Risk Shari’ah prohibits the use of certain
Risk management can be defined as asystematic approach to managing risks that threaten the assets and income of abusiness or entrepreneurship.
There are five types of risks in business have beenidentified that are relevant to takafulas follows:1. Underwriting risk2. Operational risks3. Credit risk4. Liquidity risk5. Market risk Underwriting risk andoperational risk are directly related to the operations of the takaful company.Whereas, credit risk, liquidity risk and market risk are associated with thecompany’s investment activities.
All types of risk in takaful require specificrisk management strategies and need to be managed individually. The effectivelymanage the risks in takaful include the following steps:1. Identifyingrisks2. Managingrisks3. Enhancingrisks management culture in takaful industry The threecurrent practical challenges in risk management which is confronting takafuloperators as follows: 1.
Shari’ahBased ChallengesPractically, most of the risk management techniquesare not applicable to Islamic financial institutions due to Shariah compliancerequirements. Therefore, Shari’ah-based challenge to risk management wascreated for takaful companies. These challenges arise because Shari’ahprohibits the use of certain instruments such as derivatives involving futures,options, swaps; and debt sales, but these instruments are considered beneficialin conventional risk management. 2.
Internal ControlsInternal controls areimportant to recognize and assess the risks faced by financial institutionsincluding takaful companies. The existence of effective internal controls canprevent takaful companies from systemic crises and enable them to be aware ofthe possible problems and risks they may face in the future. To have aneffective internal control mechanism, the takaful company must ensure thatShariah controls are in addition to all statutory regulations. It urges Syariahaudit requirements as part of an on-going system of internal control.
3. Corporate GovernanceThe structure of corporategovernance determines the distribution of rights and responsibilities of the boardof director (BOD), managers, shareholders and other stakeholders. While effectivecorporate governance will ensure the independence BOD which will developspolicies and implements strategies for risk management.
The lack of effectivecorporate governance framework prevent the independence of the BOD and therebyposes a challenge to risk management. It continues to increase operating riskswhich may lead to operational failures due to BOD’s inability to implementunbiased and independent decisions for the best interests of all stakeholders.Takaful companies are faced with additional challenges related to the ShariahSupervisory Board’s corporate governance where it requires more need toincorporate corporate governance culture to address issues related to theTakaful industry.