Risk Management in
Islamic Financial Instruments
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The modified mudarabah model is similar to the conventional framework seen above for
mudarabah takaful models, but with a performance incentive for the fund’s operator, termed
in the chart above as “underwriting surplus”. In this model, this surplus is shared between the
operator and the participant, while the traditional model does not provide the operator with a
share to the surpluses of the underwriting, nor does it monetarily incentivize the operator to
produce such surpluses.
Figure 2.9: Takaful Model – Wakalah with Mudarabah on Investments
The above model provides an incentive to the operator to produce higher investment profits in
the form of a stake, “X%”, in the investment profits, though it does not allow for the operator to
share in underwriting surplus profits. This model, like the modified wakalah model, was
designed so that the operator has reason to attempt to maximize profits, not just meet base-
line expectations placed on them by the stipulations contained within their contract.
Figure 2.10: Takaful Model – Wakalah with Incentive Compensation
This model combines mudarabah components on the fund’s investments with an incentive for
operators should they generate underwriting surpluses, as noted in the figure above. Another