BKAA3023 AUDITING AND ASSURANCE II

INDIVIDUAL ASSIGNMENT

UNIVERSITI UTARA MALAYSIA

BKAA3023
Kump H
AUDITING AND ASSURANCE II

INDIVIDUAL ASSIGNMENT

Submitted to:
Dr. Mohamad Naimi bin Mohamad Nor
Prepared by:

MATRIC. NO. NAME

5 248518 Muhammad Arif Hilmi Bin Sabri

Submission date
6th December 2018
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TABLE OF CONTENTS

Contents Page
Table of Contents i
1.0 INTRODUCTION 1-2
2.0 OBJECTIVE 2
3.0 ISSUE AND CHALLENGES 3-15
3.1 Lack of Expertise and Human Resource 3-5
3.2 Corporate Governance 5-8
3.3 Lack Awareness in Takaful 8-10
3.4 Ethical Practice Issue among Takaful Agents 10-13
3.5 Shortage of Shariah-Compliant Assets 13-15
4.0 CONCLUSION 16-17
5.0 REFERENCES 18-19

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1.0 INTRODUCTION

The origin of Takaful operation in Malaysia begins in June 1972 when the National Fatwa
Committee of the Malaysian Islamic Affairs Council declared that conventional insurance is not
compliance with Shariah. The non-compliance of conventional insurance from the Shariah
perspective is because it contains the elements riba’ (usury), gharar (uncertainty) and maisir
(gambling). In addition, in 1985 the Fiqh Academy of the Organization of Islamic Conferences
(OIC) also made a similar declaration that all forms conventional insurance do not conform to
Islamic principles. Because of that, the Muslim in Malaysia and elsewhere need to seek
alternative insurance that in comply with the Shariah perspective.

A Special Force Task was established by the Government in 1982 in order to study the
validity of the setting up of an Islamic insurance company. By the following of the Task Force,
the Takaful Act was introduces in 1984 and the first Takaful operator in Malaysia was
introduced in November 1984. Furthermore, in 1997 the re-takaful operater was formed.
Meanwhile, in 2002 the Malaysia Takaful Association (MTA) was established as mandatory
association under Takaful Act of 1984. The purpose of establishment of Malaysia Takaful
Association is to enhance self-regulation and to promote the interest of the operators. In addition,
all the Takaful operators are required to be member Malaysia Takaful Association (MTA) before
they can run their business operations. So, until 2018 there are 17 member of the companies that
are listing under Malaysia Takaful Association (MTA).

In 2016 there are 11 registered Takaful operators and 64,200 Takaful agents that are
providing family and general Takaful services in Malaysia. In addition, the net contribution
Malaysia’s Takaful Industry in 2016 is RM7, 534.6 million. The net contribution in Malaysia’s
Takaful industry seem increasing if compared the net contribution in 2011which is only RM4,
863 million. (Central Bank of Malaysia, 2017). Recently, the issuance of few new family Takaful
licenses to joint venture between global and regional players and strong domestic entities has
further strengthened Malaysia’s position as a global hub for Islamic Finance. There are four joint
ventures were issued new Takaful licenses. The four joint ventures includes several international
operators.

Although, the Takaful operation has been established more than 30 years old since
1984 and the performance of the Takaful has been encouraging, ,the Takaful industry is still

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relatively remain insignificant when compared with conventional insurance. According to

Deloitte (2015), despite of boost growth in the Takaful operation recently, the penetration rate
for Takaful operation is remain small which is about 10% when compared with the conventional
insurance which stand about 40%. Penetration rate is percentage of target market that consumes
of product and services. So, its show that the sales in Takaful industry is still low if compared to
the conventional insurance. According to Puteri etc al. (2016) even tough Takaful industry has a
good performing, there is still behind the conventional insurance because the Takaful industry
have to face numerous challenges and issue in many aspect compared to the conventional
insurance. So, in this assignment we have discuss some key issue and challenges that faced by
Takaful industry such as the lack of expertise and human resources in the industry, issue of
corporate governance, the shortage of Shariah-compliant asset like Sukuk which is most suitable
type of investment for Takaful companies, the lack of awareness in Takaful among customer and
the ethical practice issue among takaful agents.

