Risk Management in
Islamic Financial Instruments
32
The above chart outlines the adaptations placed on the takaful model following the
implementation of mudarabah activity with regards to the investment profit. Hassan and
Lewis (2011) also state that, under a mudaraba contract, a profit is generated to be
distributed between the rabb al-mal and the mudarib (entrepreneur or takaful operator);
however, issues are borne out of the fact that, in the insurance arena, the profits from
investments are not the same as surplus. Essentially, Shari’ah scholars cite the profit-
sharing contract being applied in the model - the relationship between participants is one
of tabaru (donation) as defined in the contract and not of mudaraba (profit sharing
contract) - since it is impermissible for both the donation and mudaraba capital
(contributed by the capital provider ) in the arrangement to be the same monies (Hassan
and Lewis, 2011). Additionally, they state, “The requirement to provide a top up interest
free qard hasan (in case of a deficit) in a mudaraba contract is by definition against the
principle of mudaraba, which is a profit sharing contract, and in it the mudarib cannot be a
guarantor” (Hassan & Lewis, 2011). Similar to conventional insurance contracts, shared
underwriting may bring about an outcome as any ordinary business venture, not one of
mutual assistance.
Figure 2.7: Takaful- Wakalah
Under a wakala contract, the operator would be receiving fixed fees for services rendered in
managing the takaful fund and the investment portfolio, but not in the form of a performance
fee geared to the surplus as an incentive for managing the takaful fund effectively. Basically,
the whole operation is based on agency fees, not encompassing any aspects of P/L. Hassan and
Lewis (2011) cite that there have been questions concerning whether or not wakala contracts
are adequate in a competitive market environment, since the wakala operator’s fee is a fixed
percentage of the total contributions, and so the fee is based on and recovered from the takaful
fund. Being that a typical contract has a risk premium to which one may add expense margins
and profit margins for the operator, both the expense and profit margin would need to be
competitively priced on the volume of premiums for a single contract (Hassan and Lewis,
2011). In a conventional insurance contract, identification of these separately is not required,
as the expense surplus in addition to the underwriting risk surplus both belong to the
shareholders (Hassan and Lewis, 2011). Since, in takaful arrangements, the underwriting
surplus belongs to the participants, an adequate risk premium needs to be identified