ISLAMIC FINANCE

Takaful Models: Wakalah and Wakalah-Mudarabah Explained

Exploring the World of Takaful: Unraveling Wakalah & Wakalah-Mudarabah Models. Learn about their intricacies, profit-sharing, and surplus distribution. Discover the significance of Takaful operations in our comprehensive series.

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Exploring the World of Takaful: A Comprehensive Series on Shariah-Compliant Insurance (Part 2)

Read Part 1 here:
Introduction to Takaful: Understanding the Concept and Principles

In the world of Takaful, a Shariah-compliant insurance, the choice of the operating model plays a significant role in shaping the structure and operations of the insurance scheme. Two primary models, Wakalah and Wakalah-Mudarabah, are commonly used in Takaful practices. In this second instalment of our comprehensive blog series on Takaful, we delve into these models, shedding light on their intricacies, participant-operator dynamics, and profit-sharing mechanisms. Join us as we explore the Wakalah and Wakalah-Mudarabah models and gain a deeper understanding of their significance in Takaful operations.

Wakalah Model

The Wakalah model is based on the concept of agency, where the participants appoint an operator to manage the Takaful fund on their behalf. Under this model, the operator acts as an agent and charges a fixed fee for their services. The primary responsibility of the operator is to ensure efficient fund management and claims administration. They manage the collection of Takaful contributions, undertake a risk assessment, and handle policy issuance and claims settlement. The surplus generated from the Takaful operations is distributed to the participants or shared between the participants and the operator based on a pre-determined ratio.

Let's unravel the intricacies of the Wakalah model, by understanding the step-by-step process. By understanding the process and roles involved, we can gain a deeper appreciation of this model in Shariah-compliant insurance.

Imagine you are Ali, a prudent individual looking to protect your family and assets through Takaful. As you delve into the world of Takaful, you come across the Wakalah model, a fundamental operating model that piques your interest. So what are the steps you follow? Let's dive into the process and unravel the mysteries together!

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Step 1: Participants' Appointment of an OperatorYou begin your Takaful journey by carefully selecting an operator to manage your Takaful funds. After thorough research and recommendations, you entrust an operator known for their expertise and commitment to Shariah principles.

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Step 2: Operator as an AgentOnce appointed, the operator assumes the role of an agent, representing your best interests and those of other participants. They take on various responsibilities, including collecting and pooling the contributions in a fund, efficient fund management and claims administration. To compensate for their services, the operator charges a fixed fee which is known as the Wakalah fee, that is agreed upon in advance.

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Step 3: Efficient Fund ManagementYou discover that your chosen operator is adept at managing Takaful funds. They carefully invest your contributions in Shariah-compliant avenues, striving to generate returns while adhering to ethical principles. This responsible approach ensures that your funds are not only safeguarded but also have the potential to grow.

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Step 4: Risk Assessment and Policy IssuanceYour operator diligently assesses the risks involved and tailors Takaful policies to meet your specific needs. They take into account factors such as your assets, liabilities, and personal circumstances to determine the appropriate coverage and pricing. Once the policies are designed, the operator facilitates their issuance, providing you with the necessary coverage and peace of mind.

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Step 5: Claims SettlementIn the unfortunate event of a claim, you witness the operator's expertise in action. They swiftly assess the validity of the claim, ensuring that the process is transparent and adheres to Shariah principles. A prompt and fair settlement is their top priority, providing you with the financial assistance you require during challenging times.

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Step 6: Surplus DistributionOne of the fascinating aspects of the Wakalah model is the distribution of surplus. After deducting claims, expenses, and the operator's fee, any surplus generated from the Takaful operations is distributed between the participants (as participants are the owner of the fund) or in other cases between the participants and the operator based on a pre-determined ratio.

As you conclude your journey through the Wakalah model, you understand that this model operates by entrusting an operator with the responsibility of fund management and claims administration, where you can benefit from their expertise while ensuring compliance with Shariah principles.

