" Regulatory Framework in Takaful " This project paper is a partial fulfillment of Module TK 1003 Takaful and Actuarial Practices) of Part 2 of Certified Islamic Finance Professional

Kuala Lumpur, Malaysia

CIFP

“Regulatory Framework in Takaful”

This project paper is a partial fulfillment of Module TK 1003

Takaful and Actuarial Practices) of Part 2 of Certified Islamic

Finance Professional (CIFP)

Facilitator: Dr. Ezhamshah Ismail

Semester: September, 2014

Name: Hasan Farid

Student ID: 1400017

Date of Submission: 21/11/2014

Abstract

Takaful has emerged as one of the alternative toward the insurance

as a result the conventional assurance that start deteriorate over the

past 5 years. Takaful has not only complied with the aspect of ethics

or moral intrigue but it’s fundamentally strongly affected with basic

concept of Shari’ah. Moreover, the regulatory frameworks has been

working as guideline over the year to keep improving the practice of

conventional insurance in which several countries has been adopted

different measurement of framework. However, there is a conflict

arise regarding the practice of Takaful with regulatory framework

existence in term of the use of Shari’ah basic, different analogy or

even the methodology which rise a question whether development of

Takaful needing the regulatory control or it might get on without it.

Therefore, this paper will be highlighting the relation, impact and

practice of regulatory framework of several countries in Takaful in a

way to see the role of regulatory framework.

1.Takaful,2.Regulatory framework,3.Shari’ah,4.Islamic

Finance,5.Insurance

Table of Content

Introduction………………………………………………………………………………………1

About Takaful…………………………………………………………………….………1

Takaful and Regulations……………………………………………………..…………...1

Objectives regulatory framework in

Takaful……………………………………………..2

Regulatory framework of Takaful in Malaysia……………………...

…………………………...1

Takaful Act 1984………………………………………………………………………...2

IFSA……………………………………………………..……………………………….3

Takaful in other countries………………………………………………….…………………….3

Takaful In Indonesia……………………………………………………………………..3

Regulatory framework for Takaful in

Indonesia………………………………………...4

Takaful in Bahrain…………………………..…………………………………………...4

Regulatory framework for Takaful in Bahrain………………………………..

………….4

Relation of the issue with AAOFI

Standard……………………………………………...5

Whether regulatory framework important or

not………………………………………………...5

Stimulation of the framework…………………………………………………………….5

Effect of improper regulatory framework…………………………………..

…………….6

Recommendation……..…………………………………………………………...……………...8

Reference…………………………………………………………………………………………9

Introduction

Takaful?

The need of assurance toward future activity has emerged in

the current global financial world, which mostly has been covered

up by worldwide insurance company. The development of Islamic

finance as global financial solution, has resulted expansion of

insurance product to be comply with Shari’ah as Islamic finance

main concept.

Originally, Takaful word has derived from an Arabic word

which means solidarity, in which means a set of contributors to

the takaful company (known as participant) agree among themselves

to support one another jointly toward any losses in the future.

In a Takaful term, the participants need to contribute money

tabarru’ (donation) into a common fund. Later, that sort of fund

can be use equally to support the members of contributor toward

specific loss, damage, and impairment.

Recently, Takaful which is

known as Shari’ah compliant

insurance, has grown rapidly

in Muslim and non-Muslim

countries as an effect

toward the brisk improvement

in Global Islamic Finance.

However, the development

itself can’t be separated

from several criticism in

the related guidelines and regulations. The particular criticism

has been addressing toward the fact of profit sharing among

takaful operator and their operation, in the view of Shari’ah

since it differ with ethic concept. Such an issue can’t be

resolve, then it will be a threat toward the continuity and

confidence of the participant as well as investor in the takaful

industry.

As a form, takaful can be in form of commercial business or even

non-profit business form. As non-profit, the Takaful world

completely on the basis of cooperation with the participant in

the use of takaful fund and the board runs the business on behalf

of all participants which there is no term of separation on

managing it. On the other hands, Commercial form means that it

work as commercial entity which has a duty to manage the related

takaful fund. However, it didn’t cut off any possibilities toward

the fund may be surrounded within and of course with clear

separation between shareholder’s and participant’s funds, or on

the other word, the fund can be limited to the boundaries where

it can be set as company apart from the operator.