2.0 OBJECTIVES

1) To discuss the challenges of the lack of expertise/human resource in Takaful industry.

2) To study the challenges in corporate governance on Takaful industry
3) To examine the awareness of Takaful among customer in insurance industry.
4) To evaluate the ethical practice issue among Takaful agents.
5) To discuss the shortage of shariah-compliant assets in Takaful operation.

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3.0 ISSUE AND CHALLENGES OF TAKAFUL INDUSTRY

3.1 Lack of Expertise and Human Resource

Although the Takaful industry shows a robust growing and developing day after day, but
they still have to face an obstacle and challenges that make the development of Takaful behind.
The main obstacle and challenges that faced by Takaful industry is the lack of expertise and
human development as well as understanding of Shariah finance among the Takaful agents. In
order to achieve further development for Takaful industry and address this challenge, the Takaful
cannot ignore the fact that their industry needs more talented people to run their operation. So
far there are less people who have mainly understood the concept of Takaful. In addition, the
industry also faced the shortage of human skill that regarding or have no enough knowledge,
experience about Takaful.

In Islamic finance industry , their total assets is recorded at USD2 trillion in 2015 and it’s
expected to increase to USD 4 trillion in 2020 (New Straits Time,2017). Based on the Human
Capital Development Report (2014), it reveals that the global Islamic financial services
including Takaful and Islamic banking requires more than 50,000 new and talented personnel
who are well understanding and trained on the Shariah finance in order to satisfy the need of
Takaful industry. Thus it’s shows that the industry rapid growth undoubtedly creates a huge
demand for an expertise. However, according to the research that carried out by the Capital
Market Regulators Forum, they found that there are 82% countries responded that they are still
experienced of scarcity of talent in the Islamic finances services areas such as Shariah and
Takaful in their countries. In addition, the studies also show that another 60% of Islamic finance
professionals required a further training and skills development. Thus, the shortage of talents and
expert in Islamic finance would poses a significant impact on the Takaful industry which would
affect their growth. In addition, in the expert level also faced a significant shortage of qualified
Shariah scholars that equipped with necessary knowledge and expertise in the field of Islamic
finance. Based on that, it shows that the Takaful industry had experienced of lack and expertise
and human capital development.

Institutionalization of knowledge and expertise are the priorities for these organizations
as they try to diminish these shortages (Daud, Rahim, Zainol & Ismail, 2018). Currently, various
universities and training institutes are offering courses in Islamic finance, but they also face lack

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of competent human resource to conduct these courses. There also remains a huge lack of human
resources on the expert level. There remains a significant shortage of Shari’ah scholars who are
well versed in Islamic finance. Inadequate training of people in selling Takaful products is
hurting the industry as they are not able to differentiate between Takaful and insurance
successfully. The number of shariah scholars have raised the concern that leaders of many
Takaful operators come from the insurance industry (Hashim & Khairuddin, 2012; Wahab,
Lewis & Hassan, 2007). Most operators would typically employ human resources, such as legal
advisors and actuaries, with conventional insurance experience. These resources would typically
tend to learn the Shariah aspects of Takaful and adapt their previous experience to incorporate
Shariah compliance rules in their new role. Hence the mind set of most operators tends to be
driven by conventional thoughts and solutions and as a result, there has been limited original
thinking in the industry. So, even though they are professionals with a deep understanding of
insurance, many of them are not familiar with the key shariah issues associated with the
conventional insurance model. Therefore, they would run Takaful as they would run the
conventional insurance companies (Halim, 2012).

Furthermore, based on Finance Accreditation Agency (2017) said that the lack of
cooperation between academia and industry in developing a good curriculum in Islamic Finance
also has resulted in a mismatch between the graduates produced and the skills required by the
industry. In fact recently the graduates that go through a system in the industry usually has
knowledgeable in theoretical part only compared to the practical parts and therefore, it’s is not
suitably equipped for the industry. In addition, Bank Negara Malaysia (BNM) also commented
that the collaboration between industry and the academia are important to meet the highest
standard of employees required in the workforce and this also would ensure a steady stream of
the competent and versatile talent to support greater innovation and dynamism of the Takaful
industry.

