Islamic Banking and

Financial Markets
Module 6
Sukuk-Takaful
Dr. Mustafa Disli

1
Part A: Sukuk

2
What is Sukuk?

‒ Sukuk is popularly known as an Islamic or Shariah compliant ‘Bond’

whilst in actual fact; it is an asset-backed trust certificate.
‒ Sukuk is the plural form of the Arabic word sakk, which means
“certificate” or “written document.”
‒ In its simplest form Sukuk is a certificate evidencing the ownership of
an assets or its usufruct and was developed by the Shariah experts for
the express purpose of answering the financial world ‘s demand for a
Shariah-compliant debt instrument

3
 UNIVERSE OF STOCKS UNIVERSE OF BONDS

Conventional investors
typically divide their
portfolios between
equities and bonds.

4
 UNIVERSE OF STOCKS UNIVERSE OF BONDS

UNIVERSE
OF ISLAMIC
STOCKS

5
UNIVERSE OF SUKUK UNIVERSE OF STOCKS UNIVERSE OF BONDS

UNIVERSE
OF ISLAMIC
STOCKS

6
 Current landscape

7
Islamic Finance Development Report 2023: Navigating Uncertainty
 Current landscape - sukuk

8
Islamic Finance Development Report 2023: Navigating Uncertainty
 Conventional bonds and sukuk
Feature Conventional bonds Sukuk
Bonds are debt instruments where the issuer Sukuk are investment certificates that represent
Underlying Structure borrows money and agrees to pay interest ownership in underlying assets, projects, or
(coupon) and principal. business ventures.
Bonds typically pay fixed or variable interest, Sukuk generate returns based on profits or
Interest Payments which is considered riba (usury) and income from the underlying assets, avoiding
prohibited in Islam. interest.
Bondholders are creditors with no ownership Sukuk holders have ownership rights in the
Ownership Rights
rights to the underlying assets. underlying assets, sharing in profits and risks.
The risk is borne primarily by the borrower; Sukuk holders share risks associated with the
Risk Sharing bondholders have limited recourse in case of underlying assets, allowing for greater
default. alignment of interests.
Sukuk holders may be affected by operational or
Bondholders are not directly affected by the asset-related costs, especially in asset-backed
Effects of Costs costs incurred in managing the underlying sukuk where returns are tied to the
assets or operations. performance of the asset. In such cases, higher
costs can reduce profits.

9
 Issuing Bonds: Parties involved

OBLIGATOR UNDERWRITER INVESTOR

The company contracts an

The company structures the
underwriter (a large financial
bonds (face value, interest rate,
institution, such as a bank,
maturity date, #bonds) with its The underwriter acts as
insurer, or investment house) to
board’s approval. middleman, selling bonds to
conduct the bond issuance. The
The company prepares the bond investors on behalf of the
underwriter offers insurance to
prospectus, which explains the corporation.
the issuer that it will purchase
bond specifics to potential
any bonds that investors don’t
investors.
buy.

10
 Issuing Sukuk: Parties involved

OBLIGATOR TRUSTEE/ISSUER INVESTORS UNDERWRITER

An underwriter may
Special Purpose
The government or be brought in as
Vehicle (SPV), the
corporation that is insurance to the SPV,
middleman between Sukuk holders
going to benefit from to guarantee that
the obligator and the
the sukuk issuance any unsold sukuk will
investors.
be purchased.

Unlike conventional bonds, which are issued via an underwriter, sukuk

usually require the obligator to create a new entity, an SPV, to act as trustee
Not frequently used
or issuer.

11
Issuing Sukuk: Process

1. The obligator creates or contracts the SPV to act on its behalf during a sukuk issuance.
The obligator and SPV enter a sukuk-specific contract, and the obligator specifies the
asset or activity the sukuk will support.
2. The SPV issues the sukuk to the investors. Each sukuk subscription involves an
agreement that spells out the relationship between the obligator and sukuk holders (as
lessor and lessee, partners in a venture, principal and agent to manage investments,
and so on) and the nature of the income/gain that the investors are entitled to (such as
rental income or what portion of the obligator’s profit or loss the investor will share).
3. The SPV gives the proceeds from the investors to the obligator. The proceeds are to be
used for the Shariah-compliant asset purchase, lease, joint venture, or other business
activity agreed upon between the obligator and sukuk holder during the sukuk
issuance.
4. The SPV distributes the obligator’s returns or losses to the investors.

