Mr.

Fakhir Musharraf Credit Risk Management in Takaful Environment

Risk Financial
Techniques
FRM 404
CREDIT RISK
MANAGEMENT IN
TAKAFUL
ENVITRONMENT

Final Report
Submitted to:
Mr. Fakhir Musharraf
May 9, 2022
GROUP # D

Najia Batool (20201-27378)

Hira Naz (20212-29384)

Abdul Waseh (20212-29379)

Soha Navaid ((20212-29387)

Haseeb Ali Khan (20201-28210)

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Mr. Fakhir Musharraf Credit Risk Management in Takaful Environment

Content

s
Letter of acknowledgement --------------------------------------------------3

Executive Summary-----------------------------------------------------------5

Credit Risk Management in Takaful Environment------------------------6

Introduction----------------------------------------------------------------------6

Fiqh Scholars--------------------------------------------------------------------7

1. General Policy-------------------------------------------------------------------8

2. Overview of the Risk Management Framework----------------------------9

Policies and Procedures Governing Body--------------------------------------10

3. Risk Strategy a risk company strategy --------------------------------------11

Principles---------------------------------------------------------------------------11

Risk Management Process--------------------------------------------------------12

Takaful Risk Management Principles: Policies and Procedures-------------12

Association of Insurance Supervisors------------------------------------------13

Takaful Risk Management Principles: Policies and Procedures-------------13

Takaful Risk Management Principles------------------------------------------14

Conclusion --------------------------------------------------------------------------15

References -----------------------------------------------------------------------15

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Mr. Fakhir Musharraf Credit Risk Management in Takaful Environment

Letter of acknowledgement
First of all, we are grateful to Almighty Allah, the most Beneficent and the most Merciful, for his

Divine guidance which has enable us to finish our project. It was His guidance, that after all the

obstacle we were able to complete this report.

After that, we would like to offer our gratitude to our Risk Financing Techniques course
instructor and supervisor of this project, Sir Fakhir Musharraf for the valuable guidance and
support through the project.

As our teacher and mentor, he has taught us more than we could ever give him credit for. Also,

would like to thank our parents, whose love and guidance are with us in whatever plan and

project we pursue. They are the ultimate role models.

We are glad to submit this report and happy to express to our deepest gratitude to all people with

whom we have had the pleasure to work during this project.

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Mr. Fakhir Musharraf Credit Risk Management in Takaful Environment

May 9, 2022

To: College of Business Management (IoBM)

From: Course Members

Subject: Risk Financing Techniques report on Role of Financial Risk Management in Hedge
Fund and Mutual Fund Industry

Following is the report on “Credit Risk Management in Takaful Environment” as per the

requirement of our course, Risk Financing Techniques, at Institute of business Management.

The report includes details on various areas including performance, profile, overview, and

Role of Financial Risk Management in Hedge Fund and Mutual Fund.

We thank our Sir, Fakhir Musharraf for giving us the opportunity to participate in this
worthwhile

study of one of the core Risk Management areas. We hope that the report fulfils all the

desired requirements and meets your satisfaction.

Regards,

Najia Batool

Hira Naz

Soha Navaid

Abdul Waseh

Haseeb Ali Khan

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Mr. Fakhir Musharraf Credit Risk Management in Takaful Environment

Executive Summary

This Report has been prepared to crucially examine, understand and analyze the Role of Credit
Risk Management in Takaful environment. In the financial world, Islamic finance consists of
Islamic banking, Islamic insurance and Islamic capital market. Being one of the major elements, takaful
(Islamic insurance) does have a significant role in the industry. The concept of takaful is where a group of
people participate in a scheme that enables them to share the burden of any misfortunes faced by any of
the participants/policyholders, and where appropriate, compensation are paid using the funds contributed
by the participants.

The report cover that due to the rapid growth in Islamic finance, there is a need for a unique risk
framework for Islamic institutions, particularly for takaful operators. Risk profile for Islamic finance can
be categorized into generic risks and unique risks. Islamic finance with its unique characteristics give rise
to a set of risk management challenges.

Therefore, this risk looks at the risk’ of takaful company. It also identifies the management of such risk
by the takaful operator. The compliance of Shari’ah should have directs relationship with the management
of risks since the unique risk for Islamic institution lies in the shari’ah supervision risk.

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Mr. Fakhir Musharraf Credit Risk Management in Takaful Environment

CREDIT RISK MANAGEMENT IN TAKAFUL

ENVITRONMENT

Introduction:
Takaful (Arabic: sometimes translated as "unity" or assurance of co-operation) is a co-operative
system of restitution or loss, which is organized as an Islamic or sharia law in conventional
insurance, which contains interest (usury) and gharar (extreme uncertainty).