In order to address this challenges, there are a few solution have been proposed by many
party. In Malaysia, they have already conduct and organize a special educational programmes for
Takaful personnel through formation of Bank Islam Research and Training Institute (BIRT)
which is known as Islamic Banking and Finance Institute Malaysia (IBFIM) and it would train
more professionals in the Takaful discipline. In global world, the International Centre for

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Education in Islamic Finance (INCEIF) also has been set up to develop more professional and
specialists in Islamic finance including Takaful by offering courses in Islamic finance at all
levels including PhDs.

In addition, the business schools and religious schools also should offer Islamic finance
qualifications in co-operation and conjunction with industry experts to create the next generation
of Shariah experts and professionals. Academic institutions should also be encouraged to
establish centres of excellence for the Islamic finance industry. Scholars also have to play a
greater role for improving the concept of Takaful or Shariah concept that regarding Takaful.
Scholars may have to operate differently in order to facilitate the innovation process, without
compromising Islamic principles. They have to be involved in the new product development
process and also the way to implement and practice it. In addition, they do have come out new
strategy to develop the new product that issued. Other responsibility that Scholars have to do is
to supervise and work with other people that have an expertise in order to insure that the new
product is implement as it was intended and also work is been done as it is. In order to solve this
challenge, it is good to teach people Takaful concept and also its good to re-educate the talent
people have forced to operate as conventional insurers, because they are best people who can
understand Takaful concept easily.

3.2 Corporate governance

Takaful principles differ by authority, with most authorities regulating corporate governance
either undistinguishable or very similar to conventional insurance operations. Takaful is
informally also controlled by Accounting and Auditing Organization for Financial Institutions.
Based on Hassan Scott stated that Corporate governance in insurance company is even more of a
challenge with the long-term nature of life insurance with the element of trust policyholders put
in an insurance company to pay proceeds possibly many years into the future.

Corporate governance in takaful is made yet further challenging with the addition of shariah
issues and controls. Corporate governance is the arrangement of procedures, approaches or laws
manipulating the way an organization is coordinated, directed or controlled. This incorporates
the networks among the several partners involved and the objectives for which the company is
embodied. Crucial partners normally include the investors, corporate governance, policyholders
and the board of director. The good board of director they will oversight their company strategic

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to make sure the corporate governance in the proper manner. Every takaful company they have
Shari’ah Supervisory Board that have been appoint by the shareholder by the recommendation
from Board of Director.

In Takaful however, there is an additional layer, namely shariah controls, along with the
collaboration between technical and shariah issues. These include compliance with shari‘ah in
activities, protecting investment account holders’ interests, calculating the mudarib's profit share,
determining issues related to the mix of funds of shareholders and open investment account
holders, as well as ensuring fairness in the overall profit distribution process (Grais and
Pellegrini, 2006b; IFSB, 2006). According to Ali (2003) asserted that shari‘ah non-compliance
could prompt excessive withdrawals of deposits, resulting in bank failure. Thus, the takaful
company should upgrade its structures to ensure shari‘ah compliance.

Based on Chapra and Ahmed's (2002) study, which reported that 85.6 per cent of Islamic
bank depositors in Bahrain, 66.8 per cent of Islamic bank depositors in Bangladesh, and 94.6 per
cent of Islamic bank depositors in Sudan would withdraw their deposits and move to another
bank if their Islamic bank did not abide by shari‘ah in its business. Alhabashi and Bakar (2008)
found variations in shari‘ah governance practices between IFIs in 11 countries to be significantly
different. Thus, they suggested the creation of a comprehensive shari‘ah governance framework
that would promote good governance. IFIS Islamic Financial Institutions (IFIs)1 is a term used to
refer to the different types of institutions that comprise the Islamic financial industry such as
most notably, banks, finance companies, mutual funds, takaful operators, and sukuk issuers. The
reports of the shariah board should have a strong statement that it is management’s responsibility
to properly comply with the Islamic Shariah rules and principles, with the shariah board’s
responsibility to form an independent opinion based on their review of the operations and report
to management. Hassan Scot (2009) state that the statement is of interest as the reports of the
shariah councils of many Takaful operations do not have such a statement, with the implication
being that responsibility remains with the shariah council.