12
Special Purposes Vehicle (SPV)

‒ The SPV is a legal entity that is separate from the obligator and that
manages the pool of assets related to the sukuk.
‒ SPVs are created to transfer the ownership of the asset, project, or
business.
‒ SPVs take legal ownership of the assets on which the sukuk are based.
‒ A parent company creates an SPV to isolate or securitize assets in a
separate company that is often kept off the balance sheet.
• It may be created in order to undertake a risky project while protecting the
parent company from the most severe risks of its failure.

13
Types of Sukuk: Mudaraba Sukuk

‒ Mudaraba contract: investors are considered to be silent partners (rabb-al-

mal), and the party who utilizes the funds is the working
partner (mudarib). The profit from the investment activity is shared between
both parties based on an initial agreement. Any loss incurred is absorbed
solely by the investors unless the working partner has been negligent in
some way.
‒ Mudaraba Sukuk: the sukuk holders are the silent partners, who do not
participate in the management of the underlying asset, business, or project.
The working partner is the sukuk obligator.
SPV is also a silent partner of the mudaraba contract because it represents
the sukuk holders (investors). The SPV pools the funds from the investors and
acts on their behalf, so in essence the SPV is owned by the sukuk holders.
14
 Types of Sukuk: Mudaraba Sukuk
Investors 1. The investors subscribe to the sukuk and pay
(rabb-al-mal) proceeds to the SPV, which acts as their trustee.
2. The SPV issues sukuk certificates to the investors.
1 2 5
3. The obligator (the mudarib) receives the proceeds
from the sukuk holders (investors).
SPV 4. The profits from the venture are divided between
(rabb-al-mal) the obligator and the SPV, using predetermined
(contractual) ratios. (Note that the obligator also
3 4
may receive a management fee per the contract)
5. The SPV receives the profits from the obligator
and holds them. These profits are distributed
Obligator
(mudarib)
among the sukuk holders on a periodic basis
(again, per the contract). 15
Types of Sukuk: Musharaka Sukuk

‒ Musharaka contract supports a joint venture business activity in

which all partners contribute capital, labor, and expertise. Profit
sharing need not be based on the proportion of shares owned, but
liability is limited to the contributions of the shareholders.
‒ Musharaka sukuk: the sukuk holders (investors) are the owners of the
joint venture, asset, or business activity and therefore have the right
to share its profits. In a musharaka sukuk, unlike sukuk based on
mudaraba, a committee of investor representatives participates in the
decision-making process.

16
 Types of Sukuk: Musharaka Sukuk
1. The investors subscribe to the sukuk and pay the
Investors proceeds to the SPV, which acts as the investors’ trustee.
2. The SPV issues sukuk certificates to the investors.
1 2 6
3. The SPV transfers the proceeds from the sukuk to the
joint venture, and the investor committee contributes its
SPV and investor committee (partners) expertise.
4. The obligator transfers cash and/or assets to the joint
3 5 venture, and it also contributes its expertise.
5. The profit and loss of the joint venture is shared between
Joint venture the SPV and the obligator based on the contract
agreement.
4 5
6. If the venture is profitable, the SPV distributes its share
of profits from the joint venture to the sukuk holders at
Obligator (partner and managing agent) periodic intervals specified in the contract.
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Types of Sukuk: Ijara Sukuk

‒ Ijara: transfer the usufruct of a particular property to another person

in exchange for a rent claimed from him.
‒ Ijara sukuk: sukuk holders (investors) are the owners of the asset and
are entitled to receive a return when that asset is leased.
‒ Ijara is a well-known sukuk structure because it is simple and
tradable.
‒ Ijara sukuk give the holders a fixed flow of income. Companies may
opt to use ijara sukuk if they determine that doing so is less expensive
than securing a bank loan to purchase an asset.

