conventional insurance models are largely Shariah non-compliant, Takaful insurance has been developed to meet the needs of individuals and institutions that want to be insured in accordance with Shariah principles. In this paper, we will analyze the process of evolution of Takaful insurance, its types and models, perform a comparative analysis of Takaful and conventional insurance, reviewing arguments in favor of Shariah specific nature of conventional insurance, and finally, list the challenges of implementing Takaful insurance in practice.
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Enterprise Risk Management (ERM) is a new concept of managing risks holistically and in Malaysia, such a concept is still relatively new among Malaysian companies. On a positive note however, the ERM concept appear to be receiving much attention over the recent years from various businesses and industries in Malaysia. This particular study aims to determine the level of ERM adoption among the Government-Linked Companies (GLCs) and to examine the influence of Chief Risk Officers (CROs) and Board of Directors (BODSs) on the ERM implementation itself. Findings of the study showed that the more established GLCs were more receptive to the adoption of ERM as compared to the less established ones. Also, companies that adopt ERM were found to have appointed the Chief Risk Officers (CROs). In addition, the quality of Board of Directors (BODSs) was also found to play a significant role in respect of ERM implementation.
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This is an essay on the perceived differences that underlie the conventional and Islamic approaches to management studies. It defines the contours of both these approaches and discusses their growth and antecedents. That the conventional approach is at a crossroad is argued on the basis of three trends. Two of these are positive: the heightened focus on soft issues and the emergence of alternative schools of management thought and one is negative: proliferation of management fashions. A review of literature describes the antecedents and growth in the Islamic approach. Some causes of the differences in the paradigms are then highlighted ascribing them mainly to the cultural contexts in which these approaches developed. Twelve points are then explained to illustrate how the paradigms governing the conventional and Islamic approaches might differ. Indication of the need and exhortation to explore further the impact of these paradigmatic differences on practice of management in organisations concludes the essay.
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This paper reviews the history of risk analysis and risk management, giving special emphasis to the neglected period prior to the 20th century. The overall objective of the paper is to: (1) dampen the prevailing tendency to view present-day concerns about risk in an ahistorical context; (2) shed light on the intellectual antecedents of current thinking about risk; (3) clarify how contemporary ideas about risk analysis and societal risk management differ significantly from the past; and (4) provide a basis for anticipating future directions in risk analysis and management.
Surge in interest in Corporate Social Responsibility (CSR) has taken its stronghold in developed countries, especially in United States and in European corporations of all sizes across business sectors. Extant literature suggests that companies benefit from being able to demonstrate their social responsibility towards stakeholders. CSR has also received an increasing public attention elsewhere, especially in emerging economies like Malaysia. However, shadow of doubt remains as to whether such initiatives could potentially lead to firm's better performance or as a source of sustained competitive advantage. Using a sample of over 1500 respondents from Islamic banking industry, this paper, aims to examine the perceptions towards CSR of various stakeholders, comprising managers, employees, regulators, Islamic legal advisors, customers, depositors and local communities. Since Islamic banks are regarded socially responsible, it is imperative to elicit the opinion of the stakeholders to get implications for drawing a CSR framework for Islamic banks. The main questions addressed are whether the various stakeholders support CSR initiatives and that they perceive CSR as a potential tool to benefit the firms that subscribe to it.
This exploratory study attempted to determine the level of formalization and implementation of corporate governance and risk management practices, and the role of human resource management in the design and formulation of such practices. This study also attempted to derive some patterns of association among the variables studied, including the degree to which specific human resource management practices were linked with the overall corporate governance and risk management objectives. Human resource management was consulted from time to time during the formulation of strategic plan, the design of behavioral control mechanisms, and the development of risk management guidelines and formal corporate culture programs. However, it was consulted only during implementation of corporate governance structures at the board level. Generally, human resource management involvement in the formulation of corporate governance and risk management mechanisms was related to the degree of formalization and implementation of such mechanisms, but not to the degree of congruence of human resource management functions with corporate governance and risk management objectives. However, the degree of formalization and implementation of corporate governance structures at the board level was related to the degree of congruence of human resource management functions with corporate governance and risk management objectives and the driver measures of performance. The latter was likewise related to mechanisms of behavioral control.
Purpose The purpose of this paper is to discuss the objectives of enterprise‐wide risk management (ERM), the Committee of Sponsoring Organizations (COSO) ERM Framework, and outline a method to implement ERM in organizations. Design/methodology/approach This paper delineates ten steps organizations can use to develop a viable ERM system for any organization. Findings It is highly recommended that a high‐level risk officer with visible support from senior and board level executives has a separate function to oversee the development of an ERM department. Practical implications Although the internal audit department has a large role in evaluation and monitoring the ERM system, it is management's responsibility to develop a strong ERM function that ties corporate strategy, the budget, controls, and the entity's performance measurement systems to risk management. Originality/value The cost to the entity of implementing and maintaining of an ERM system is grossly out‐weighed by the results and knowledge gained in evaluating, assessing, and overseeing risk to insure achievement of strategic objectives over the short‐ and long‐term life of the organization.
The new Basel regulatory initiatives and a burgeoning risk management literature signify the rise of enterprise risk management (ERM) in the financial services sector. However, very little is known of the roles that risk management plays in organizations and how it obtains organizational significance. This study, utilising case study material from seventy-five in-depth interviews with senior managers at two large banking groups, is a first step in exploring ERM in action. Apart from the field material, the study draws on the normative- practitioner literature of risk management, as well as on a long strand of organisationally grounded studies of management control. ERM appears to be an assembly of four risk management ideal types (Risk Silo Management, Integrated Risk Management, Risk and Value Management, Strategic Risk Management), all of which aspire to be 'enterprise-wide', and together constituting the 'risk management mix' in a given organisation. Three distinct types of risk managers emerged in both organisations, displaying characteristic aspirations and alliances (risk silo specialists, risk capital specialists, senior risk officers). The case study analysis compared and contrasted the observed two ERM assemblies, and emphasised the alternative patterns of organizational significance displayed by the risk management functions. Under the first model (value-based ERM) risk management was integral to the formal planning and performance measurement process, while remained neutral in the discussions of discretionary strategic decisions. Under the second model (strategic ERM) risk management was incidental to formal planning and control, however, senior risk officers exercised agenda-setting power to influence the discussion of key strategic uncertainties. The study explains the observations in terms of firm-specific factors and institutional pressures. The politics of risk control and the presence of different calculative cultures in the organisations were tampered by contemporary corporate governance imperatives, such as the shareholder-value drive and the risk-based internal control imperative.