In essence, takaful operation can be segregated into two principal activities. On the one hand, it acts as the conduit for providing financial benefits in the event of a misfortune through the various types of takaful product that may be participated by both individuals as well as corporate bodies. Technically, the product is similar to an insurance. From straight-forward personal lines such as motor vehicle cover to the very complex requirements of the corporate sector, takaful products would fulfil the demand of all. A long-term family takaful plan would one way or another satisfy the life insurance need of an individual; whilst the industrial all risks scheme would meet the insurance need of a sophisticated manufacturing plant belonging to a huge conglomerate.
In all, as consideration for using these products, takaful participants whether individuals or corporate bodies, shall pay a certain sum of takaful contributions to the takaful funds managed by the takaful operator. Depending upon the types of product, contributions in respect of family products shall be credited into the Family Takaful Fund, whilst contributions for general products shall be paid into the General Takaful Fund. Essentially, these takaful funds belong to all participants. The basic function of the funds is to provide financial assistance, in the form of claim benefits to any participant who suffers a loss due to a defined misfortune. In this sense, takaful assumes the role of helping one another at times of need by participants. Proceeds from the claim benefits would come from the pooled contributions accumulated in the respective takaful funds; and not from any other fund.
In this respect it is extremely important for the takaful operator to ensure at all times that the takaful funds would not in anyway be harmed or unduly exposed to undesirable risks. Underwriting skills and technical knowledge would therefore be critical. This is a process of checking and filtering unwanted risks from being absorbed by takaful. On the other hand, underwriting would not be considered as vital if the system allows all participants to make good by paying additional contributions in the event of a shortfall of the takaful funds due to large payment of benefit. Certainly this alternative would not be practical. At worst takaful would lose its economic value because its cost would be higher. Apart from proper underwriting the funds have to be strongly supported by other means that would ensure its regular streams of income. Thus investment is the other important principal activity of takaful operation.
From the standpoint of profit sharing investment is certainly more vital under takaful. After all one of the elements that distinguishes takaful from conventional insurance is the profit-sharing contract. One of the components of the profit is the return on investment. In fact, for family takaful, investment returns would be the only source to be shared as profit. In other words, the higher the returns on investment, the bigger would be the profit sharing. Similarly, a significant part of the total income to the shareholders fund is also heavily dependent upon profit from investment. It is profit of the shareholders fund that would be taken into account as the overall profit of the operator. Dividends to shareholders are paid from this project.
As an Islamic system, all facets of the takaful operation must therefore comply with Shariah principles, including its investment. Shariah compliance here covers not only how but where the fund is invested; whether the return and the purpose of the investment are permitted by Shariah. Over and above this the investment must also comply with the regulations and guidelines of the authority.
It has been acknowledged the rejection by Shariah of conventional insurance is due partly to the non-Shariah way of the investment of the premium. On this note, it is worth mentioning that Muslims generally tend to be sensitive profoundly concerned on matters related to investment. As long as they can be assured and certain that Shariah-compliance, they would not mind even the return would be marginally lower.
Being a relatively new sector, investment avenues for Islamic finance including takaful are rather limited. But Malaysia has been in the forefront in developing and promoting new Islamic investment instruments and avenues; thanks to the players, scholars and regulatory agencies. Compared to ten years ago, Islamic finance now has wider options through a more diversified avenue of investment. This illustrates the importance of having the players first before designing the game. Once the players are familiar to the game improvement and modification would be easy, and perhaps new game may be introduced. ‘Doing’ is more effective than ‘talking’.
Islamic investment instruments began to be developed and ensured of its practicality in Malaysia following the debut of Islamic banking around twenty years ago. When takaful came into being not long after that, the foundation for investment had at least been established.
As trustee and custodian of participants’ money, the hallmark of a takaful operator’s investment philosophy should always be based on reasonable returns to the participants and shareholders whilst at the same time upholding the principle of safety and security. Greater care and prudence in fact has to be exercised under the trusteeship structure.
To begin with, one of the first such instruments introduced as an alternative to the statutory requirement for takaful funds to invest in interest-based treasury bills was the Malaysian Government Investment Certificate (MGIC). It was created and introduced when Islamic banking came into operation following the establishment of Bank Islam in 1983. The first of its kind anywhere MGIC, briefly, is based on the Islamic principle of ‘Qardhul-Hassan’. It is a benevolent loan type of transaction and in this case the borrower is the Government. Islamic investment instrument or papers such as MGIC are also subscribed by non-Islamic financial institution. As such it is always in great demand.
Other avenues of investment include deposit at Islamic banking institution. To guarantee sufficient liquidity a takaful operator should prudently ensure adequate level of the deposit be maintained so that should any urgent payment be required in the event of a misfortune the money would be readily available.
Investment in properties especially commercial buildings that would generate a steady and reasonable return to the operator would be another attractive avenue. But it is crucial for these properties to have tenancy because the rental income would be critical to ensure a steady flow of return to the funds. Furthermore ownership of properties is an investment permitted in Islam. In the case of Takaful Malaysia, for example it has properties practically in all major towns in the country. Being part of Bank Islam group tenancy normally would not pose a major problem.
Takaful operator may also invest in the equity market. Buying and selling of shares and any gains secured thereof is permissible in Islam as long as the equity concerned is a Shariah approved counter. There are more than 600 Shariah compliance counters in the Malaysian bourse that Islamic financial institutions have the option to deal with. The list is published from time to time by regulatory bodies such as the Securities Commission.
It is also possible for the takaful operator to utilise part of the takaful funds for the purpose of providing credit facility to selected clients as long as it is undertaken prudently. The financing transaction must certainly be on Islamic basis. Usually, financing of this nature is granted to a borrower to enable him to acquire or purchase fixed assets of which the repayment shall be made over a certain fixed period. By this transaction, the party that provides the facility shall purchase the assets required and re-sell it to the borrower at a price plus profit. It is usually structured based on the principle of al-Bai Bithaman Ajil (BBA). Granting of such financing facility ought to have appropriate collateral as security. This is part of the steps taken to protect the participants’ money in case of default. Investment of this nature usually would be in the form of syndication with Islamic banking.
The progress of Islamic finance in general has enabled Islamic financial institution in Malaysia to develop numerous investment papers through the securitisation of debts usually out of the BBA transaction. In this manner, financial institution has the opportunity to diversify its investment avenues further. Out of this development Islamic bonds now are gaining wide acceptance. It is reported that more than 60% of the bonds issued in Malaysia are Shariah compliance. In addition, there are Islamic bills known as Islamic Acceptance Bill (IAB) issued by Islamic banking. A takaful operator may purchase these papers or instruments as part of its investment activity for both the takaful funds and the shareholders fund.
The ‘Islamicness’ of takaful must not only be in terms of its operation but also its investment. To oversee this requirement there is the Shariah supervisory council at the operator’s level as well at the regulatory agencies.