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Types of Sukuk: Ijara Sukuk
1. Investors subscribe to the sukuk and pay
Investors
the proceeds to the SPV, which acts as
trustee.
1 2 6 2. The SPV issues sukuk certificates to the
investors.
3. The SPV purchases the asset from a
Seller
SPV seller using investor proceeds.
3 (lessor)
4. The SPV leases the asset to the obligator.
5. The company (obligator) pays rental fees
4 5 to the SPV.
6. The SPV distributes the rental fees to the
Obligator investors according to the sukuk
(lessee) payment schedule.
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Types of Sukuk: Ijara Sukuk
1. Investors subscribe to the sukuk and pay
Investors
the proceeds to the SPV, which acts as
trustee.
1 2 6 2. The SPV issues sukuk certificates to the
investors.
3. The SPV purchases the asset from a
MoF
QCB seller using investor proceeds.
3 (lessor)
4. The SPV leases the asset to the obligator.
5. The company (obligator) pays rental fees
4 5 to the SPV.
6. The SPV distributes the rental fees to the
MoF investors according to the sukuk
(lessee) payment schedule.
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Types of Sukuk: Ijara Sukuk
1. Investors subscribe to the sukuk and pay
Investors
the proceeds to the SPV, which acts as
trustee.
1 2 6 2. The SPV issues sukuk certificates to the
investors.
3. The SPV purchases the asset from a
Seller
SPV seller using investor proceeds.
3 (lessor)
4. The SPV leases the asset to the obligator.
5. The company (obligator) pays rental fees
4 5 to the SPV.
6. The SPV distributes the rental fees to the
Bank Negara investors according to the sukuk
Malaysia
(lessee)
payment schedule.
21
Types of Sukuk: Murabaha Sukuk

‒ Murabaha contract: an agreement between a buyer and seller for the

delivery of an asset; the price includes the cost of the asset plus an
agreed-upon profit margin for the seller.
‒ Murabaha sukuk: the SPV can use the investors’ capital to purchase an
asset and sell it to the obligator on a cost-plus-profit-margin basis. The
obligator (the buyer) makes deferred payments to the investors (the
sellers). This setup is a fixed-income type of sukuk, and the SPV facilitates
the transaction between the sukuk holders and the obligator.
‒ Murabaha sukuk are similar to debt certificates. Shariah does not allow
the sale of debt, and debt cannot be traded in the secondary sukuk
markets.
22
 Types of Sukuk: Murabaha Sukuk
Investors 1. The investors subscribe to the sukuk and
(sellers) pay the proceeds to the SPV, which acts
as their trustee.
1 2
2. The SPV issues sukuk certificates to the
6
investors.
3. The SPV purchases the asset from a
Asset or commodity
SPV
supplier.
supplier 3 4. The SPV sells the asset to the obligator
per the contract terms. The delivery takes
4 5 place on the spot.
5. The obligator pays the deferred payment
to the SPV in installments.
Obligator
(buyer) 6. The SPV distributes the deferred
payments to the sukuk holders. 23
 Types of Sukuk: Murabaha Sukuk
Investors 1. The investors subscribe to the sukuk and
(sellers) pay the proceeds to the SPV, which acts
as their trustee.
1 2 6
2. The SPV issues sukuk certificates to the
investors.
3. The SPV purchases the asset from a
Asset or commodity
SPV supplier.
supplier 3 4. The SPV sells the asset to the obligator
per the contract terms. The delivery takes
4 5 place on the spot.
5. The obligator pays the deferred payment
Bank Negara to the SPV in installments.
Malaysia 6. The SPV distributes the deferred
(buyer)
payments to the sukuk holders. 24
Types of Sukuk: Salam Sukuk