Wakalah-Mudarabah Model

The Wakalah-Mudarabah model combines elements of the Wakalah model with the concept of Mudarabah, which refers to a profit-sharing arrangement. It happens when the takaful policy has an investment or savings option. In this model, the operator acts as both an agent and a Mudarib (entrepreneur). The participants provide the contribution which creates the risk pool from where the claims are settled as well as capital which makes the investment fund separate. The operator contributes their expertise and management skills. The operator receives a management fee (Wakalah fee) as compensation for managing the risk fund and also receives profit based on a pre-agreed profit-sharing ratio from the investment fund. This model incentivizes the operator to generate higher returns on investments as well as prudent management of the risk fund as their share of the profit is directly linked to the profitability of the Takaful operations.

The difference between the pure Wakalah model and the Wakalah-Mudarabah model is operators receive profit from the investment as Mudarib.

Roles and Responsibilities

Under both the Wakalah and Wakalah-Mudarabah models, participants have the right to be informed about the Takaful operations, including the financial performance and investment activities. They also have the right to voice their opinions on matters affecting the Takaful fund. On the other hand, operators bear the responsibility of ensuring transparency, adhering to Shariah principles, and managing the Takaful fund prudently. They are accountable for maintaining separate accounts for each Takaful fund and disclosing relevant financial information to the participants.

Let's elaborate with an imaginary example:
Imagine a Takaful company called "Safeguard Takaful" that offers family Takaful plans. They operate under the Wakalah and Wakalah-Mudarabah models.

Participants

The participants in Safeguard Takaful are individuals seeking family Takaful coverage. Their role is to contribute Takaful premiums regularly to the Takaful fund. In our example, let's consider a participant named Ahmed who wants to secure his family's financial future through Takaful.

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Right to Information: Ahmed has the right to be informed about the Takaful operations of Safeguard Takaful. This includes receiving regular updates on financial performance, investment activities, shariah compliance and surplus distribution.

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Voice and Opinions: Ahmed has the right to voice his opinions and suggestions on matters affecting the Takaful fund. For example, he may provide feedback on the types of coverage offered or express concerns about the investment strategies employed by Safeguard Takaful.

Takaful Operators

Safeguard Takaful acts as the operator in this example. As the operator, they assume significant responsibilities to ensure the efficient and Shariah-compliant management of the Takaful fund.

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Transparency and Shariah Compliance: Safeguard Takaful is responsible for ensuring transparency in its operations. They must adhere to Shariah principles in all aspects of the Takaful business, including investments and surplus distribution.

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Prudent Fund Management: The operator has the duty to manage the Takaful fund prudently. This involves making sound investment decisions that align with Shariah guidelines and risk management practices. For instance, Safeguard Takaful may invest the Takaful contributions in Shariah-compliant assets such as real estate, equities and Sukuk.

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Separate Accounts: Safeguard Takaful maintains individual accounts for each Takaful fund they operate. This ensures that the funds are appropriately allocated and accounted for and prevents cross-utilization of assets between different Takaful plans as well as shareholder funds.

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Financial Disclosures: The operator is accountable for disclosing relevant financial information to the participants. This includes providing regular reports on the fund's performance, detailing the investments made, expenses incurred, and the surplus generated.

By fulfilling their respective roles and responsibilities, participants and operators contribute to the smooth functioning and success of the Takaful system. Through transparency, accountability, and adherence to Shariah principles, Takaful operations like Safeguard Takaful aim to provide individuals like Ahmed with reliable and ethical insurance coverage for their families.

What did we learn about Takaful Models?

Understanding the Wakalah and Wakalah-Mudarabah models is crucial in comprehending the mechanics of Takaful operations. These models govern the participant-operator relationship, profit-sharing mechanisms, and the distribution of surplus. By exploring these models, we gain insights into the unique aspects of Takaful and appreciate its adherence to Islamic principles. Stay tuned for the upcoming blogs in our series as we continue to unravel the fascinating world of Takaful and its various facets.

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Disclaimer: The views expressed in this blog are not necessarily those of the blog writer and his affiliations and are for informational purposes only.

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