Corporate Governance in Takaful
There has been an increasing emphasis on corporate governance in recent years in a global context. In the Takaful system as well, corporate governance became essential for maintaining the efficiency and stability of this sector and for protecting the rights of policyholders, shareholders but also the rights of other internal and external stakeholders. In fact, corporate governance treatment organizes many aspects of the Takaful business that include the necessary conditions to validate Takaful models and the relationship between policyholders’ and shareholders’ funds. The corporate governance is intended to maintain the order of the Islamic insurance industry regarding certain regulations and ethical values that Takaful operators should respect and to help identifying and analysing of risks and opportunities in this sector. This would enhance the quality and the credibility of the Takaful sector and allow more loyalty and commitment from participants, shareholders and employees.
Yet, the Takaful market has some distinct features and challenges compared to conventional insurance, as it has to match the service quality of the conventional insurance market and convince the uninsured segment of the market to use its Shari’ah-compliant facilities. The fact that this industry is quite new requires Takaful operators to adapt existing mechanisms and set of laws to create their own corporate governance framework and to avoid any conflicts of interest which may arise in the process of decision-making.
Moreover, the conceptual foundations of Takaful and the specific structures of Takaful undertakings require Takaful operators to complete the basic concepts used in insurance regulations such as capital adequacy and solvency, risk assessment and transparency, with a range of specific control functions to ensure that Takaful funds are managed and invested in accordance with Shari'ah rules and that all investments are undertaken ethically and responsibly. The role of the Shari’ah Supervisory Board in overseeing the proper management of policyholder funds should help to increase transparency in regard to Shari’ah compliance. In fact, the board checks that transactions had taken place without the use of Riba, Gharar or Maysir; it also controls that the financial accounting of the Takaful operator is presented in a precise, accurate, and timely manner.
Yet, the Takaful market has some distinct features and challenges compared to conventional insurance, as it has to match the service quality of the conventional insurance market and convince the uninsured segment of the market to use its Shari’ah-compliant facilities. The fact that this industry is quite new requires Takaful operators to adapt existing mechanisms and set of laws to create their own corporate governance framework and to avoid any conflicts of interest which may arise in the process of decision-making.
Moreover, the conceptual foundations of Takaful and the specific structures of Takaful undertakings require Takaful operators to complete the basic concepts used in insurance regulations such as capital adequacy and solvency, risk assessment and transparency, with a range of specific control functions to ensure that Takaful funds are managed and invested in accordance with Shari'ah rules and that all investments are undertaken ethically and responsibly. The role of the Shari’ah Supervisory Board in overseeing the proper management of policyholder funds should help to increase transparency in regard to Shari’ah compliance. In fact, the board checks that transactions had taken place without the use of Riba, Gharar or Maysir; it also controls that the financial accounting of the Takaful operator is presented in a precise, accurate, and timely manner.
Sharia'h Auditing in Takaful
Shari’ah auditing in Takaful sector is about investigating all financial statements and accounting procedures of the Takaful operator to evaluate its management efficiency and its compliance with Shari’ah rulings and with established policies. Shari’ah audit guaranties the transparency of the Takaful industry and would allow all stakeholders control the compatibility of all operations of the company with the teachings of Islam. In fact, auditors from both the internal Shari’ah Supervisory Board of and from outside the organization periodically examine the Takaful operator’s records and reports to assess its soundness and adherence to the Shari'ah principles.
The Shari’ah Supervisory Board is an independent body that issues fatwas to certify that financial instruments and transactions used by the Takaful operator comply with Shari’ah rulings; it is also responsible of the calculation of Zakat and of determining the distribution of income or expenses among shareholders and participants. Takaful operators can also establish other internal Shari’ah review units to ascertain that all financial transactions implemented; they perform tasks in parallel to those of audit departments. Both Shari’ah advisors and reviewers should have access to all records and staff necessary to conduct the audit and should have enough power to require formal responses and concrete actions from management of the Takaful operator about their audit findings. The responsibilities of each Shari’ah body should be clearly defined to safeguard their independence their independence to allow them to conduct their assessment on large volumes of transactions and produce appropriate audit recommendations.