‒ Salam contract: an asset is delivered to a buyer on a future date in exchange

for full advance spot payment to the seller.
‒ Salam sukuk: the sukuk holders’ funds are used to purchase assets from an
obligator in the future. The SPV provides the money to the obligator.
This contract requires an agent (which may be a separate underwriter) who will
sell the future assets because the investors (sukuk holders) want money in
return for their investment — not the assets themselves. The proceeds from
the sale (typically the cost of the assets plus a profit) are returned to the sukuk
holders. Salam sukuk are used to support a company’s short-term liquidity
requirements.
‒ The sukuk certificates held by the investors are generally non-tradable as they
represent a debt (the debt being the future delivery of the Salam Assets).
25
Salam contract

26
 Types of Sukuk: Salam Sukuk
1. The investors subscribe to the sukuk and pay the proceeds to
Investors the SPV, which acts as their trustee.
2. The SPV issues sukuk certificates to the investors.
1 2 7
3. The proceeds from the sukuk sales are passed to the obligator
(the seller).
At this stage, the SPV appoints an agent to sell the asset in the
future for its cost plus a profit margin. This agent may be a
SPV separate underwriter, or it may be the obligator itself.
4. On or before the date established in the contract, the seller
delivers the asset to the underwriter or agent (if not the
3 6 seller).
5. The underwriter, agent, or seller-as-agent sells the asset to a
buyer for a profit.
Obligator Agent 6. The sales from the asset are transferred to the SPV.
Buyer
(Seller) (underwriter)
7. The SPV distributes the proceeds to the sukuk holders
4 5 (investors). 27
Types of Sukuk: Istisna Sukuk

‒ Istisna: a deferred manufacturing or construction contract between the

buyer and the contractor, whereby the client needs to construct,
manufacture or assemble a specified asset (property, equipment,
machinery, etc) through an agreed schedule of payment related to the
progress and performance of the contractor and date of completion.
‒ Istisna sukuk: sukuk holders are the buyers of the project, and the
obligator is the manufacturer. The obligator agrees to manufacture the
project in the future and deliver it to the buyer, who (based on a separate
ijara contract) will lease the asset to another party for regular payments.
‒ This quite complex sukuk product is not tradable in the secondary market

28
 Types of Sukuk: Istisna Sukuk
1. The investors subscribe to the sukuk
Investors and pay the proceeds to the SPV,
which acts as their trustee.
1 2
2. The SPV issues sukuk certificates to
the investors.
3. The proceeds from the sukuk issues
are transferred to the obligator (in
SPV the role of manufacturer or
contractor) in stages according to the
agreed-upon payment schedule.
3 4 5 4. After the full project is complete, the
title of the asset is transferred to the
SPV.
Obligator Obligator Obligator
(as contractor) (as lessee) (as buyer) 5. The SPV leases the asset to the
obligator. 29
 Types of Sukuk: Istisna Sukuk
6. The obligator (as lessee) makes
Investors
rental payments to the SPV.
7. The SPV distributes the rental
1 2 7 10 payments to investors at regular
intervals.
8. At the sukuk maturity date, the
SPV asset ownership transfers to the
obligator. In other words, the SPV
sells the project to the obligator.
3 4 5 6 8 9 9. The obligator (now in the role of
buyer) pays the SPV for the asset
ownership.
Obligator Obligator Obligator
(as contractor) (as lessee) (as buyer)
10. Sale proceeds are distributed
among the sukuk holders. 30
Types of Sukuk: Wakala Sukuk

‒ Wakala: In an agency arrangement (wakala), an investor appoints an

agent (wakeel) to invest funds on their behalf for a set period to
achieve an agreed-upon profit. The wakala agreement outlines the
agent's responsibilities, terms, and any applicable fees.
‒ Wakala sukuk: an Islamic financial instrument where the issuer (often
a business or government) raises funds by issuing sukuk (Islamic
bonds) based on a wakala structure. In this arrangement, the
investors (sukuk holders) act as the principals, while the issuer acts as
the wakeel (agent), managing the investment on their behalf.

