Takaful Models: Mudharabah & Wakalah
There are 3 models and several variations on how takaful can be implemented.
- Mudharabah (profit sharing) Model
- Wakalah (agency) Model
- Combination of both
The takaful operator is the administrator of the fund and manages the fund in trust on behalf of the participants, and the contract between participants and the operator is governed under the contract of Mudharabah or Wakalah.
Mudharabah gives the right to the contracting parties to share profit, while liability for loses is borne by the participants; and under the Wakalah model, the takaful operators earn a fee for services rendered while liability for losses is borne by participants. The fee may be varied based on the performance of the takaful operator. It can be a fixed amount or based based on an agreed ratio of investments profit or surplus of the takaful funds.
The wakalah concept is essentially an agent-principal relationship, where the takaful operator acts as an agent on behalf of the participants and earns a fee for services rendered. The fee can be a fixed amount or based on an agreed ratio of investment profit or surplus of the takaful funds.
Under the mudharabah contract, the takaful operator acts as a mudharib (entrepreneur) and the participants as rabbul mal (capital providers). The contract specifies how the surplus from the takaful operations is to be shared between the takaful operator and the participants. Losses are borne by the participants as the capital providers. However, to protect the interest of the participants, the takaful operator is required to observe prudential rules including provision of financing rate-free loans by the operator to the takaful risk funds in the event that there is a deficiency in the takaful risk funds.