Takaful and Regulations

One of the most important aspect of Takaful is regulatory

framework, in which to establish a proper framework usually takes

a longer adoption and it might involve several thought and

argumentation inside it. Therefore, in a way to process Takaful

in proper direction, it needs appropriate entities or structure

to fully control and regulate the work of framework, in which in

this case is Takaful. In several countries, there still is dual

system which often crossed each other way and create some issue.

For instance, it is the fact between conventional system and

Islamic system. The conventional system component such as good

governance, compliance of regulations and other provisions should

also be applicable to the Islamic financial system. However, due

to the nature of Islamic finance, the legislative may require

minimum interference of conventional pattern in which also

needing legal capacity and legislative power to enable the

authority to have full control towards it.

Moreover, the movement of Takaful which expanded vertically

has put several challenges in order for it to keep improving.

Therefore, there is major disagreement between the scholars in

terms of regulatory framework such as issue on different regions.

This regional issue is mainly passed on the practice of Takaful.

For instance, in Malaysia which the regions wants to be more

liberal and also combine modern conventional concept with Takaful

framework, while in middle east countries are more conservative

based on strong culture in Islam, and they basically do not want

to deal with modern conventional insurance with Takaful

framework. Consequently, it seems that every region practice its

own system of believe that regarding the concept of Takaful

framework even though sometimes it’s hard to be transferred one

concept of Takaful that one region practice to the other region.

Furthermore, there is also an issue regarding the model of

Takaful is being practiced by specific region. There are various

models that adopted in different regions in Takaful industry

which sturdily influenced by practice of scholar (Hambali,

Maliki, Syafi’I, Hanafi) that been followed in specific region.

For instance, in Saudi Arabia (SAMA) Saudi Arabian monetary

procedure approves a supportive model in which only 10% in

surplus is compulsory for distribution to policyholders. This

model is very practice in Saudi Arabia which migh not be agreed

by all the scholars, and some scholars are against it because

they said it is not acceptable or meets the requirement of

Shari’ah compliance.

Objectives of Regulatory Framework in Takaful

Basically, in order for the takaful and re-takaful industry

to grow globally, there is a need for standardized regulations.

These regulations can help in providing ‘quality assurance’ to

help consumers decide which practices and models are acceptable

to them. Other than that, the regulatory system has legal

capacity for giving safety for the customer in the case of

protection against the bankruptcy of established operators. In

most countries, there is currently only limited Takaful specific

regulation, whereby there have been some initiatives launched

recently to expand the regulatory framework. Examples are the

setting up of a Takaful operational framework by Bank Negara

Malaysia and the draft paper on solvency requirements by the

Islamic Financial Services Board. One particular challenge is to

take into consideration the specifics of Islamic insurance and

reinsurance. An adequate regulatory framework will have a

positive effect on Takaful.

In term of function, the regulatory framework has allowed a

greater operational flexibility to promote product innovation

while preserving policy/certificate value Life insurers and

family takaful operators will be given greater flexibility to

manage their operating expenses, commensurate with their business

strategy. However, consumers’ interest will remain protected

through appropriate safeguards that will preserve their

policy/certificate value. Moreover, the framework in Takaful

plays important role on diversifying distribution channels to

widen outreach Life insurance and family takaful products will be

provided to consumers through multiple delivery channels and

therefore a broader choice of channels will be available for

consumers to utilize depending on whichever is most convenient

and appropriate. Strengthened market conduct to enhance consumer

protection. In addition, with the framework of regulations that

fully understood and applied, it will reflect on the level of

professionalism of intermediaries which might be enhanced to

ensure consumers are given proper advice. At the same time,

product disclosure standards will be strengthened with greater

transparency in order for consumers to better understand product

features and for ease of product comparison. Meanwhile, financial

education and awareness efforts will continue to be pursued to

promote greater consumer empowerment.

