138 Islamic Finance in Practice
and have allowedtakafulcompanies to reinsurance their business with
conventional reinsurers.Investment compliance
As part of Shari’a compliance,takafulbusinesses should invest their assets
within Shari’a-compliant assets. However, given the rapid growth oftakaful
entities, it may not be possible to invest all assetswithin Shari’a-compliant
assets and also meet local regulatory rules on asset investment, which are
designed to protect policyholders by ensuring that companies do not invest
within risky investments or have too great a reliance on one asset.
Many of these investments that are allowable under local regulatory
requirements (eg. bonds) are not Shari’a-compliant. Even if there are
suitable Shari’a investments, there may not be enough of them; for example,
if there is only onesukukbond available for atakafulcompany to invest in,
the company may fall foul of local regulations concerning “concentration
risk”−the local regulator may want its companies to be invested in at least
threesukukbonds, not just one.
Currently there is a shortage in Shari’a-compliant investments that
takafulbusiness can invest in. The only option fortakafulbusinesses in the
short term is for their Shari’a boards to allow them to invest in non-Shari’a-
compliant but ethicallyallowable investments.Takaful principles
Tabarru’ (contribution/donation)
The participants pay contributions to the takaful business to secure
protection. The amount of contribution is fixed, based on the risk assured
and duration of participation defined under thetakafulcontract. For Shari’a
purposes, the contributions are treated as donations from the policyholders
to thetakafulbusiness. In theory, protection is provided under the principles
of joint indemnity (ie. each policyholder jointly protectsother policyholders,
so in theory if a loss occurs that is bigger than the contributions that the
policyholders have put in, they could be asked to put more money into the
takafulentity). However, this does not occur in practice.Mutual cooperation
Thetakafulindustry is based on the concept of mutual cooperation, where
the insured is also the insurer, and therefore shares in the profit or loss of
the institution they arepaying the contribution to.