The report of the shariah board should contain a clear statement that the financial statements
have been observed for the relevance of the shariah basis of allocation of profit between the
equity holders and the investment account holders. The shariah council is the external to the

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company it is not be able to oversee the day to day operations of the Takaful operator this is a
weakness in corporate governance.

Another important element in corporate governance is board independence of directors.

The board independence means a corporate board that has most outside directors who are not
affiliated with the top executives of the firm and have minimal or no business dealings with the
company. This is to avoid any fraud or conflict of interest.

The diagram above is the corporate governance statement disclosure of Syarikat Takaful
Malaysia Berhad from the annual report in year 2017. From the diagram above we know that
57.14% of the board directors are independent. Another 42.86% of the directors are non-
independent directors. That means almost half of the member of board are having more than one
role in the corporation, which will cause a blur responsibility of the members.

To have a better corporate governance, the Takaful company should choose members of
board who has no conflicts in interest. The board members who is non-independent will probably
has the conflict of interest, especially when the CEO of the company is the chairman of the
board, the CEO duality will happen. The conflict will happen when the chairman has different
objectives with other board members, but he or she has the power to control the decision. There
must be a clear division of responsibilities between the chairman of board and CEO of the
company to make sure that the power and authority is balance and no overlap. The chairman
needs to run the board to achieve its objectives and lead the discussion at the board level to have
a healthy deliberation. CEO is responsible to manage the company as well as the implementation
of policies and decisions.

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The challenges when there is overlapping of authority and responsibilities, fraud will
often happen. Due to the power of decision focused on one person, he can make decision that
will benefit him. This will cause the company to loss its profit or even facing huge problems due
to this.

Besides the members of board who is independent, members of board should also from
different background or major. This is because the members from different major and
specialization can help the company to solve different problems. If the company has member of
board from the same major, conflicts will happen as everyone has their own idea. This is to make
sure Takaful business can be effective and efficient. With more different specialization, different
ideas can lead Takaful to a better future with different new proposals on changing Takaful
business direction or methods.

3.3 Lack of Awareness in Takaful

The Islamic financial institution plays a significant role in developing and

implementing Takaful concept through entire world. Despite the introduction of Takaful, the
expansion in the level of entrance foreseen still can't seem to be figured it out. Numerous
customers are yet not mindful of Takaful as an option and some view Takaful commercialization
of ordinary protection into the Islamic world and reject the idea that it is a Shariah agreeable
instrument. Abdul Hamid and Othman (2009) studied the level of knowledge and awareness
among Muslims towards Takaful insurance and its terms and concepts in Malaysia. Consumers
usually build a certain set of cognitions, or pieces of information and knowledge about the
product offering before deciding to buy or not to buy the product. In other words, lack of
knowledge on Takaful may affect consumers' decisions to buy it or not.

Lack of customer awareness is the big challenge and it is the one of the reasons
Takaful is not widely develop in the world. Many consumers are still stick to conventional
insurance, and they adopt more than Takaful which is Islamic insurance. It is important for
marketer to enhance the development of the industry and maintain the innovation and
development of the Takaful. Malaysia is the only country with a specific Takaful Law and the
demand for Takaful products, both life and nonlife has been huge (Patel, 2008). Much of holding
back in the current markets of Takaful in the Malaysia is to do with the mind set of those player
(insurer and policyholder) who are entrenched in these markets in conventional insurance and

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see Takaful as a niche only. According Dar stated that 83% of Muslims in his study do not
believe on Takaful because their doubt whether this insurance is Islamic.