Under takaful, individuals and companies involved in accidents make regular donations
("donations") to be returned or reimbursed to members in the event of a loss, and are carried on
their behalf by the takaful operator. Like other Islamic financial products, Takaful is based on
Islamic Muamalat (commercial and public acts or Islamic law branch).

By 2018, the takaful industry had grown to a size of "donations" of $ 27.7 billion (from the 2011
figure of $ 12 billion). The organization has been praised for providing “better alternatives” to
insurance that “regenerates human capital, emphasizes personal dignity, self-sufficiency, and
economic development”; industry "" general insurance with Arabic words and contract language
".

In theory, takaful is considered a co-operative or co-operative insurance, in which members

donate a certain amount of money to a joint venture. The purpose of this program is not to profit,
but to support the principle of "bearing one another's burdens". The principles of takaful are as
follows:

• Policymakers work together for the benefit of all.

• The contributions of policyholders are considered to be contributions to the pool.

• Everyone in charge of the policy pays his or her subscription to help those in need.

• Losses are divided and liabilities are distributed through a community mobilization program.

• Uncertainty over registration and compensation.

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• It does not profit at the expense of others.

The Islamic scholar "has no differences of opinion" about "the need to manage, rescue and
reduce the general, business and health risks covered by the insurance business". However, the
general prohibition against illegal (haram) insurance is disputed.

Fiqh Scholars

In its second phase (December 1985), [8] the Fiqh Academy of the Islamic Cooperative Society
(also known as the International Islamic Fiqh Academy) ruled the common (but not) commercial
(forbidden) insurance haram. Its ninth resolution stated:

A commercial insurance contract, with a fixed insurance premium, as done by commercial

insurance companies, contains a large cost, which makes the contract a feature. As a result, it is
illegal.

Debate against common insurance

Islamic scholars began to forbid commercial insurance in the late nineteenth century C.E. Most
scholars and fundamentalists (i.e. majority) Muslim scholars believe that commercial insurance
is not allowed for Muslims because it contains.

• Al-Gharar (uncertainty)

• Al-Maisir (gambling)

• Interest (loan)

They have two main concerns about conventional insurance:

1. Uncertainty "when and when an insured event, and, if it occurs, what would be the
relationship of compensation to the insurance premium". (What if the owner of a collision
insurance has never had a car accident? Loses and the insurance company wins. In terms of life
insurance, everyone dies, but what if death occurs after the first life insurance payment is paid?

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They win and the insurance company loses.) This "makes business. This insurance is like
gambling, when the gambler does not know the end of the game ". Thus, uncertainty in the
conventional insurance business is "excessive and limited to prohibited gharar".

2. "Insurance companies invest the accrued interest on the basis of interest and pay part of the
proceeds to policyholders as bonuses." According to the 'orthodox meaning', this is usury.

According to Jamal Zarabozo, the majority of modern Muslims are scholars of the Islamic Fiqh
Council of the Organization of Islamic Cooperation, the Board of Scholars of Saudi Arabia, the
Fiqh Council of Mecca under the Muslim World League, Siddiq ad-Dharir, Wahbah al-Zuhayli,
Muhammad Mustafa as-Sinqithi , Salaah al-Saawi, Abdullah al-Muslih, Sulaiman Thunayaan,
Ali Abu al-Basl, Abdur Rawf al-Shaadhili, Faisal Maulawi, Mohammad Muslehuddin,
Afzalurman and many other respected scholars and jurists unanimously agreed that commercial
insurance was prohibited.

Takaful Risk Management Principles: Policies and Procedures

1. Risks of Risk Management and Responsibilities

2. Enterprise Wide Risk Management Framework
3. Takaful and Re-Takaful
4. Working Risks 5. Shari’a Risk Management
6. Credit Risk
7. Balance and Market Risk
8. Strategic Risk
9. Dangerous Risk
10. Retention Risk
11. Group Risk
12. Completion
13. Development Meetings

1. General Policy:
Statements a takaful company faces a variety of risks including:

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• Common risks that apply to any trade concern;

• The risk of failure in any of the financial markets in which it participates;
• Business risks of Takaful Company Takaful operations;
• Economic and political risks; and
• Financial risks and reputation associated with failure to comply with laws and regulations.

The most common risks operating in a takaful company are:

• Takaful and Re-Takaful Risk;
• Occupational hazards;
• Debt Risk;
• Occupational hazards;
• Balance Sheet and Market Risk;
• Risk Management;
• The dangers of Shari’a;
• Name Danger; and Strategic risks

The Takaful Company will manage and maintain a sound business risk management framework
and integrate these risks.