Regulatory Framework for Takaful in Malaysia

Takaful Act 1984

Malaysia’s Takaful Act 1984 has

been introduced as a package

toward development of Islamic

Finance in Malaysia. During the

year, this act is presently the

world’s only specifically

legislated the structure on

governing the operation of

Takaful funds. The laws

governing Takaful vary from one

country to another, whereby in

most other countries, they

believe that the existing laws is applicable to the insurance

industry. However, Malaysia’s legislation recognizes that Takaful

as possessing unique characteristics which needed other

independent regulatory framework. The Malaysia’s legislation has

discovered one of the requirement that Takaful needed, which is

not provided in conventional insurance, and it was led to series

establishment of Shari’ah supervision framework.1

This particular Act has provided the regulation of Takaful

business in Malaysia and for other purposes related to Takaful.

Whilst the Governor of theAct is the Central Bank of Malaysia,

the Act also makes a provision by virtue of Section of 8 (5) (b)

1 Draft Regulatory Framework for Takaful by BNM

that all Malaysia Takaful operators must be supervised by the

Shariah Advisory Council (SAC), also known as Shariah Supervisory

Council, to advise the operators on their Takaful business to

ensure that they do not involve in any element which is not

approved by Shariah (Bank Negara Malaysia, 2012).2

Under the Takaful Act 1984, a Takaful operator must be

incorporated as a company as defined in the Companies Act 1965 or

as a society as registered under the Co-operative Societies Act.

The operator must have the required deposit and pay annual

registration fees. Moreover, it always has to maintain the

surplus of assets over liabilities which not less than the amount

as may be prescribed from time to time. The Act requires that the

objectives and operations of the Takaful business must adhere to

the tenets of the Shari’ah and must not mix its operations with

any prohibited activity under the Shari’ah3.

Introduction of IFSA

After, almost 20 years of existence of Takaful Act 1984,

Malaysia’s legislation has introduced IFSA as effective in June

2013 in which combines the regulations for Islamic Banking as

well as Takaful. The most drastic changes under IFSA was related

to the requirement complex structure of takaful operator to

separate their general takaful from family takaful and treat it

2Juristic Analysis on the Applications of Common Law in MalaysiaTakaful Act 1984 3 Draft-Takaful Act 1984 by BNM

as separate entities. All the takaful operator was given five

years’ time to be able fully on complying with requirement that

already set up. As a result, the operator start separating their

particular capital in term of general and family takaful

businesses, with minimum capital requirement, while previously it

was RM100 million is applicable for the combined general and

family takaful business under the complex structure.

Further, the development of regulatory in IFSA has

indirectly resulted several mergers and acquisitions as a result

of this requirement. Since many operators find it too burdensome

to hold separate capital requirements, most of them decided only

focus in one particular takaful, which either general or family.

Though, the separation of family and general takaful business

also likely encouraging the growth of the general takaful

industry, given the additional focus and specialization within

the industry. In Malaysia, it shown that the growth of family

takaful business has far exceeded the growth of the general

takaful business as operators have tended to take advantage of

the growth of the Islamic banking industry to develop its family

takaful business, with limited attention being given to develop

the general takaful business.

Moreover, in term the minimum capital requirement for

takaful (except composite type of takaful operator), the

requirement wasn’t explicitly mentioned under IFSA. Comparing

with the previous Takafuls Act, the IFSA just stated that minimum

capital will generally specified by the regulator. Before, in

Takaful Act 1984, the minimum requirement was fully stated with

specific minimum capital was RM 100 million. To conclude, the

movement of minimum requirement from Takaful Act to IFSA wasn’t

clearly effecting the market, but IFSA have impacted on giving

confidence to the operator in term of scope for regulators to

issue capital requirements depending on the nature and complexity

of the business.

In addition, IFSA also mentioned about responsibility

requirement for Takaful operator governance. It stated about the

responsibility from the Appointed Actuary to the Board of

Directors of the takaful operator in which implicated potential

increased of responsibility for the Board of Directors. This

particular changes has indirectly force takaful operators to

increase the number of independent directors to address the

additional responsibility such that the Board will have a higher

proportion of technical Board members (e.g. those with technical

experience such as accounting, actuarial, legal, etc.).