Takaful is yet confronting some key inquiries regarding its execution and future.
One possible reason of this gap may be due to lack of information dissemination or a shortfall of
disclosing the required information to participants by the Takaful operators (TOs), which causes
weak knowledge among participants of the Takaful principles (Hashem 2015). There is a lack of
information and study about Takaful in the country. Mostly of them do not expose to the Takaful
principle. Based on the Hashem 2015 he conducts the research to find out whether people know
about the Takaful principle or not. Mostly people that participate in Hashem research do not
know about Takaful policies. This strongly shown that mostly people do not have education
about Takaful policy.

The Takaful company were conveying the necessary information to participants

regarding their products, policies and principles. According to Hashem statement shown that the
participant’s knowledge with regards to the principles and models of the Takaful fund has been
explored by forwarding the main questions which reflect participant knowledge about the fund
they are participating in. According to Hashem mostly people in the world they do not know the
model they are participating in and mostly of them do not know about Takaful insurance.

There likewise remains the observation among numerous Muslims in the nation on
whether protection is passable under Islam fundamental with respect to the key issues of
Shari‟ah consistence and sanitization. One of the contributory determinants to this absence of
awareness among Muslims is the lack of understanding of Islamic product and services (Mohd
Razif, 2011). Most of Muslim doubt whether the Takaful policies compliance with Shari’ah or
not. This strongly indicate that Muslim in the world have less knowledge about Takaful policy.
This shown that the lack of knowledge about Takaful policy will influence the growth of Takaful
company in the world. Which means that when people do not have the knowledge about Takaful
policy they will more likely to buy the conventional insurance rather than Takaful policy. This
will make the growth of Takaful company become stunted.

In any case, Takaful offers the main option for Muslims hesitant to take a gander at
regular protection by their solid religious conviction. The concept of Takaful is still relatively
new to some or perhaps all of them even though it has been in existence for more than ten years.

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It can be said that the concept of Takaful is still hazy to many people because they are not
educated to see the advantage. There is a lack of understanding regarding how the Takaful
providers should be organized and operate and the providers themselves have not been effective
in consumer education and marketing (Wilson, 2007). Customers’ lack of knowledge and
awareness about the basics and technicality of the products and services they are dealing with
can lead to an obvious deficiency in customer-motivated reasons to possess insurance products
and services (Alnemer, 2015).

Mostly customer do not have enough knowledge about Takaful rather than
conventional insurance. People now day more expose about conventional insurance knowledge
rather than Takaful knowledge. The importance of customer education and knowledge was
realized by the British Government, as one of the Financial Services Authority (FSA) reforms to
address the communication weakness in the insurance industry after the failure of the Equitable
insurance company, was to launch the Financial Capability Steering Group to examine consumer
education. Accordingly, it recommended that other countries follow the FSA consumer
education programmed (Alnemer, 2015). The lack effort of Takaful provider also will influence
customer awareness in purchasing Islamic insurance (Takaful). These will not educate people
about the important principle of Islamic insurance (Takaful) and its elements. Takaful provider
also lack in advertising their product to customer. This will make people do not know about the
product and service that have been provided by the Takaful company. Mostly people now day
will rely more on what their see and what their have learn in their life. This will increase the
awareness among them. Through advertising it will give some knowledge to the people who saw
the advertising about the Takaful policy. Takaful provider should play important role to increase
the awareness among people in the world and spread the important and benefit of having Takaful
for their life. It will influence the growth of Takaful company in the world.

3.4 Ethical Practice Issue among Takaful Agents

Ethical practice among Takaful agents is one of the most challenges and barriers
towards Takaful industry to stand and compete in competitiveness the demand for the Takaful
industry in insurance market Malaysia.

Ethical is relating to beliefs about what is morally right and wrong (Ethical, 2018).
Practice is the actual application or use of an idea, belief, or method, as opposed to theories

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relating to it (Practice, 2018). However, (Practice, 2018b) stated practice as actions rather than
thought or ideas. Hence, ethical practice can be defines as the idea, method or actions that beliefs
about what is morally right and wrong.

