Risk management can
be defined as a systematic approach to managing risks that threaten the assets
and income of a business or entrepreneurship. There are five types of risks in business have been
identified that are relevant to takaful
as follows:

1.    
Underwriting risk

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2.    
Operational risks

3.    
Credit risk

4.    
Liquidity risk

5.    
Market risk

 

Underwriting risk and
operational risk are directly related to the operations of the takaful company.
Whereas, credit risk, liquidity risk and market risk are associated with the
company’s investment activities. All types of risk in takaful require specific
risk management strategies and need to be managed individually.

 

The effectively manage the risks in
takaful include the following steps:

1.    
Identifying
risks

2.    
Managing
risks

3.    
Enhancing
risks management culture in takaful industry

 

The three current practical challenges
in risk management which is confronting takaful operators as follows:

 

1.              
Shari’ah Based Challenges

 

Practically, most of the risk management techniques
are not applicable to Islamic financial institutions due to Shariah compliance
requirements. Therefore, Shari’ah-based challenge to risk management was
created for takaful companies. These challenges arise because Shari’ah
prohibits the use of certain instruments such as derivatives involving futures,
options, swaps; and debt sales. But these mentioned instruments are beneficial
in conventional risk management.

 

2.              
Internal Controls

Internal controls are
important to recognize and assess the risks faced by takaful companies. Effective
internal control plays a crucial role in risk management of takaful companies
which can evade takaful companies from systemic crises and enable companies to
be aware of the possible problems and risks they may face in the future. To
have an effective internal control mechanism, the takaful company must ensure
that Shariah controls are in addition to all statutory regulations. It urges
Syariah audit requirements as part of an on-going system of internal control.

 

 

3. Corporate Governance

It is crucial for takaful
company to have an effective corporate governance to ensure the independence
and efficiency of board of director and management level who take the
responsibility to develop policies and implement strategies for risk managment.
The lack of effective corporate governance may caused BOD not functioning
independently and thereby poses a challenge to risk management. If the
ineffective corporate governance phenomenon persist, it will increase the
operating risks which may lead to operational failure. This operational failure
is due to the inability of BOD to implement independent and unbiased decisions
for the best interests of all stakeholders. As a shari’ah compliance insurance
company, takaful companies are facing with additional challenge related to the
Shari’ah Supervidory Board’s corporate governance. This additional challenge
highlight more need to incorporate corparate governance culture to resolve
issues related to the takaful industry.

 

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