Further, another major change in the takaful regulations is

the requirement for takaful operators to set up a Financial

Holding Company which will be subject to the requirements under

IFSA. Consequently, it effected the subsidiary takaful operator

in Malaysia which is subjected to minimum capital requirement.

The reason behind introduction of the system is that Malaysia’s

legislation was aiming to put an independent status in term of

financial liability. However, there were several criticism since

the IFSA for not only applying this policy to subsidiary in

Malaysia, whereby the subsidiary outside Malaysia still subjected

to this policy even though they may be more onerous and stringent

toward International requirement compared to local requirements.

Therefore, this policy was putting takaful operator subsidiaries

at a disadvantage compared to other players in their local

market.

Takaful in Indonesia

Despite all un-favor situation after the financial crisis

2008, the insurance industry has big optimistic toward the new

opportunities of the industry. Back in 2009, the insurance

industry has projected to grow up to 7% in same direction as

national economic, which projected to grow up to 7.4% after the

financial crisis. The figure wasn’t untrue since it is supported

by fact that there was huge increase in local marker demand

toward insurance protection as well as big potential local market

which shown 12% penetration rate.

Despite the prediction that in 2009, the insurance sector

will face slow-down movement, the industry has shown the

opposite. The reason is that public would most likely seek

insurance protection to insure their properties against possible

damage that might arise due to any unfortunate incidents caused

by the election process which seem heating up the general market

condition. Further, its practically supported by the fact that

Government has been issued recent regulation, (PP) No. 81 year

2008, which brought added advantage to the more than 50 general

insurance companies in Indonesia with capital below IDR 50

billion (USD 4.87million). The regulations has impacted to the

adjournment of 2010 and 2014 for conventional insurance companies

to fulfill the minimum capital requirement of IDR 40 billion (USD

3.87 million) and IDR 100 billion (USD 10 million), respectively.

With that circumstances, it give a huge impact in general which

brought great relief to the insurance players that will have more

time to increase their capital inside that additional 4 years’

time. However, the minimum capital requirement for insurance

companies based on Shari’ah principles or takaful is maintained

at IDR 50 billion (USD 4.87 million).

Since 2008, the takaful industry continues to grow despite

slowing macroeconomic condition. It reflected by the fact that

there was 60 insurance related institutions operating on shari’ah

principles in Indonesia (Three were full-fledged Shari’ah

insurers, 46 window- based, three retakaful and eight takaful and

retakaful Shari’ah brokers). Further, the fact is supported by

data from the biggest takaful entities (PT Asuransi Takaful

Keluarga (ATK) and PT Asuransi Takaful Umum (ATU) ), which has

recorded a remarkable growth with significant improvement on the

performance of its two subsidiaries for General Takaful sides.

Gross contribution of Takaful Indonesia in 2008 rose by 42%,

reaching almost IDR 500 billion (USD 49.6 million) from IDR 352

billion (USD 34.9 million) in to the previous year. This

improvement is contributed by ATK’s gross collection of IDR 324

billion (USD 32.2 million) (65%) and ATU’s IDR 176 billion (USD

17.5 million) (35%). The net income of these two Takaful

Indonesia’s subsidiaries also improved significantly. For 2008,

ATU recorded IDR 7.79 billion (USD 773, 969) in net income, an

impressive increment of about 80% compared to IDR 4.32 billion

(USD 429, 210) in 2007. In addition, ATK also registered a gain

of IDR 14.06 billion (USD 1.65 million); rising 58% from IDR 8.90

billion (USD 884, 252) recorded the year before. This marked an

impressive achievement far exceeding the average growth of the

Indonesian insurance industry which at the most only grows 25%

per annum.4

4 TAKAFUL IN INDONESIA: BUSINESS GROWTH AMIDST ECONOMIC TURMOIL

Regulatory framework for Takaful in Indonesia

In Indonesia, the Takaful regulatory framework still can’t

be separated with the act for conventional insurance. The

regulatory to control practice of Takaful is mainly still limited

to the fatwa that been issued by Indonesia Ulema Council as body

that control shar’iah activities within the country, or any

supported insurance regulations that issued under the Ministry.

