Non - bank Financial Intermediation 221
used for asset - management purposes. In this case, the asset management
business can be run by an entirely different entity — that is, a professional
asset manager — on behalf of the policyholders. Some regulators may pre-
fer this model for transparency reasons. For example, the Central Bank of
Bahrain prefers this model.^9
Distinctive Features of Takaful
Cooperative Organization Takaful is based on principles of mutual assistance
and therefore is similar to conventional cooperative insurance whereby par-
ticipants pool their funds together to insure one another. The customers
(policyholders) of the takaful business agree to pool their contributions and
share the liability of each. Claims are paid out of the combined pool of con-
tributions and assets.
Risk Sharing In the risk-sharing aspect, the takaful is closer to the essence
of Islamic fi nance than the Islamic banks. The policyholders share in the
profi ts and losses of the business through sharing each other’s insurance risk
as compared to conventional insurance, where there is no sharing of risks
across policyholders. For example, in the case of a typical takaful model, a
surplus or profi t made at the end of a fi nancial year after satisfying all claims
and reserves is shared between the takaful operators and its policyholders.
On the other hand, if at the end of the fi nancial year the policyholders’ fund
suffers a loss, the defi cit is funded by an interest - free loan (qard - ul - hassan)
from the shareholders’ fund. Any future surpluses are used to repay the
loan. The shareholders’ access to the capital from the fund is restricted until
the loan is repaid.
Shari’ah - compliant Investments One of the most distinguishing features of
takaful is the requirement that all investments and assets under management
are invested in accordance with the principles of Islam and therefore have
to be fully compliant with Shari’ah. Where conventional insurance compa-
nies invest funds in debt - based fi xed - income securities, derivatives, govern-
ment securities, and hedge funds, a takaful asset manager cannot invest in
these products. Similarly, any investment in stock markets is required to be
compliant with Shari’ah. With the continued expansion of Islamic fi nan-
cial markets, there are more opportunities of Shari’ah - compliant investment
products and this requirement is becoming much less of a constraint.
Mutual Guarantee Takaful is based on cooperative principles which spread
the liability amongst the policyholders and all losses are shared. This mutu-
ality results in the policyholders guaranteeing the performance of each other.
In other words, policyholders are both the insurer and the insured.
Table 10.2 provides a comparison of different features of takaful, con-
ventional, and mutual insurance.