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Wakala versus Mudaraba

Wakala vs. Mudaraba

– Mudaraba: Profits are shared between the investor and manager based on pre-
agreed ratios.
– Wakala: The investor receives a fixed, agreed-upon return.
– Any profit beyond the agreed return is retained by the wakeel as a performance or
incentive fee.
Shariah Compliance
– In a wakala arrangement, the fixed return agreed upon is not a guaranteed return
in the conventional sense (which would involve riba or interest, prohibited in
Islam). Instead, it is an expected return based on the wakeel's promise to do its
best to achieve the agreed profit target.
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 Types of Sukuk: Wakala Sukuk
Investors 1. The investors subscribe to the sukuk and pay
(rabb-al-mal) proceeds to the SPV, which acts as their trustee.
2. The SPV issues sukuk certificates to the investors.
1 2 5 3. The obligator (the agent) receives the proceeds
from the sukuk holders (principals/investors).
SPV 4. The periodic distribution amounts will either be a
(Principal) fixed or variable amount calculated in accordance
with a fixed formula (e.g., based upon LIBOR). Any
amount in excess will be held by the agent (wakeel).
3 4
5. The SPV receives the profits from the obligator and
holds them. These profits are distributed among the
Obligator sukuk holders on a periodic basis (again, per the
(Agent) contract).
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 Example of wakala for overnight liquidity
Parties Involved:
– Bank A: The bank in need of overnight liquidity.
– Bank B: The bank with excess liquidity to provide.
Steps of the Transaction:
– Agreement: Bank A and Bank B agree on the terms of the Wakala contract, specifying that Bank B
will manage and invest Bank A's funds overnight.
– Funds Transfer: At the end of the banking day, Bank B instructs Bank A to provide a specific
amount (e.g., $10 million) for overnight liquidity. Bank A transfers $10 million to Bank B's account.
– Profit Sharing: The agreement states that Bank B will either charge a pre-agreed fee or share the
profits from investments made with Bank A's funds. For instance, if Bank B earns $50,000 in
profit, it retains $10,000 as a fee and returns $40,000 to Bank A.
– Repayment: At the end of the overnight period, Bank B returns the principal amount ($10 million)
along with the profit to Bank A.

34
Sukuk issuances by structure

35
 Sukuk Issuances (2010-2020)
60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
1 2 3 4 5 6

Series1 Series2

36
International Islamic Financial Market: IIFM Sukuk Report
 Importance of Shariah scholars
‒ When a prominent Shariah scholar (Sheik Muhammed Taqi Usmani) declared
in late 2007 that as much as 85% of sukuk structures are in violation with the
risk sharing principle of the Islamic law, sukuk issuance suffered a 40% decline
during the first half of 2008 compared to a year before

Muhammed Taqi Usmani, Chairman,

International Shariah Standard Council,
Accounting and Auditing Organization
https://www.arabianbusiness.com/most-sukuk-not-islamic-body-claims-197156.html for Islamic Financial Institutions

37
Malaysia

Asset-backed versus asset-based sukuk

– Development of Islamic Bond Market: Malaysia successfully established a

domestic Islamic bond market, aiming to expand to the international stage.
– Historic issuance in 2002: Issued the first global Islamic sukuk (Sukuk al-Ijarah)
compliant with U.S. Regulation
– Key milestones:
• First sukuk listed on the Luxembourg Stock Exchange.
• Rated by Standard & Poor’s and Moody’s.
• Offered USD 600 million to global Islamic and conventional investors, including U.S.
Qualified Institutional Buyers.
– Market success:
• The issue was highly successful and oversubscribed twice, marking a significant
development in integrating sukuk with conventional bond practices.
38
Malaysia

Asset-backed versus Asset-based sukuk

Legal and structural challenges

– Asset-Backed Structure Issues:
• Sukuk was backed by USD 600 million in sovereign assets (e.g., government
buildings, hospitals).
• Existing international bonds had a negative pledge clause:
– Restricted issuing new bonds not in parity with existing unsecured bonds.
– Proposed sukuk structure was seen as a breach of this clause, risking its classification as a
secured bond.
– Impact of Negative Pledge:
• The Federation of Malaysia was advised against proceeding with the sukuk until
all outstanding international bonds were redeemed.
• The issuance of sukuk was almost halted due to these legal constraints.
39
Malaysia