In addition, for fatwas is only limited to five major fatwas for

insurance framework such as Fatwa Number 21/DSN-MUI/X/2001

General Guidance of Shari’ah Insurance (Takaful). Fatwa Number

39/DSN-MUI/X/2002 Pilgrimage Insurace, Fatwa Number

51/DSN-MUI/III/2006 Mudharabah and Musharakah in Takaful, Fatwa

Number 52/DSN-MUI/III/2006 Wakalah bil Ujrah in Takaful, and also

Fatwa Number 53/DSN-MUI/III/2006 Tabarru in Takaful. However,

even those particular fatwas has been used as the main

regulations framework toward the takaful activity, but it still

leaves several loopholes. The fatwas might be good enough to

guide but in the view of legal law it has no power since the

fatwas didn’t permanently convert into Indonesia Constitution

Law. The only law that can be implanted is still general law that

guide the system of conventional insurance even though it still

not enough to rule in the takaful since there are several

fundamental different between conventional insurance and takaful

itself.

In October 2014, Faction of people's representative has

granted new revision of Insurance Act to replace the UU Nomor 2

Tahun 1992. This act only limited to renew the structure of

current practice of conventional insurance with also additional

requirement for foreign subsidiary. This particular act still

leaving the loophole toward the Shari’ah recognition within the

country. It means that Takaful development still has to dependent

with conventional framework in which crystal clear that will

affect the transparency in the view of shari’ah perspective. It

might be acceptable if the circumstance was 10 years ago whereby

Takaful still new, but the market has emerged pretty good.

Based on fact, Indonesia has the largest market potential

where almost 60% of the 250 million population might needed the

Takaful product, but without proper framework it will not empower

the confidence of the market toward the product. Comparing with

other Islamic countries which also developing Takaful, Indonesia

still categorized as low in term of market penetration which

impacted on un-maximization of market opportunity. Therefore,

fair to say that with big opportunity in term of market, the

Indonesia’s takaful framework still hasn’t led the development of

Takaful into right direction. And

the big question still remain, can

the Indonesian legislation provide

what Takaful needed?

Takaful in Bahrain

Takaful insurance was

introduced in Bahrain in 1990

after the first company, Takaful

International Company, was established in 1989. Bahrain's

financial services industry, including the Takaful insurance

industry, is regulated by the Central Bank of Bahrain (CBB).

Driven by the increasing awareness and improvements in the

quality of products and services offered and a strongly regulated

financial system, the Bahraini Takaful industry showed remarkable

growth during the review period (2007-2014). Moreover, as one of

the pioneers in the field of Islamic insurance, Bahrain’s takaful

sector has grown tremendously in the last decade and it can be

shown by a CAGR of 40% over the period 2001-2010. The latest

published figures saw gross contributions of BHD38.6 million

(US$102.4 million) at the end of 2010 whereby ten years before

takaful only cope 3% of Bahrain’ insurance policy. 5

There are eight takaful operators in Bahrain, and like in

many other regional markets, takaful growth is disproportionately

lop-sided towards the non-life sector – which currently makes up

75% of total takaful contributions. Non-life takaful displayed

growth of 8.38% to BHD62.6 million for 2010.6 On the other hands,

Family takaful only scored relative slight growth of 6.3%, and

ended 2010 with contributions of BHD6.02 million. The reason is

that there was poor performance of the stock markets over period

which impacted the demand for unit-linked products. However,

despite the fact that family takaful still unfavorable, takaful

operators still remain committed to improve the growth of family

5 CBB data 20146 Insurance Research Centre data 2014

takaful in the Kingdom. The number of Reinsurance and Retakaful

firms, licensed in Bahrain, have been increasing since 2006. By

end of 2012, there were four conventional Reinsurance firms and

two Retakaful firms in Bahrain.

