Principles and Business Models of Takaful

A5.3. Types of Takaful Models

The operation of takaful within the tijari sector can be structured on a number of business models as shown below:

  • Wakalah model
  • Mudharabah model
  • Mudharabah + Wakalah model also known as hybrid model
  • Waqf model

What is important though, the foundation of any of the above models as depicted in its respective contracts is based on Shariah. The choice of models by a takaful operator demonstrates the flexibility of Shariah. After all, its objective is the attainment of the well-being of mankind as outlined in the Maqasid Shariah.

5.3.1 Wakalah Model

The term “wakalah” in Arabic means agency. Therefore under the structure, an agency relationship is agreed between two parties to conduct a certain business undertaking. Based on this premise, the model describes an agency agreement between the operators, acting as the agent or “wakil” to the participant as the principal to manage the participation of the latter in a variety of takaful products provided by the operator. In return for rendering the agency services, the operator is permitted to charge a fee under the agreement. The fee is payable from the takaful contribution paid by the participant. In this sense under the above model, management expenditure can be charged to the takaful fund as upfront charges.

By this model, the operator earns its revenue from the agency fee described in the aforementioned as well as returns on the investment of its shareholders’ fund. However, there are also operators practicing the above model charged performance fees on its roles and services of managing the investment of the takaful fund. In the event of a cancellation or surrender, the participant will be refunded of the net balance of his contribution, if any, after deducting all the upfront charges such the wakalah fees and other management expenses from the takaful fund.

  • General Takaful Wakalah Model Flowchart

  • Family Takaful Wakalah Model Flowchart

5.3.2 Mudharabah Model

Basically, Mudharabah is defined as a profit sharing principle applied normally to a business or commercial contract between the party that provides the fund or capital and the party that manages the business. For takaful this would mean the contract of profit sharing between the takaful participants and the operator from the profit, if any, of the takaful business. Under this arrangement, a profit sharing contract is signed between the operator, as the entrepreneur or termed “Mudharib” entrusted with managing the takaful business and the participant(s) as the provider of capital, called “sahibul-mal” who is obliged to pay the takaful contribution as the capital or “ra’sul-mal”. The contract will define profit of the takaful business and the ratio to be shared between the two parties such as 50:50, 60:40 or 70:30 between the participant and operator respectively. In essence, profit in takaful is defined as returns on the investment and surplus from the underwriting in respect of the takaful funds only. Therefore this does not include profit posted by the Shareholders’ Fund. For the family business it includes the mortality surplus to be allocated to the eligible participant as declared by the actuarial valuation at the end of every financial year. However, unlike the Mudharabah contract for Islamic banking product, profit sharing in takaful will be undertaken only after all the obligations of takaful have been accounted for: the biggest factor is claim. In the event of a loss or deficit of the takaful fund, the loss will be borne wholly by the participant(s) as provider of capital.

Notwithstanding the above, it is the responsibility of the operator to safeguard the interest of the participants in order to ensure the business will not be seriously affected by the loss that might jeopardize the credibility and confidence of takaful as a whole. For this reason proper governance, prudence and professionalism in managing the business on the part of the operator is imperative. In the event of such loss, it is incumbent upon the operator to make good the loss by “qard” or loan by the shareholders. An important feature to note is that under the Mudharabah model, management expenditure is not charge on the takaful fund instead it is borne by the shareholders’ fund. Revenue of the latter is its portion from the profit sharing of the takaful funds with the participants, and all returns on the investment of the shareholders fund itself.

  • General Takaful Mudharabah Flowchart

  • Family Takaful Mudharabah Flowchart

5.3.3 Hybrid Model

As the term denotes, the business model is a combination of the two principles above. Under the model, a relationship between the operator which combines the role of entrepreneur or Mudharib as well as the agent or wakil of the participant, whilst the latter in the capacity as both provider of capital or sahibul-mal and principal to the agent. By this arrangement on the part of the operator, an agency fee can be remunerated as upfront charges from the takaful fund whilst at the same time will have the right to profit-sharing on returns on the investment of the takaful fund in accordance with the Mudharabah contract.

In this regard, the Mudharabah contract is applied on the investment activity only. Profit to the fund in this instance comprises surplus from underwriting as well as returns on the investment as a whole. In addition to the wakalah fee the model provides discretion to the operator to charge on surplus of the takaful fund a performance fee in consideration for managing the takaful business as a whole.

Therefore to the operator it has three sources of income: wakalah fee and profit sharing from the investment return of the takaful fund; and returns on the investment of its shareholders fund. As for participants, they will have the right to share the net underwriting surplus as well as profit sharing of the investment of the takaful fund.

The above model underpins the cooperative risk sharing taking place among participants whilst the operator earns a fee for the services provided as agent or “wakil” of participant. In other words the operator derives part of its revenue from upfront deductible fee on the contributions. Thus, unlike the Mudharabah model, this model enables the operator based on the agency arrangement to charge the takaful fund to cover both the management expenses as well as the agency cost. In addition, there is profit sharing on Mudharabah on the investment of the takaful fund. On the other hand, any underwriting surplus of the takaful fund will be shared among participants only.

  • General Takaful Hybrid Model Flowchart

  • Family Takaful Hybrid Model Flowchart

5.3.4 Waqf Model

The term “waqf” referred for this model explains the contract of takaful that underlines the agreement or consent of the participant that the takaful contribution paid in return for participating in the takaful product to be credited by the operator into the takaful fund in accordance with the principle of waqf or endowment. To begin with, a waqf account has to be established by the operator within the takaful fund. To this effect the operator is required to relinquish some kind of “seed” money as waqf to generate the said waqf account. This waqf account of the takaful fund will be invested similar to the three business models hereinbefore. The Waqf fund shall work to achieve the following objectives:

  1. To extend financial assistance to its members in the event of losses.
  2. To extend benefits to its members strictly in accordance with the Waqf Deed.

All the expenses related to the underwriting and operational cost of takaful shall be charged to the Waqf fund. As manager, the takaful operator will perform all functions necessary for the operations of the Waqf against a Wakala fee to be deducted from the contribution paid by the participants. As Mudarib, the operator will manage the investment of the takaful fund including its Waqf account in Shariah-compliant investment avenues and will share its returns on the investment at an agreed ratio similar to the profit sharing structure under the Mudharabah contract.

It is important to note the different principles of Shariah are used in the takaful contract to express the consent of the participants for their contributions to be credited into the takaful fund for the purpose of undertaking the concept of joint guarantee as encapsulated in the term takaful. In contrast to the Waqf Model, the other three models applied the principle of tabarru to the contract.

It is a basic feature of the model that the Waqf Fund will lay down the rules for distribution of its proceeds to the beneficiaries and will determine how much compensation be paid out to a participant. In addition, the Waqf will be the owner of the contributions and has the right to act as a legal entity and dealing with its surplus. The operator, whilst managing the Waqf Fund, will assume two different functions at the same time – manager and mudharib or entrepreneur.