Risk Management in

Islamic Financial Instruments

important issue worth noting is that the participants of

takaful

pools have a small stake in the

decisions made for the fund (if a stake at all), while the operator’s actions, as you can see from

the structure of the contract, have a significant impact on all decisions (Hawary, Grais, and

Iqbal, 2003). As the IFSB (2006) notes,

“because the interests of policyholders may diverge from those of the shareholders of the

Takaful operator, whose board of directors is in principle acting on behalf of both groups but

which is appointed only by the shareholders, there is reason to consider whether policyholder

interests need to be represented within the governance structure. Such representation might,

for example, extend to any committees established to decide on investment policy, since there

may be issues around which investments are attributed to shareholders’ funds and which to

policyholders’ funds.” (p.12)

Going forward, structures for a takaful pool should also extend to shari’ah boards, as well as

utilizing shura, the Islamic concept of mutual consultation (Iqbal and Lewis, 2006). Despite the

fact that, as an industry, the Islamic banking sector should remain weary of extending Shari’ah

compliancy too far and allowing for structures that are not truly in accordance with Islamic

principles. Shari’ah boards should continue to seek to extend the confines of what financial

structures are acceptable, particularly, Islamic project finance and infrastructure financing,

which will prove to be critically important for Muslim countries (Hawary, Grais, and Iqbal,

2003).

It is evident from the key issues listed above and the conversations pertinent to them (for both

wakala

and

mudaraba-based takaful

models) that most of the issues pertaining to

takaful

are

issues regarding the

Shari’ah

compliancy of

takaful,

both generally and within the confines of

specific

takaful

mechanisms, and the various governance risks surrounding the models. The

heterogeneous interpretations of Islamic scholars, particularly as applied to

takaful

concerning every facet of this Islamic structure, from auditing to modeling and account, have

led to a lack of transparency and comparability in financial statements (Hawary, Grais, and

Iqbal, 2003). In spite of this, the underlying theoretical conceptual design of

takaful

is a

testament to the enhanced Islamic financial engineering taking place today; however, in

practice, the risk-sharing (co-operative) advantages of

takaful,

specifically

mudaraba

-based

models, are, through an amalgam of circumventions, offset (Hawary, Grais, and Iqbal, 2003).

Islamic banks operate in mixed financial systems and, as mentioned before, cannot always

practice finance in a wholly Islamic manner. One important example, which Baldwin (2002)

cites, is that Islamic banks tend to remunerate investors with returns commiserate with the

market at present, regardless of the bank’s actual margins and profitability, something that is

obviously not in line with whichever Islamic banking is activity being engaged.

IFSB (2006) quoted in Hawary, Dahlia El, Wafik Grais, and Zamir Iqbal. "Regulating Islamic Financial Institutions: The Nature of the

Regulated." International Conference on Islamic Banking: Risk Management, Regulation and Supervision, Aug. 2003.

Baldwin (2002) quoted in Hawary, Dahlia El, Wafik Grais, and Zamir Iqbal. "Regulating Islamic Financial Institutions: The Nature of the

Regulated." International Conference on Islamic Banking: Risk Management, Regulation and Supervision, Aug. 2003.