2. Overview of the Risk Management Framework:

The Risk Management Framework of the takaful company is as follows:

• Process, continuous and ubiquitous;

• Contact with employees at all levels of the drug company;
• Used in strategic planning;
• It applies to every takaful company, at every level and unit, and includes risk-checking business
portfolio;
• Designed to identify potential incidents, which, if they occur, affect the entity and control the
risk within its risk profile;

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• Ability to provide effective assurance to senior management and risk management principles in
Takaful:

Policies and Procedures Governing Body:

It aims to achieve goals in one or more different but interdependent categories. The senior
management and the Governing Body are responsible for developing a Risk Management
Framework, as they determine the level and types of risks a takaful company is comfortable
accepting and what controls and risk mitigation measures will be used to ensure that exposure
remains. Within the agreed levels. The Risk Management Framework of the Takaful Company
will have a full understanding of the needs of the takaful company stakeholders as its context,
and focus on maintaining the value building of shareholders. Risk management capabilities will
be focused on the operations and practices / activities of the company, takaful, competent and
performance monitoring. Business processes will be adequately supported by RM and
appropriate tools and strategies and always independently ensure that the framework achieves its
objectives in the most efficient and effective manner. The Governing Body will annually review
the performance of the entity with regard to current business performance and future prospects.
A comprehensive review of the Governing Body will critically evaluate the overall role of the
Risk Management Framework for the effective and efficient operation of the business and
ultimately improve the number of shareholders.

The following are the key elements of the takaful company's Risk Management Framework:

• Risk strategy aligned with the overall company strategy lost as a member of the Group;
• Administrative requirements;
• Risk management procedures;
• Skills and technical programs;
• Risk management activities integrated within each department / unit and RM; and • Culture and
ability throughout the takaful company.

3. Risk Strategy a risk company strategy consists of the following:

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1) A uniform risk management framework for every lost company is essential. a takaful
company must be able to deal with risk from the same perspective in order to manage its
business effectively. The Executive Authority and the Senior Management decide on the
interests of the entire business at risk.

2) The Audit Committee and the Head of Risk Management will ensure that Takaful Risk
Management.

Principles:

Policies and Procedures business-wide disaster risk management system is consistently applied.
Typically, this process will involve strategic planning, risk assessment, risk management,
monitoring and providing assurance in the operation.

3) A risk classification system will be established by the Audit Committee and the Head of Risk
Management to identify, categorize, and register all types of risks.

4) To establish a link between the risk and the parties the takaful company will:

a) Establishing what its stakeholders view as value from a takaful company;

b) Find out what the risks are of that number;
c) Use what treatments are best for those risks; and
d) Communicate its efforts back to its stakeholders
e) A clear strategic plan will ensure a well-designed risk management framework. Elements
of an effective risk management strategy will include:
f) Vision for a future state of comprehensive business management;
g) Definitions of purposes and objectives;
h) Key performance indicators and key performance indicators;
i) Roles and responsibilities;
j) Startup sponsors;
k) Timetables and key steps;
l) Resources and budget;
m) Progress review processes; and

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n) Authorization from the Governing Body and Senior Management to ensure its
effectiveness.

Risk Management Process:

A prudent company will ensure that a comprehensive, integrated and integrated risk management
system is established, to maintain overall risk management. The Risk Management process will
include:
1) Risk Assessment and Evaluation;
2) Risk Assessment;
3) Risk Management; and 4) Risk Management.
5. Risk Identification and Risk Management Risk Assessment Risk Management

• Risks and risk sources an unreliable company exposed to them will be identified and
evaluated.
• The takaful company's "desire" for risk will be defined based on the business intentions of the
takaful company.

Takaful Risk Management Principles: Policies and Procedures:

• The evaluation process will be comprehensive enough to cover all significant sources of risk
exposure.
• The evaluation process will be responsive to the needs of information users.
• Risk limits will be in line with takaful company policies and authorized exposure.
• RM will ensure that transactions do not expose the company to losses that may jeopardize their
operations.
• Reports will provide relevant, accurate and timely information on management exposure
• Risk monitors will be independent of office bearers (existing risks).

Risk Assessment and Evaluation will include risk assessments and assessments against all areas
of the takaful company. Each risk identified will be owned by the owner; the person who will be
responsible for ensuring that the risk is treated properly, as well as the set of indicators, in order
to continue to monitor changes in the risk profile and the scope of the risk area. In addition, the

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takaful company will evaluate and understand the interactions of risks and their related impacts.
The RM will mimic risk exposure in a number of cases to link each other's dependence on risk,
assess its growing impact on the number of shareholders, and compare risk management
portfolio. Direct imitation and the conditions for the analysis of the situation will be explained in
detail in each relevant section of the risk policy. The Takaful Company will measure risk, in
accordance with local laws and regulations of the International

Association of Insurance Supervisors:

Risks will be treated visually as a portfolio of strong strategies for growth, reduction, or keeping
the level of risk and uncertainty associated with the appetite defined by the takaful company at
risk. Takaful company will check that risk has a life cycle - before, during, and after the
occurrence of an accident during hazardous treatment. The takaful company will ensure adequate
prevention and control (e.g. by emergency planning).

