Diversification of Islamic Financial Instruments
36
The pioneering Sudan, Malaysia and Bahrain practice a mixture of Wakala and Mudarabah
models. The United Kingdom uses pure Wakala-based model for Takaful, whereas Saudi Arabia
and Malaysia also use pure Mudarabah. In Pakistan, it is a Shariah requirement that the
Participants’ Takaful fund be operated as a Waqf (i.e. not in the direct ownership of either the
Takaful operator or the participants), and hence a Wakala-Waqf model (which also includes
the Takaful operator acting as a Mudarib for the Participants’ investment fund) is used.
In all these models, a separate fund is set up, managed by the Takaful operator, on behalf of the
Takaful participants. When multiple products are offered, e.g. Motor insurance, marine
insurance and fire insurance, usually separate funds are set up to cover losses arising from
each risk. For any given period, the Takaful operator can either have an underwriting surplus
(contributions exceeding payments, usually paid for either by past retained surplus or by
Qard-e-Hasan from shareholders or investment fund) or an underwriting loss. Quite separate
from this, the investment fund also bears investment profits or losses. In some hybrid models,
such as the Wakala-Waqf-Mudarabah model for Family Takaful practiced in Pakistan, there is a
separate Participants’ Investment Fund, while payments made to the participants to cover
their risks are made from a separate Takaful fund.
In a pure Mudarabah Takaful model, the Takaful operator acts as a Mudarib, entitled to a pre-
agreed profit ratio (such as 35%, 40%, 50%) of any underwriting surplus and/or investment
profits. The participants are then similar to depositors or investors in a typical Mudarabah
based product. Hence, the Takaful firm bears the operational expenses, shares in favorable
performance returns of the assets under management, but their income cannot be guaranteed.
Any losses from investment are born by the Rabb ul Maal as per Shariah rules (i.e. the Takaful
participants), while underwriting losses are paid for by Qard – Hasan from the operator.
The mixed Wakala-Mudarabah model is the dominant Takaful model in the Middle East, with
the Central Bank of Bahrain taking an initiative to make it compulsory for its Takaful and Re-
takaful firms. Compared to pure Mudarabah, here the Takaful operator manages two funds –
one with shareholders, and the other of the Takaful participants. A Wakala fee (a percentage of
participants’ contribution) is paid to the Takaful operator for the takaful fund (from which the
underwriting claims are paid). The operator earns a fee for any surplus in the participants’
fund (serving as incentive for effective management), and invests the surplus as a Mudarib in
Shariah However, there were issues arising from the fact that the participants’ takaful fund
was at least partially owned by either the Takaful operator or the participants. The
distribution of surplus raised similar concerns – with a conflict of interest on whether to hold
them for future sustainability or distribute them among the participants. As Takaful (to make
the process Shariah compliant and free from Maysir-gambling contract where several
members contribute and only a few win) is conceptually based on Tabarru (donation), there
was also a Shariah issue that profit sharing contract should not be applied to donations, and
over the legal status (and ownership) of the Takaful fund. Hence, a hybrid Waqf model was
developed, in which the participants’ contribution goes directly to a Waqf fund (from which
payments cannot be made except for claims payout – the purpose of the Waqf). This is because
the Waqf has no owner (except Allah Almighty). Waqf-like trusts are legal institutions in their
own right, and the operator can only manage the fund and administer its rules. The operator
ears a Wakala fee on the Waqf fund, and the Waqf pays underwriting costs, claims and re-
Takaful expenses. The participants have a Mudarabah relationship with the operator in the
separate investment fund.