Degree

Master of Science in Islamic Banking & Finance

Department

Department of Finance

Faculty/ School

School of Business Studies (SBS)

Date of Submission

Spring 2025

Supervisor

Dr. Irum Saba, Associate Professor & Program Director MS-IBF, Institute of Business Administration, Karachi

Keywords

Takaful accounting, Wakala-Waqf Model, Takaful Models, Wakala Fee Treatment, AAOIFI Standard on Takaful, AAOIFI Accounting Standard on Takaful

Abstract

Conventional insurance is considered to be Shariah non-compliant because it contains elements of gharar (uncertainty), maysir (gambling) and riba (usury) in the sense that an insurer indemnifies a policyholder for an uncertain loss occurring due to an unforeseen event / happening against some consideration called “insurance premium”, the policyholder also transfers its unforeseen risk completely to the insurer by making the insurance premium payment to the insurer, the insurer, on the other hand, pays excess amount (riba) to the policyholder in case of occurrence of a covered asset / risk suffers loss, and the surplus amount generated as a result of insurance underwriting is then invested in interest bearing investments (including conventional bank accounts). Hence, due to presence of these forbidden elements, the conventional insurance is considered and declared as haram (forbidden) as per Islamic Shariah. However, Islamic insurance (takaful) provides an alternative to conventional insurance, as former is based on the principle of sharing, care and mutual assistance (towards the other participants).

There are various takaful models across the globe (presented 10 different models in this paper), in which the takaful operators takes on different roles towards the participants / participants’ fund. More specifically, in Wakala Waqf Model that is prevalent in Pakistan, the takaful operator act as agent (Wakeel) of the policyholders (participants) in respect of the Participants’ Takaful Fund (PTF), and Mudarib of the Participants’ Investment Fund (PIF), which is the fund created for and owned by the participants for making investments and generating profits thereon. As Wakeel, the takaful operator charges Wakala Fee; however, in addition to the Wakala Fee, the takaful operator takes the share as Mudarib from the investment performance generated in the PIF.

The PTF maintained by a takaful operator in Pakistan, if it generates surplus, the same is shared, owned or distributed to its participants, however, in case there is a deficit in the PTF, the takaful operator makes Qard-e-Hasan (interest-free loan) to the PTF so as to make it a workable model and also to keep the PTF solvent, given the regulatory requirement laid down by the Regulator. So, on one hand, the takaful operator charges a hefty Wakala Fee that varies from operator to operator and from fund to fund on accrual basis, in line with the contributions received or receivable, and when the fund (PTF) runs into losses / deficit, Qard-e-Hasan is made to PTF. Moreover, upon perusal of the Takaful Rules, 2012, and Waqf Deeds and PTF Policies of the takaful operators, it transpired that this PTF is liable to pay off Qard-e-Hasan first upon PTF’s dissolution or as soon as surplus or liquidity is there in the PTF, and thereafter, the remaining balance may be distributed among the participants in the proportion of their respective contributions or in such a manner as may be determined with the approval of the Shariah advisor(s). This practice poses serious question about how the participants’ money / fund is being ripped off to the benefit of the takaful operator / Wakeel in the sense that takaful operators first charge their income in the shape of Wakala Fee (through amortization of the deferred Wakala income) and then in case the PTF runs into losses / deficit, Qard-e-Hasan comes into play to keep the fund apparently workable – PTF becomes liable to pay off Qard-e-Hasan on top priority as soon as it generates surplus or adequate liquidity. In any case, it becomes a win-win situation for the operator, as its income becomes guaranteed.

This study aims to answer the very question that “how the takaful operators in Pakistan charge and treat Wakala Fee at the cost of incurring losses to the Participants’ Takaful Fund (PTF)?”

Document Type

Restricted Access

Submission Type

Research Project

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