to govern the relationship between the participants and the TO. Firstly, this relationship may be

established using the contract of

mudarabah

. Under this contract, the participants, collectively

as the capital providers, entrust the TO, as the

mudarib

, to invest the

Takaful

contributions to

generate profits for the

Takaful

fund. Any profits from the investment will be shared between

the

Takaful

fund (participants’ portion) and the TO at a pre-agreed ratio.

Secondly, the contract of

wakalah

could also be used to govern this relationship. Under the

wakalah

model, the participants as the principals (

muwakkil

) appoint the TO as an agent (

wakil

)

to perform the specific tasks of managing and investing the

Takaful

fund on their behalf. The

contract of

wakalah

is very flexible; it could be applied for delegating either the management of

underwriting activities or investment of the

Takaful

fund or for both. As an agent who works on

a commercial basis, the company normally charges fees (

ujrah

) for their services. The amount

or rate of the fees must be fixed and agreed by the TO and the participant upfront.

Thirdly, the contract of

juʻalah

(reward) could also be used to govern the relationship between

the TO and the participants. In this contract, the participants appoint the TO to manage the

Takaful

fund to reach a certain level of performance, and a specific amount of reward or

commission will be paid to the TO if the required outcome is achieved. Under this arrangement,

the payment of reward or commission to the TO depends on the final result at the end of the

financial year. If the TO does not achieve the required outcome, it would not be entitled to get

the reward. In the operation of

Takaful

, the contract of

juʻalah

is typically used for the payment

of performance fee to the TO. The fee is paid as an incentive to the TO if there is a surplus in the

risk fund after deducting claims and expenses.

Finally, the relationship between the TO and the participants could also be governed by a

combination of two or all of the above-mentioned contracts. For example, the contract of

wakalah

could be used for the management of the

Takaful

fund and the contract of

mudarabah

used for the investment of the fund. Through this arrangement, the company charges a fixed fee

for the management of the fund and shares some portions of the investment profits with the

participants. Also, the contract of

juʻalah

could be added to provide incentives for the TO if it

could improve its performance to achieve specific outcomes.

3.2.

Takaful

Modus Operandi

The

Takaful

industry has developed significantly over the years and with the help of

Shari'ah

scholars some of whom are members of

Shari'ah

Boards, several

Takaful

models (non-

commercial and commercial models) have been developed.

Figure 3 c

lassifies the models

according to the underlying contract, which clarifies how the TO is compensated for the

management of the

Takaful

fund. From the regulatory perspective, a major concern is how the

TO is compensated for its services. Every

Takaful

model defines the following aspects:

It is a contract of reward, a unilateral commitment to reward for a specific act or accomplishment.