“MILLIY IQTISODIYOTNI ISLOH QILISH VA BARQAROR RIVOJLANTIRISH ISTIQBOLLARI”
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206
MANAGING TAKOFUL FUNDS: A COMPREHENSIVE APPROACH
IN ISLAMIC FINANCE
Abdurasulov Behzodbek
Doctorate Student at CEDR
Takoful is an Islamic alternative to conventional insurance, rooted in
mutual cooperation and compliance with Shariah principles. One of the critical
aspects of Takoful operations is the management of the pooled funds contributed
by participants. These funds, collectively referred to as the Takoful fund, must be
managed in a way that aligns with Islamic financial ethics, while simultaneously
providing financial security to the participants. This paper explores the
fundamental principles and challenges of managing Takoful funds, focusing on
models of fund management, investment strategies, risk sharing, surplus
distribution, and regulatory requirements. By examining current practices, this
study aims to provide insights into improving the efficiency, transparency, and
sustainability of Takoful fund management in the modern financial system.
Takoful (Islamic insurance) represents a system of mutual protection
whereby participants contribute money to a pool, and this fund is utilized to
compensate for potential damages, losses, or misfortunes of any of its members.
Unlike conventional insurance, which is profit-driven, Takoful operates on the
principle of Tabarru’ (donati
on or mutual assistance), meaning that participants
willingly donate their funds for the welfare of others. A critical part of Takoful
operations is the management of these funds, which must conform to the
principles of Islamic finance, such as avoiding interest (riba), uncertainty
(gharar), and gambling (maysir) [1]. This article will explore the complexities
and responsibilities involved in managing Takoful funds, including fund
allocation, investment strategies, risk management, and surplus distribution.
Managing Takoful funds is fundamentally different from conventional
insurance fund management due to the adherence to Shariah principles. The key
elements include: Tabarru' (Donation): The fund is established through
participants' donations, which are used to compensate members who experience
loss or damage. Risk-Sharing: Unlike conventional insurance, where risk is
transferred to the insurance company, Takoful participants share the risk
amongst themselves. This mutual structure eliminates the profit motive inherent
in traditional insurance [2].
Investment Ethics: The funds must be invested in halal (permissible)
ventures. Investments in interest-bearing accounts, alcohol, pork, or other
industries deemed haram (forbidden) are prohibited.
There are several models used in managing Takoful funds, each offering a
unique approach to how funds are pooled, managed, and allocated [3]:
Mudaraba Model (Profit-Sharing): In this model, the Takoful operator
manages the fund and invests it in Shariah-compliant ventures. The profits
generated from the investment are shared between the participants and the
“MILLIY IQTISODIYOTNI ISLOH QILISH VA BARQAROR RIVOJLANTIRISH ISTIQBOLLARI”
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operator according to a pre-agreed ratio. The operator bears no risk for losses
on the investment, which are borne entirely by the participants.
Wakala Model (Agency): The operator acts as an agent (wakil) for the
participants and is paid a pre-agreed fee for managing the fund. Any surplus or
deficit in the fund is borne by the participan
ts, while the operator’s income is
limited to the fee. This model is seen as more tra
nsparent since the operator’s
compensation is not tied to investment returns.
Hybrid Model: This combines both the Wakala and Mudaraba models,
where the operator receives a management fee and is also entitled to a portion
of the investment profits.
Takoful funds must be invested in accordance with Islamic principles,
which means that all investments must be free from riba, gharar, and maysir.
This poses both a challenge and an opportunity for fund managers, as they must
seek out investment avenues that comply with Shariah while also generating
sufficient returns to ensure the sustainability of the Takoful fund. Common
Shariah-compliant investment vehicles include:
Islamic Bonds (Sukuk): These are asset-based securities that generate
returns in a way that complies with Shariah principles. Sukuk is one of the most
popular instruments for Takoful fund investments due to its compliance with
Islamic law.
Islamic Equities: Investing in shares of companies that operate within
Shariah guidelines. Screening criteria exclude companies involved in activities
such as alcohol, gambling, and conventional banking.