In this topic will discusses ethical behaviour of Takaful agents in Malaysia. An ethical
practice among Takaful agents means how the Takaful agents behaviour in carrying out their
duty as an agent. As their behaviour ethically wrong or right. As we know, Takaful agent acts as
marketing function provide to acknowledging Takaful, promote Takaful, and exposure regarding
the necessary Takaful nowadays in life. According to The Majelle (2001: 504) “Agency consists
of one person (principal) empowering some other person (agent) to perform some act for him,
whereby the latter stands in the stead of the former in regard to such act (an authorized act)”
(Che Mohd Salleh, Irwani Abdullah, & Salwani Razali, 2013).

There are relationship between sales pressures and ethical sales climate on ethical sales
behaviour among Takaful agents (Aziza, Aziz, Mohtar, & Othman, 2017). Also, there are
relationship of Takaful
Agents’ Islamic ethical
behaviour towards
Customers’ Satisfaction, Trust and
Commitment (Che Mohd
Salleh et al., 2013). Both of the
statement showed as a
provident to issue of Ethical
practice among Takaful
agents the challenges to the
Takaful Industry

Figure 6.1
The graph
percentage of the
market share of the
country in the
region from 2012
until 2015
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Figure 6.0 shows that within South East Asia, Malaysia has the largest general
Takaful market share in the region at 70% in 2015. Malaysia exhibited a negative growth in its
general Takaful market with 14% in 2015 in terms of total contributions in US dollars. In local
currency terms, Malaysia continues to exhibit positive growth of 9% in 2015 in total
contributions in US dollars. Similarly, in local currency terms, Indonesia exhibited a higher
positive growth of 22% in the same year. (Milliman, 2017)

Based on the figure 6.0, represent Takaful had a negative growth in 2015. Hence, the
ethical practice among Takaful agents is one of the main role marketing function that had been
influence the negative growth of the Takaful performance and growth. Customers often face
considerable uncertainty restricting from intangibility, complexity, a lack of service familiarity,
and long-term benefits, due to the experience and credence properties of these services (Chen
and Mau, 2009)

Figure out ethics with marketing activities viewed as something that raises doubts
and problems(Aziza et al., 2017). The method serves and what the information delivers by the
Takaful agents will affect the growth of business whether raise or decline the growth. Clients or
prospect customers often rely on agents who are representatives of business to provide the
correct information and proper guidance resulted good ethics in business can enhance business
results, which leads to sustainable development of organizations(Aziza et al., 2017).

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Figure 6.1
The percentage
experience with
life insurance
industry

Source: Customer Satisfaction with Service Delivery in the Life

Insurance Industry. Norazah Mohd Suki, 2013

Based on the figure 6.1,

can be define AIA Bhd Almost
half of the respondents (47%)
have a life insurance policy
with AIA. Thirteen percent of
the respondents have an insurance
policy with Etiqa Insurance
and Takaful Berhad; 14 percent
signed insurance policies
with Great Eastern Life Assurance and 8 percent with Takaful Malaysia Berhad. AIA Bhd has
the strongest percentage that the insured with them. This performance had been achieve after the
AIA Bhd performed good attitudes which implies that customers are reliant on their insurance
agents and are confident that they will be provided with all the correct and useful information
and advice (Suki, 2013)

Also based on the figure 6.1, figure out that Takaful Malaysia Berhad among the
company that achieve the below percentage of relationship with the customer. Hence, this figure
will support the judgement that the negative relationship between ethical practice among Takaful
agents and Takaful performance due to the unethical behavior. Haron et al. (2011) categorized
unethical selling as false or misleading representations of products or services, failure to identify

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client’s needs and recommend products and services that meet those needs, lack of knowledge or
skills, and conflicts between opportunities for personal financial gain and proper (Che Mohd
Salleh et al., 2013).

Ethics has become a starting point from which one can examine the success or failure
of a business. Good ethical practice among Takaful agent will reflects positively towards the
relationship with the customer at the same time automatically the more customers will be attract
to them, depends on how they treats their customers. Agents who behaves ethically is more
effective at building customer relationships, as well as getting customers satisfied, trusted, and
committed (Aziza et al., 2017).