Risk will be monitored to ensure that business issues are easily identified and resolved by the
appropriate level of management. Risk monitoring will be part of the integrated processes run by
the takaful company.

Different approaches to critical risk monitoring and key business processes will be identified.
These will include the following: Key Control Indicators (hereafter ‘KCIs’);
• Key Risk Indicators (hereafter ‘KRIs’); and
• Risk Assessment (after ‘ORSA’).

Takaful Risk Management Principles: Policies and Procedures:

The Governing Body will ensure that there are independent verification procedures. Strategically
coordinated verification functions such as external auditors, internal audit function ... etc., will
provide real-time, and, where possible, independent verification of risk management activities.
The Governing Body will receive regular reports considering important risks and how they were
assessed, the effectiveness of the treatment plan, timeliness and appropriateness of remedial

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actions, and the overall efficiency of the disaster risk management and internal control system.
Within this system of internal control, risk ownership and accountability will also be assessed
and validated. The integration and coordination of various risk and risk management activities is
considered to be of paramount importance. 5. Risk functions Part of the Risk Management
functions of the Enterprise
Risk Management Framework integrates existing management functions that contribute to or
contribute to risk management. These activities can take many forms; can be embedded;
embedded or exported. The takaful company will have a number of embedded jobs such as
Internal Audit and Compliance and AML. Embedded jobs are often part of the ongoing
departmental / unit management activities - in assessing risk activities within the takaful
company, it is important to consider the activities that are part of the department / unit
management.
Risk activities will be relevant and focused on:
• Business strategies / objectives; and
• Significant risks to the number of shareholders and policyholders.
Spaces and spacing will be visible and minimized / eliminated. In addition, structural
specification and role description will allow risk holders, business process holders, and RM to
not only communicate effectively but also maintain their focus on increasing the number of
shareholders in a takaful company. Skills and training will be recruited and developed and fully
evaluated, documented, and understood by all stakeholders. Takaful Company will use the
technology to make the most of its risk management efforts. Takaful company will set up "early
warning systems" to keep RM informed.
The standard website will contain disaster risk management information accessible to all, and the
intranet will assist the company as a whole to communicate disaster risk, lead processes, and
training. Takaful's early warning system will use key risk indicators to identify and track
potential risks rather than traditional analysis and the addition of historical and actuary data.

Takaful Risk Management Principles:

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Policies and Procedures this ongoing risk intelligence program will warn of impending danger
and will be linked to the procedures for the rise and fall of the dirty company so that risks can be
managed early in their life cycle and implemented in a way that benefits the Group. Takaful
Company will establish a website that will be a source of data based on modeling risk, decision-
making, treatment portfolio development, and reporting objectives. RM will use risk
management systems to monitor, manage and maintain a database of risks associated with a lost
company.

Conclusion:

The Audit Committee shall meet from time to time to consider matters of risk as set out in RM-1
Risks and Responsibilities of Risks and ‘Terms of Reference’ of the Committees. The Head of
Risk Management is responsible for presenting information to the Committees and providing the
Committees with the necessary risk documents. During the meeting, the Secretary of the
Committee assumes responsibility for taking the minutes of the meeting. After the meeting and
on the second day, the minutes of the meeting, approved by the Chair of the Committee, will be
distributed to the staff involved during the meeting. A copy of the minutes of the meeting will be
included in the RM files for reference purposes.

References:

Covello, V. T., & Mumpower, J. (1985). Risk Analysis and Risk Management: An Historical Perspective.
Risk Analysis Volume 5 Issue 2 , 103-120.
Ismail, A. (1997). Insurance and Shari'ah: Part I. The Call of Islam , 22-23.
Kazmi, A. (2004). "Probable Differences among the Paradigms Governing Conventional and Islamic
Approaches to Management." International Journal of Management Concepts and Philosophy 1(4):263-
289.
Karray, R. (2010). The World of Takaful - An Update. Tunisia: Islamic Finance News.
Liu, J., Li, B., Lin, B., & Nguyen, V. (2007). Key Issues and Challenges of Risk Management and
Insurance in China's Construction Industry An Empirical Study. Industrial Management & Data Systems
Vol. 107 No. 3 , 382-396.
Mendoza, A. M., Supangco, V. T., & Tolosa, M. T. (2005). A Look into the Role of Human Resource
Management in Corporate Governance and Risk Management: The Philippine Experience. Advances in
Public Interest Accounting, Vol. 11 , 195-222.

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Shimpi, P. A., & Lowe, S. P. (2006). Risk Management: ERM for Insurers - From Compliance to Value.
Risk Management July 2006 - Issue 8 , 34-38.
Stagg-Macey, C. (2007). An Overview of Islamic Insurance.

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