Moreover, The CBB has reported that gross premiums of

Reinsurance and Retakaful firms have decreased to BD 312.11

million in 2012 compared to BD 349.53 million in 2011, a decrease

of around 11% over the period 2011-2012. Reinsurance & Retakaful

Firms retained around 83% of the gross premiums in 2012 compared

to 81% in 2011. On the other hand, Gross claims of Reinsurance &

Retakaful Firms decreased to BD 220.28 million in 2012 compared

to BD 272.83 million in 2011, a decrease of around 19%. In 2006,

the Central Bank of Bahrain licensed the first Retakaful firm;

Hannover Retakaful company. Subsequently, during 2008 the CBB

licensed the second Retakaful firm; ACR Retakaful Company. The

gross contributions of Retakaful firms decreased by around 28% to

BD 61.87 million in 2012 compared to BD 86.15 million in 2011. It

is worthwhile to say that Retakaful business represents

approximately 20% of the total Reinsurance & Retakaful premiums/

contributions.7

Regulatory framework for Takaful in Bahrain

Since beginning of the

establishment of Takaful,

Bahrain legislation is

7 Delloitte Global Takaful Report 2013

centered only to the CBB as the role that control the legal

framework. Before, In Bahrain, they introduced Bahrain Monetary

Authority rules 2005 which containing all the regulation to

control the Takaful practice. Further, in this respect, in

October 2013, the CBB also have introduced enhanced rules from

the previous one on the Operational and Solvency framework for

Takaful and Retakaful industry for consultation. The industry was

asked to review the new enhanced regulatory framework and submit

their respective comments back in 10 November 2013. In this

regard, meetings were also held with the Takaful industry to

facilitate their understanding of the new rules and successfully

conclude the consultation process.

The new enhanced framework has been drafted with an

objective of strengthening the solvency position of the firms,

enhancing operational efficiency of the business, and

safeguarding the interest of all stakeholders. This particular

the new framework also aim to ensure that the firms, both new to

the business and incumbents, have adequate liquidity and are able

to generate surplus through operational efficiency, since

basically it will help the Takaful firms to effectively compete

with not only the other Takaful firms in the industry but also

with the conventional insurance counterparts. After considering

the views and comments received from the Takaful and Retakaful

industry through the consultation process and meetings, the

regulation has been finalized and approved in the beginning of

2014. From these, basically Bahrain legislation has been adapting

approached which more relying and compactible with market

requirement. Here, the CBB more acting as facilitator between the

Takaful industry, participant, and also Shari’ah scholar and from

there the CBB will be able to generate the regulatory structure

that in favor for all stakeholders of Takaful. This approach is

suit with current condition of culture and market scope of

Bahrain in general but it might be not suit for another countries

which certainly has different background and market scope.

Whether important or not?

Stimulation of the framework

Good governance and transparency standards are a key

requirement for most retail as well as institutional investors.

According to the International Financial Corporation sound

corporate governance practices increases valuations by 20- 30%,

result in higher credit ratings and improves access to finance.

The governance and transparency standards of Takaful players are

comparable to their local conventional peers, but below their

global conventional counterparts

Moreover, the requirements of Shari’ah compliance and the

structural and operational requirements that this imposes on

Takaful operators gives rise to a number of governance related

issues. There is an information asymmetry and misalignment of

incentives between the Takaful operator and the fund

participants. The Takaful operator has a duty to both

shareholders and fund participants in his capacity as custodian

and manager of their respective assets. The conflict arises in

that actions aimed at maximizing the return on shareholders’

capital may at times have the opposite effect on the

participants’ fund. This issue does not arise in conventional and

co-operative insurance companies, since these are run exclusively

in the interest of shareholders and policyholders respectively.

The presence of a Shari’ah Board which inside the overall

regulatory framework, will have the courage to resolve all that

matters.

Moreover, to address this issue the IFSB has called on

Takaful operators to create a Governance Committee. The committee

should comprise an independent director, a Shari’ah scholar, an

independent actuary and a representative of the Takaful

participants. The role of the committee is principally to monitor

that fees charged by the operator are appropriate, that the

underwriting performance is sound and that the Takaful operator

is in a position to provide liquidity back-stop to the fund as

and when required.