Asset-backed versus Asset-based sukuk

Shariah compliance solution

– Collaboration with Shariah scholars:
• Prominent Shariah scholars assisted in developing a revised sukuk structure to avoid breaching the
negative pledge.
– Revised structure features:
• Sukuk holders would have beneficial ownership of the underlying assets through the sukuk trustee,
ensuring compliance with Shariah asset ownership principles.
• In case of default, the sukuk trustee’s recourse was limited to disposing of assets only to the
Federation of Malaysia.
– Legal Implications:
• Sukuk holders would be treated as unsecured creditors once assets were disposed of, despite
underlying assets.
• The structure was classified as “asset-based” securities instead of asset-backed, reflecting Shariah
compatibility while limiting asset disposal.
40
 Asset-backed versus Asset-based sukuk
Feature Asset-Backed Sukuk Asset-Based Sukuk
Sukuk holders have legal ownership through The originator retains legal ownership of the
Legal Ownership the SPV, sharing in both profits and losses asset while the SPV oversees its management
tied to the asset’s performance. and cash flows.
Sukuk holders share in the economic
The originator retains the majority of economic
Economic Ownership ownership, participating in profits and losses
benefits and risks associated with the asset.
based on the asset’s performance.
The asset remains on the originator’s balance
The asset is fully transferred to the SPV and
Balance Sheet Treatment sheet, allowing continued control and
removed from the originator’s balance sheet.
management.
Returns are directly linked to the asset’s Returns are based on the cash flows generated
Income Distribution performance, rewarding Sukuk holders based by the originator, managed and distributed by
on how well it performs. the SPV.
Sukuk holders can seek recourse from both Sukuk holders can seek recourse only from the
Recourse the SPV and the asset itself, providing greater originator, limiting their options in the event of
security in case of default. default.

41
Part B: Takaful

42
 Issues with conventional insurance
Gharar (Uncertainty) Maysir (Gambling) Riba (Interest)

Conventional insurance
It is not acceptable in In insurance companies
is regarded as a form of
contract arrangements this relates mainly to the
gambling as the insured
to make payments investment side (e.g.
makes a bet on loss
conditional upon the investments in fixed
occurrence and the
outcome of an uncertain interest rate assets like
same applies in reverse
event. deposits or bonds)
to the insurer.

43
What is Takaful?

‒ The word “Takaful” is derived from the Arabic word “kafalah,” which
means “guaranteeing each other” or a “joint guarantee” and is based on
the concept of social solidarity, cooperation, and mutual indemnification
of losses.
‒ Takaful operates on the Islamic principles of
• Taawun (brotherhood or mutual assistance)
• Tabarru (donation, gift or contribution)
‒ Each participating member contributes resources (premium payments)
to support the needy participants within the group.
‒ Earning profit is not the sole objective of the Takaful operator or
participants (who share in any surplus).
44
Takaful Business Model: Mudaraba Takaful

‒ Under the concept of mudaraba (profit sharing), the Takaful

participants (rabbal-mal) provide funds to the Takaful operator
(mudarib), who manages the funds and generates profits through
Shariah-compliant investments.
‒ The parties to the Takaful transaction enter into cooperative risk-
sharing and profit-sharing agreements.
‒ The Takaful operator shares in the profits earned from investments
but not in the losses; the participants bear the sole burden of losses.

45
 Mudaraba Takaful

PARTICIPANT SURPLUS
(rabb-al-mal)
LOSS

INVESTMENT FUND Investment +

Contribution (Investment in Profit –
Shariah-compliant Operation
1-x% business) expenses

TAKAFUL OPERATOR RISK FUND

(mudarib) (dedicated to the Donation –
x% compensation of Claims –
The Takaful participant agrees to relinquish as tabarru a Takaful participants Operation
certain percentage (x%) of the total Takaful contribution. who experience losses expenses
The investment fund contribution is the amount remaining or damages)
(1-x%) after the total Takaful contribution
Mudaraba Takaful - Example