Shari’ah Audit of Takaful can also be operated by external arrangements from regulators or from external financial information services providers or rating agencies to offer complementary assessments about compliance of instruments and processes with regulations and to propose harmonisation actions. External arrangements can allow the Takaful operator accessing a wide range of expertise with a broader independence vis-à-vis shareholders and management and that the company may not afford to hire internally. Moreover external Shari’ah audit can be used as arbitration in case of disagreement between members of the same internal board.
The Shari’ah Supervisory Board is an independent body that issues fatwas to certify that financial instruments and transactions used by the Takaful operator comply with Shari’ah rulings; it is also responsible of the calculation of Zakat and of determining the distribution of income or expenses among shareholders and participants. Takaful operators can also establish other internal Shari’ah review units to ascertain that all financial transactions implemented; they perform tasks in parallel to those of audit departments. Both Shari’ah advisors and reviewers should have access to all records and staff necessary to conduct the audit and should have enough power to require formal responses and concrete actions from management of the Takaful operator about their audit findings. The responsibilities of each Shari’ah body should be clearly defined to safeguard their independence their independence to allow them to conduct their assessment on large volumes of transactions and produce appropriate audit recommendations.
Shari’ah Audit of Takaful can also be operated by external arrangements from regulators or from external financial information services providers or rating agencies to offer complementary assessments about compliance of instruments and processes with regulations and to propose harmonisation actions. External arrangements can allow the Takaful operator accessing a wide range of expertise with a broader independence vis-à-vis shareholders and management and that the company may not afford to hire internally. Moreover external Shari’ah audit can be used as arbitration in case of disagreement between members of the same internal board.
Regulatory implications
There are many areas where the regulatory standards developed for conventional insurance cannot automatically be applied to Takaful business. The distinctive aspects of Takaful products and services pushed many jurisdictions to develop additional specific rules and standards that take into account the nature of that business. In fact the insurance market regulation should be reviewed to take into account the particular types of risks related to the structure of Takaful products based on the Mudarabah, Wakalah and Waqf and other hybrid combinations. The Takaful framework should incorporate conditions for the clarity and consistency of how these regulations would be applied to the Takaful activities. The Takaful in-house Shari’ah board would apply the defined regulatory and supervisory controls to ensure that all aspects of the Takaful operations represented by The Takaful operator to policyholders are compliant with Shari’ah principles.
Takaful funds cannot be invests in conventional interest-based bonds or in equities of companies involved in prohibited activities such as weapons. The use of derivatives is also extremely restricted. As a result, the asset risk profile in Takaful business is quite different from that of a conventional insurance. Moreover, there may be issues in the overall risk profile of the policies and assets managed by Takaful operators. For example, the risk profile in Family Takaful is different from the conventional insurance product as the Takaful plan generally operates on an agreed contribution basis rather than a guaranteed benefit. This would impact both capital adequacy and disclosure to consumers which will depend on the particularity of the chosen Takaful model. Therefore the Takaful regulators should adapt capital adequacy principles to reflect the nature and allocation of the financial risks related o the Takaful model. Similarly, the solvency regime needs to be based on the location of risk and to represent how liability in Takaful fund can be extended to policyholders’ investment accounts, as policyholders are entitled also to share possible losses; so there is a need to determine how their shares should be determined in both surpluses and deficits.
Takaful funds cannot be invests in conventional interest-based bonds or in equities of companies involved in prohibited activities such as weapons. The use of derivatives is also extremely restricted. As a result, the asset risk profile in Takaful business is quite different from that of a conventional insurance. Moreover, there may be issues in the overall risk profile of the policies and assets managed by Takaful operators. For example, the risk profile in Family Takaful is different from the conventional insurance product as the Takaful plan generally operates on an agreed contribution basis rather than a guaranteed benefit. This would impact both capital adequacy and disclosure to consumers which will depend on the particularity of the chosen Takaful model. Therefore the Takaful regulators should adapt capital adequacy principles to reflect the nature and allocation of the financial risks related o the Takaful model. Similarly, the solvency regime needs to be based on the location of risk and to represent how liability in Takaful fund can be extended to policyholders’ investment accounts, as policyholders are entitled also to share possible losses; so there is a need to determine how their shares should be determined in both surpluses and deficits.