3.5 Shortage of Shariah-Compliant Assets

As far as we concern, Takaful industry is growing fast and fast recently, but there is
always shortage of tradable Shariah-compliant assets in the market. The serious challenge faced
by this factor of shortage of Shariah-compliant assets is because of lack in investment or
shortage of investment. There is lack of investment vehicles, especially with the long term
duration. Actually, there could be many ways to further improve the Shariah-complaint assets
and one of ways is to make investment in order to operate accurately and clearly in Takaful
industry.

Safder Jaffer, Farzana Ismail, Jabran Noor and Lindsay Unwin (2010) said that a
Takaful transaction is free from the element of uncertainty, unjust enrichment and riba. The
avoidance of riba, gharar, haram, maisir in the design of Takaful product has a significant impact
on the investment decisions of Takaful operation. Contribution that get must be invested purely
in Shariah- compliant assets for example asset that are not- interest bearing and whose return are
not derived from activities considered unethical.

Takaful is structured around the core principle of sharing and pooling risk with
fellow participants rather than transferring it to a profit-oriented corporate entity. The concept of
mutual support allows many parallels to be drawn between Shariah-compliant Takaful operations
and mutual insurers. Hale Abdul Kadera, Mike Adamsb and Philip Hardwick (2010) said that
Takaful insurance involves pooling individual risk exposures on an indemnity basis but without
predetermined rates of interest (riba) and profit margins, which are both forbidden under Shariah

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law. However, Islamic finance allows shareholders to participate in the surplus arising from the
use of contributed insurance capital on a profit-sharing basis that has been agreed with policy-
holders which is based on forecasts rather than actual results.

While Takaful insurance pools have many similarities with Western mutual
insurance operations, their managers are which in addition to being unable to charge interest on
capital, prohibited under the Shari’a from taking highly uncertain underwriting and speculative
investment decisions (gharar). Managers of Takaful insurers must also invest surplus funds in
Shari’a-compliant (halal) assets such as domestic public sector securities and the equities of
Islamic financial institutions. However, as noted earlier, the shortage of Islamic investment
opportunities and the lack of market liquidity for Islamic securities can sometimes put downward
pressure on reported annual profits. However, unlike mutual insurers and friendly societies,
current Takaful operations involve shareholders who have a profit motive, who provide the
capital and fund the administration of the risk pool, and who are separate from the participants.
Hence, Takaful operations can be viewed as Shariah-compliant commercialised mutual insurance
operations. This structure of necessity, which is due to the need for capital.

The investment returns on contributed funds by the participants are based on actual
investment experience. However, the Takaful operator is obligated to advance a loan on an
interest-free basis, to support any shortfalls in the risk pool in meeting claims. This implicit
guarantee of underwriting risk by shareholders of the Takaful operation creates some weakness
in the current commercial model of a Takaful operation. Shariah law forbids loan issues that are
at a discount to their nominal value and completely restricts the earning of interest (Riba). These
two conditions effectively rule out conventional corporate or government bonds. The expanding
Sukuk market offers access to an asset class which shares some properties with conventional
bonds and others with equity stock, whilst remaining Shariah-compliant. Sukuk provides the
Takaful market with a legitimate investment alternative to government and corporate bonds.
Several issues surround these Sukuk, such as availability, control, and ownership. These issues
impact their overall effectiveness in supporting long-term liabilities, especially income annuities.

There are a number of hurdles related to the Shariah-compliant assets in which

companies must invest the contribution made by Takaful participant. In short-term there
available and an adequate supply of compliant assets such as Sukuk. However, there is

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competition with Islamic banks in term of purchasing short-term Sukuk in the primary market,
whereas the secondary Sukuk market is currently illiquid and expensive. Availability of assets
may further tighten as the rapid growth of Takaful continues in the market.

