UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Takaful Management Models

Wakalah Contract

The participants appoint the Takaful Operator as ‘Agent’ (Wakalah) to manage the administrative and investment activities of the Takaful for as secured agency fee. Legally Wakalah refers to a contract where a person authorizes another person to do a certain well-defined legal action on his or her behalf.   In this management model, the Takaful Operator usually fixes the agency fees upfront and the fees are deducted from each partner contribution to the Takaful in advance.  The agency fee is used to cover the costs of managing the Takaful as well as the Takaful investments.  The Takaful Operator also uses this fee to cover their operating expenses.  In some Takaful, their Sharia’h boards have allowed for the company to share in the surplus as an incentive fee for the Takaful operator under the principle of ‘hafiz’ (over and above the agency fee).  Therefore, under the Wakalah model, the Takaful operator may get upfront agency fees as well as an incentive fee based on the performance of underwriting surplus.  (AMANIE and IIU – International Islamic University, Malaysia)

Mudarabah Contract

Under the Mudarabah Model, the participants appoint the Takaful Operator as the mudarib or manager whereby both the participants and the manager share in the profit.  (Mudarabah essentially means profit-sharing)  Remember Mudarabah is a contract with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. Compared to Musharakah, in a Mudarabah only the lender of the money has to take losses. The Takaful Operator uses the profits it makes to cover its operating expenses rather than charging an agency fee or collecting incentive fees such as in the Wakalah management model.  The risk falls with the Takaful Operator in the event of loss of or lower profit.  This model is about investment return.  (Amanie and Wikipedia)

Hybrid Wakalah and Mudarabah Contract

This model adopts a fee-based as well as a profit- sharing based with regards to the two different accounts contributed by the participants.  For example, the Takaful Operator may charge a fee for managing the Takaful based on Wakalah such as 15% of the total Takaful contribution.  However, at the same time, the Takaful Operator will also share in the profit with the participants based on the Mudarabah model.  Therefore, in this hybrid model, the Takaful Operator receives a secured income in the form of agency fees as well as investment income from the investment activities of the Takaful Operator itself.  (AMANIE)

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