Real Estate and Infrastructure: Investments in real estate and
infrastructure projects that comply with Islamic finance principles are common
for long-term stability and growth.
Islamic Money Market Instruments: These instruments offer short-term
investment opportunities with lower risk, providing liquidity and relatively
stable returns without compromising Shariah compliance [4].
Risk management in Takoful is inherently different from conventional
insurance due to its mutual nature and Shariah requirements. The risk-sharing
mechanism requires careful management of the
fund to ensure that participants’
needs are met without compromising the fund’s solvency. Key strat
egies include:
(1) Risk Pooling: Participants' contributions are pooled together to spread the
risk of losses across the group. The larger the pool, the more stable the fund
becomes in handling claims. (2) Re-Takoful (Reinsurance): To manage large or
catastrophic risks, Takoful operators often rely on Re-Takoful, a Shariah-
compliant form of reinsurance. This allows the fund to offload some of its risk to
another entity, providing additional financial protection in case of high-value
claims. (3) Actuarial Assessments: Just like conventional insurance, actuarial
science plays a critical role in ensuring the fund’s sustainability. Actuaries assess
the level of risk within the participant pool and calculate the contributions
required to maintain a healthy fund.
“MILLIY IQTISODIYOTNI ISLOH QILISH VA BARQAROR RIVOJLANTIRISH ISTIQBOLLARI”
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One of the unique aspects of Takoful fund management is the handling of
surplus
–
the amount left over after claims and expenses have been paid. In a
typical Takoful arrangement, any surplus in the fund is returned to the
participants rather than being kept as profit by the operator. There are two main
approaches to surplus distribution: (1) Pro-Rata Distribution: Surplus is
distributed among participants based on their contributions. This method
ensures fairness and transparency in the fund’s operation. (2
) Reinvestment:
Alternatively, the surplus may be reinvested back into the fund to strengthen it
for future claims, enhancing the fund’s long
-term sustainability. (3) In the
Wakala model, the operator may receive a performance fee based on the surplus,
providing an incentive to manage the fund efficiently.
To ensure the integrity and transparency of Takoful operations, strict
regulatory and governance frameworks are required. Takoful operators are
subject to both financial regulations and Shariah compliance, which means they
must adhere to the following: (1) Shariah Boards: Every Takoful company must
have a Shariah board comprising scholars and experts in Islamic finance. This
board reviews and approves all aspects of the fund’s operation to ensure
compliance with Islamic law. (2) Regulatory Compliance: In addition to Shariah
compliance, Takoful operators must comply with national insurance regulations,
which may impose capital requirements, solvency margins, and transparency
standards. (2) Auditing: Both internal and external audits are essential to
maintain the integrity of the fund. Shariah audits are conducted to verify that all
operations adhere to Islamic principles, while financial audits ensure that the
fund is managed in accordance with sound financial practices.
Managing Takoful funds requires a delicate balance between adhering to
Islamic financial principles and ensuring the financial stability of the fund. The
mutual risk-sharing model, combined with ethical investment strategies and
robust risk management practices, distinguishes Takoful from conventional
insurance. However, the complexity of Shariah compliance, investment
restrictions, and surplus distribution necessitates careful governance and
transparency. As Takoful continues to grow in both Islamic and non-Islamic
markets, improving fund management practices will be crucial to ensuring its
long-term sustainability and appeal.
REFERENCES
1.
Al-Amri, K., Abdul Rahman, Z., & Hussein, M. E. (2020). The Fundamentals of Takaful: A
Comprehensive Guide to Islamic Insurance. Islamic Finance Press
2.
Billah, M. M. (2019). Shariah Governance of Islamic Insurance Takaful Operations.
Springer
3.
Naifar, N., & Merdassi, A. (2018). Risk Management in Takaful: A Comparative Analysis
with Conventional Insurance. Journal of Islamic Accounting and Business Research, 9(4), 562
–
578.
4.
Sakr, A., & Ismail, R. (2021). Takaful: Concept, Regulation, and Evolution in Islamic
Finance. Global Finance Journal, 32(2), 125
–
139.
