Risk management can be defined as asystematic approach to managing risks that threaten the assets and income of abusiness or entrepreneurship. There are five types of risks in business have beenidentified that are relevant to takafulas follows:1. Underwriting risk2.
Operational risks3. Credit risk4. Liquidity risk5.
Market risk Underwriting risk andoperational risk are directly related to the operations of the takaful company.The remaining three risks are associated with the company’s investmentactivities. All types of risk in takaful require specific risk managementstrategies and need to be managed individually. The effectivelymanage the risks in takaful involves the following steps:1. Identifyingrisks2.
Managingrisks3. Enhancingrisks management culture in takaful industry The threecurrent practical challenges in risk management which is confronting takafuloperators as follows:1. Shari’ahBased Challenges Most of the risk managementtechniques do not apply to Islamic financial institutions due to Shari’ahcompliance requirements. It creates a Shari’ah-based challenge to riskmanagement for Takaful companies. These challenges emerge because Shari’ahprohibits the use of certain instruments, but that instrument considered usefulin conventional risk management. For instance: derivatives (which involve futures,options, swaps) and sales of debts.
2. Internal ControlsInternal controls are vital torecognize and assess the risks faced by financial institutions includingTakaful companies. The existence of effective internal control has preventedfinancial institutions from systemic crisis and enabled them to get earlydetection of the problems and risks they might face in the future. Thisexperience emphasize the important and need of internal control for Takafulcompanies.
To have an effective internal control mechanism, the Takaful companymust ensure that Shari’ah controls are in addition to all statutoryregulations. It urges the need for a Syariah audit as part of an ongoinginternal control system. 3. Corporate GovernanceThe structure of corporategovernance determines the distribution of rights and responsibilities of theBoard, managers, shareholders and other stakeholders, but effective corporategovernance ensures the independence of board of director(BOD) who subsequentlydevise policies and executes strategies for risk management and hold managementaccountable to shareholders. The lack of effective corporate governanceframework impedes the independence of the BOD and thereby poses a challenge torisk management. It further increases the operational risk which may lead tooperational failures due to BOD’s inability to implement unbiased andindependent decisions for the best interests of all stakeholders.
Takafulcompanies are confronted with additional challenges related to the Shari’ahSupervisory Board corporate governance. It requires more need to incorporatecorporate governance culture to address the issues related to the Takafulindustry.