‒ Mr. A’s motor Takaful contribution for a given year is $500

‒ Agreement states that the surplus-sharing ratio between participants and the
Takaful operator is 40:60.
‒ In this particular year, imagine that policyholders contributed a total of
$500,000 to the fund and made only $350,000 worth of claims. That leaves a
surplus of $150,000.
‒ The surplus-sharing ratio for participants is calculated by first dividing 150,000
(the surplus) by 500,000 (the total contributions in the fund) to get 30 percent:
150,000 ÷ 500,000 = 30 percent
This number indicates that the surplus represents 30 percent of the total
contributions.
47
Mudaraba Takaful - Example

‒ The participants receive 40 percent of the surplus amount (based on the

agreed 40:60 ratio). Therefore, for an individual participant to calculate
how much to expect back, he multiplies his 40-percent cut by the 30-
percent surplus:
40 percent × 30 percent = 12 percent
‒ Mr. A’s share of the surplus equals 12 percent of his total contributions, a
total of $60:
$500 × 12 percent = $60

48
Takaful business model: Wakalah Takaful

‒ In the wakalah model (the word “wakalah” is Arabic for “delegation”

or “representation”), a contract provides that the Takaful operator
will manage the Takaful fund on behalf of the participants (muwakil)
and will be compensated by a fee called a wakalah fee.
‒ The operator is appointed as an agent (wakil), and a fee (ujr) is paid
for this agent’s expertise.

49
 Wakalah Takaful
PARTICIPANT SURPLUS
(rabb-al-mal)
(muwakil) LOSS

Contribution INVESTMENT FUND Investment +

(including fee) (Investment in Profit –
Shariah-compliant Operation
business) expenses

TAKAFUL OPERATOR RISK FUND

(wakil) (dedicated to the Donation –
compensation of Claims –
Takaful participants Operation
who experience losses expenses
or damages)
 Takaful types
Family Takaful plans General Takaful plans

Individual Takaful plan Contracts that provide compensation in

(resembles life insurance) the event of a defined loss.
It acts as a contingency saving, if the Short term in nature (normally one
participant survives, or to be set aside year), cover individuals or commercial
for peril from ill luck, tragedy or entities, and insure real and personal
becoming permanently disabled. property. The types of general Takaful
schemes offered include fire Takaful,
motor (automobile) Takaful.

51
52
 Current landscape

53
Islamic Finance Development Report 2021: Advancing Economies
ReTakaful

‒ Risk hedging method in which the Takaful operator resorts to a ReTakaful

operator to reinsure original insured risks against an undesirable future
situation if the risk insured were above the normal underwriting.
‒ Takaful operator may, based on limited financial resources, hedge against
possible incapability to meet all Takaful insurance protection from a
financially capable reinsurer.
‒ ReTakaful has two motives.
• The inability of direct insurance companies to insure property whose financial value
is very high such as huge airplanes, large factories, luxurious buildings, very big stores
and so on.
• Increase the capacity of direct insurance companies in the area of accepting risks in
order to increase their gains.
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ReTakaful

In theory

TAKAFUL OPERATOR RETAKAFUL

PARTICIPANTS (mudarib) OPERATOR
(rabb-al-mal) (rabb-al-mal) (mudarib)

Participants pay an agreed-upon premium to the Takaful operator to protect them

from unforeseen risk and also extraordinary losses.
The Takaful operator will take a portion of money from the Takaful fund and pay a
premium to the ReTakaful operator to get reinsurance protection to spread its risks.

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ReTakaful

In practice

TAKAFUL OPERATOR CONVENTIONAL

PARTICIPANTS (mudarib) REINSURANCE
(rabb-al-mal) (rabb-al-mal) COMPANY

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Challenges for the Takaful industry

‒ Young industry, corporate governance policies for Takaful operators

are still developing.
‒ Not many ratings agencies that rates Takaful companies regarding
their Shariah compliance
‒ Consumer awareness is still too low about the industry.
‒ More Takaful products are needed to be competitive with
conventional products.
‒ Shortage of skilled Takaful staff.

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