The lack of longer-term Sukuk presents a potential reinvestment risk for those
companies offering Family Takaful. As a result of the lack of suitable assets, Takaful companies
have been forced to invest in highly volatile regional equity or real estate markets, which creates
a mismatch between its assets and liability profile and subsequently may result in higher capital
compared to a typical conventional insurance company. It is not uncommon for Family Takaful
operators to maintain a high proportion of assets in cash or bank deposits.

The continued success of the Takaful industry is linked to sound Shariah-compliant

asset management capabilities. Both the shareholders’ fund and the policyholders’ pool need to
be invested in a Shariah-compliant and profitable manner. The development of a strong asset
management capability will enable a stronger Takaful proposition. The lack of suitable assets
with sufficient liquidity remains a big challenge in the Takaful industry.

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4.0 CONCLUSION

In conclusion, Takaful is the Islamic principle that are acceptance in Shariah and it is the
counterpart of conventional insurance. The word Takaful is derived from the Arabic verb
‘kafala’ which means to take care of one’s need. Therefore, Takaful is a joint-guarantee between
two or more parties in the event of loss. Takaful was introduced as an alternative to commercial
insurance, which are seen as violating Islamic restrictions in riba (interest), al-maisir (gambling),
and al-gharar (uncertainty) principles.

Takaful company is now developing in a positive way. We can see that Takaful is having
greater and greater achievements throughout the years. Takaful is continuously striving to
develop best practices in the management of their business. In the process of evolving, Takaful
business are facing a lot of regulatory challenges and also technical challenges. Takaful business
is becoming more competitive in insurance industry, not only in meeting customers’ needs but
also in achieving Shariah requirements.

The ethical practice issues among Takaful agents stated in the study shows the difficulties
of Takaful business in this industry. To make sure that Takaful give a good first impression to
customers, Takaful companies should be more careful in choosing their agents. This is because
agents are the representatives of Takaful. People won’t say the agents are bad, but all the
negative feedbacks will impact the most on Takaful company itself. So, Takaful companies have
to make sure that the agents they choose are really in a good manner and follow all the ethics in
promoting or selling products to customers.

Takaful business is also facing many challenges because of the lack of awareness and
shortage of Shariah-compliant assets. So, Takaful Company should be more alert on the needs of
customers, be more proactive in promoting the importance of Takaful and designing more new
Shariah-based Takaful plans. Takaful should not set an image of Islamic entity in customers’
mind. This will make Takaful business to limit their market. Takaful companies should put some
effort on changing customers’ perspective about Takaful is only for Muslims so that they can
become more competitive. Takaful business can have a lot of initiative to face all those
challenges and become a stronger entity.

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Takaful has its own unique features that can be developed to become their strengths.
Takaful business is relatively young compared to other financial businesses, where it should have
put on more efforts to build up its name and strength, and also the faith and trust of people in
Takaful. With that, Takaful business will become one of the biggest financial business in the
world in one day, even can beat other insurance companies in one day.

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7.0 REFERENCES

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Musa, S. M. (2016). Challenges in Takaful Application within Conventional Insurance

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Jaffer, S., Ismail, F., Noor, J., Unwin, L., & Ajayi, D. (2010). Takaful (Islamic Insurance):
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Yakob, Rubayah & Yusop, Zulkornain & Radam, Alias & Noriszura, Ismail. (2015).The relative
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Coolen‐Maturi, T. (2013). Islamic insurance (takaful): Demand and supply in the UK.
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Alnemer, H. A. (n.d.). Participants’ Perceptions about Takaful Operators Disclosure System:

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Daud, W. N. W., Rahim, M. A., Zainol, F. A., & Ismail, A. G. (2018). Leader's qualities and
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Mroueh, M., & de Waal, A. (2018). Is the high performance organization framework applicable
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Fauzi, P. N. F. N. M., Abd Rashid, K., Sharkawi, A. A., Hasan, S. F., Aripin, S., & Arifin, M.
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Aziza, N., Aziz, A., Mohtar, A., & Othman, M. Z. (2017). Sales Pressure and Ethical Sales
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Che Mohd Salleh, M., Irwani Abdullah, N., & Salwani Razali, S. (2013). The Relationship of
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