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Takaful and Islamic Cooperative Finance

Takaful and Islamic Cooperative Finance

Challenges and Opportunities

Studies in Islamic Finance, Accounting and Governance series

Edited by S. Nazim Ali and Shariq Nisar

Islamic finance distinguishes itself from conventional finance with its strong emphasis on the moral consequences of financial transactions; prohibiting interest, excessive uncertainty, and finance of harmful business. When it comes to risk mitigation, it is unique in its risk sharing approach.

Chapter 9: The nature of retakaful: risk sharing or transferring risks?

Abu Umar Faruq Ahmad, Ismail Bin Mahbob and Muhammad Ayub

Subjects: economics and finance, islamic economics and finance, law - academic, finance and banking law, islam and the law


Takaful has emerged in the global Islamic finance industry from the fundamental Islamic principles of ‘brotherhood’, ‘cohesion’ and ‘mutual assistance’, utilizing the virtuous contract of ‘donation’. Given that risks are inevitable both at individual and institutional levels, retakaful has been innovated as an Islamic alternative to conventional reinsurance so as to allow takaful operators (TOs) to reduce or mitigate the financial impact to their respective takaful funds (TFs) arising from the occurrence of such risks. Unlike conventional reinsurance where risks are transferred from the original insured to the insurance company and then from the insurance company to the reinsurer the concept of retakaful, like takaful, is based on risk sharing. Retakaful operators (RTOs) manage the TFs on behalf of their respective participants. The mechanism of retakaful would benefit TOs in the form of (1) risk spreading; (2) capacity boosting; (3) financial stability; and (4) protection against catastrophic losses. The research in the chapter examines the shari’ah issues related to retakaful as to whether risks are genuinely shared by the participating TOs/retakaful funds (RTFs) or transferred to RTOs, and whether participants should be responsible to provide additional fund to cover deficits in the RTFs that are managed by the RTOs. It suggests that in light of the very nature of the cooperative agreement and the small number of cedants vis-à-vis the number of participants in takaful, the cedants may be required in the contract to provide additional contributions in case the RTFs fall short of the claims lodged, or would accept pro-rata reduction in the bills to be paid during a period.

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