The Mudaraba Model: The Takaful Operating Model

C. Takaful Operating Models

• The Mudaraba Model

The mudaraba is a kind of partnership in which one party that affords supplies funds while the other offers its expertise and management. It is based on classic profit sharing principles, for example a partnership in which two parties involved, one is fund provider which is called the participant, while the other person or party is called the operator who provides expertise and management of the fund. Both share the profits of the joint venture with a pre-defined ratio stated by Akhtar, 2010; Bhatty, 2007; Hussain, 2010; Nadeem, 2010 and Wahab (2006a).
Figure 1 displays this model. A separate fund is created with the name of General Takaful Fund for the purpose of investment. Similar to the
The net contribution after deduction of the operator fee is put into Participants’ Risk Account (PRA) which is used to pay the claims, re-takaful and reserves adjustments purpose (Ayub, 2003). The capital or initial investment is provided by the participants. During the contract period, if the company faces a deficit due to adverse claims experience, the operator is usually obliged to make up for the deficit and provide so called Qard Hasnah or interest free loan which will be repaid , out of arising future surplus. A lot of skills are required to successfully manage a wakala operation. The participants are responsible to meet all management related expenses from their share and any remaining amount to be the participant’s profit. Under Mudaraba profit is distributed between both parties. But under Wakala, operators provide its services as an agent on fixed fee or ratio base, so the total profit is distributed among the participants according to their contribution after paying all claims. Generally, a portion of the surplus may be retained as a contingency reserve and the balance may be distributed to participants in proportion to their contributions. The participant is responsible for all management and marketing costs. If company faces a deficit, the operator is usually obliged to make up for the deficit and provide extra funds named
If there are no legal issues, the waqf entity is required to be registered. The purpose of the waqf fund is to provide relief to participants against losses (Wahab, 2006). In the wakala contract, the tabarru or hibah is not complete as it is conditional on being used to pay claims and there is an element of surplus which may return to the participants. From a Shariah perspective proportionate ownership of the funds not utilized for claim settlement remains to the participants (Billah, 1997). The shareholders initially make a donation to establish the Waqf fund. The donation can be any reasonable amount which is specified by the shariah scholars. After creation of the Waqf fund, the shareholders lose their ownership rights on the Waqf fund. However, they have the right to administer and develop rules and regulations of the fund. The original donation of the Waqf fund is invested in a very safe shariah compliant investment and its return is used for the benefit of the participants. Furthermore, different line of Takaful services, more than one Waqf fund can be formed with the shareholders money (Mughal 2008).The operational cost of business is met through the fund which is collected from participant. The fund is used for claims settlement and as well as for investment purpose. The profit earned on investment is again deposited to the investment fund. The company utilizes