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.Whereas, credit risk, liquidity risk and market risk are associated with thecompany’s investment activities. All types of risk in takaful require specificrisk management strategies and need to be managed individually. The effectivelymanage the risks in takaful include 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’ah BasedChallenges Practically, most of the risk management techniquesare not applicable to Islamic financial institutions due to Shariah compliancerequirements. Therefore, Shari’ah-based challenge to risk management wascreated for takaful companies. These challenges arise because Shari’ahprohibits the use of certain instruments such as derivatives involving futures,options, swaps; and debt sales.
But these mentioned instruments are beneficialin conventional risk management. 2. Internal ControlsInternal controls areimportant to recognize and assess the risks faced by takaful companies. Effectiveinternal control plays a crucial role in risk management of takaful companies whichcan evade takaful companies from systemic crises and enable companies to beaware of the possible problems and risks they may face in the future.
To havean effective internal control mechanism, the takaful company must ensure thatShariah controls are in addition to all statutory regulations. It urges Syariahaudit requirements as part of an on-going system of internal control. 3. Corporate GovernanceIt is crucial for takafulcompany to have an effective corporate governance to ensure the independenceand efficiency of board of director and management level who take theresponsibility to develop policies and implement strategies for risk managment.The lack of effective corporate governance may caused BOD not functioningindependently and thereby poses a challenge to risk management. If theineffective corporate governance phenomenon persist, it will increase theoperating risks which may lead to operational failure.
This operational failureis due to the inability of BOD to implement independent and unbiased decisionsfor the best interests of all stakeholders. As a shari’ah compliance insurancecompany, takaful companies are facing with additional challenge related to theShari’ah Supervidory Board’s corporate governance. This additional challenge highlightmore need to incorporate corparate governance culture to resolve issues relatedto the takaful industry.