Effect of improper framework

By all the effect towards the regulatory, we can see that it

still play important roles even though there is still minor

loophole. The regulatory framework has played core role as a

basic foundation toward the development of Islamic finance and

Takaful. Without it, there will be huge doubt from the market,

and while confidence dropping then the development will be stuck.

Yes, it still far from perfect but Malaysia with current

framework has become one of the leading country in Takaful

development. But giving such a reasonable time to progress then

it will be able to cope with projection that been wanted.

Comparing it, with Indonesia which has huge market

potential, Malaysia with proper regulatory structure has a few

step ahead to penetrate their 20 million market potential. In

Indonesia, the framework still seem biased and there is no proper

structured guideline which can support one and the other.

Instead, the framework only being glued with Fatwa which has no

legal power as well as development structure for the future

takaful framework. Or we can say, that Indonesia still not being

able to determine which direction their Takaful industry headed.

Therefore, it seems that regulatory framework is running as an

important tool which has full control toward the object to reach

the objective that will required, and more, without it the

development of Takaful that been proposed won’t ever be achieved.

Recommendation

Framework that overview the relation of the stakeholders

Well, in a way to achieve the perfect system to guide, isn’t

an easy job, whereas it might need further time with trial and

error process which might not in favor to all party. Several

areas are still critical to the regulatory and supervisory

framework of the Takaful industry and need to be addressed in an

integrated way. One of possible way is by a deep adaptation of

the current IFSA for the Takaful industry by the IFSB, and also

another specific guidance in the form of standards. Further, the

regulatory framework also has to cover parameters for each mode

of takaful which guided the relationship between policyholders’

and shareholders’ funds, Shari’ah governance, and how

policyholders’ and shareholders’ interests, so that it balanced

in the governance model. In addition, if basic principles can be

established, it will be much easier to make progress in the other

areas and the IFSB may also collaborate with the IAIS to produce

this kind of framework.

Framework with full control expense

Further, the system can be rehearse with compact systematic

procedure to guide the technical aspect. In the case of a Takaful

framework need to adapt with particular need for systems to

control expenses, especially claims handling expenses which are

normally charged to Takaful funds, regardless of the Takaful

model adopted. For instance, the case of expenses related to

contributions, the amount is typically capped at a percentage

under the wakala model or borne by shareholders under the pure

mudaraba model. However, the need to control expenses remains

relevant given the potential impact on adequacy of shareholders’

working capital.

Framework that overview the role Shari’ah board

Moreover, one of the main aspect in Takaful that differ from

insurance is Shari’ah aspect point of view. Well the current

regulatory scheme actually already highlighting the role of

Shari’ah board. However, there is still a potential for conflicts

of interest if members of the Shari’a board are significant

shareholders in the Takaful operator or hold Board or senior

management positions. Given the limited number of Shari’a

scholars competent in the field, there is also a possibility that

they may hold shares or management roles (including Shari’a board

membership) in the firm’s counterparties or competitors. If this

is not prohibited then rules must be put into place to require

appropriate management of any conflicts of interest. Therefore,

by that the regulatory structure also need to strengthen this

particular area since the Shari’ah is key element to make sure

the transparency of the Takaful process itself.

Conclusion

It seems that in Malaysia, is start having clear regulations

which now drive takaful into different level. Previously there

were very little regulations for takaful, which determines the

“type” could vary between takaful operators and there were no

obvious solvency margin required of takaful. Further, pricing for

takaful products did not allow for regulatory capital and surplus

sharing, if any, were left to each operator’s discretion.

As the regulatory gap closes, any arbitrage window available

before where similar insurance and takaful products attract

different level of capital requirements is fast disappearing. The

regulatory framework in Malaysia continues to be a leading

example in the takaful industry globally, in which the latest

regulations are to be predicted will penetrate another step in

its initiative to develop equal level competition between the

conventional insurance and takaful operators. There is a risk

that because takaful still leave a few loophole so perhaps from

the development over the years it can reflect whether there is

still room to accommodate a takaful that is less of a business

and more of a service to meet the needs of the society.

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