current practical challenges in risk management which is confronting takaful
operators as follows:
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 instruments are considered beneficial
in conventional risk management.
Internal controls are
important to recognize and assess the risks faced by financial institutions
including takaful companies. Effective internal controls can prevent takaful companies
from systemic crises and enable them 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
The structure of corporate
governance determines the distribution of rights and responsibilities of the board
of director (BOD), managers, shareholders and other stakeholders. The effective
corporate governance in takaful company will ensure the independence of BOD
which take the responsibility to develops policies and implements strategies
for risk management. The lack of effective corporate governance framework prevents
the independence of the BOD and thereby poses a challenge to risk management.
It continues to increase operating risks which may lead to operational failures
due to BOD’s inability to implement unbiased and independent decisions for the
best interests of all stakeholders. Takaful companies are faced with additional
challenges related to the Shariah Supervisory Board’s corporate governance
where it requires more need to incorporate corporate governance culture to
address issues related to the Takaful industry.