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ABSTRACT
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1. INTRODUCTION
The Islamic banking, Islamic financing, Islamic Insurance and Islamic capital market are
essentially creatures of the Islamic economics. They emerged as a result of Al-Tajdid Al-
Islami (Islamic revivalism) i.e. the “cleansing of Islamic practices of all un-Godly
elements” in an effort to return Islam to its original pure form (Mawdudi, 1999). The
efforts have been concentrating on various spheres such as in the aspect of politics (the
establishment of Islamic states e.g. Sudan and Iran), knowledge (the Islamization of
knowledge and the setting up of Islamic Universities), legal aspects (the adoption of
Shari’ah law i.e. Hudud and Qisas), as well as economics (the introduction and
promotion of Islamic economics, Islamic banking and Islamic Insurance). In economic
aspect particularly, given its extensive Islamic revivalism efforts, it is unsurprising to
note its rapid development practically and considerable growth of research in the same
area academically.
Equivalent to the case of Islamic banking which forms part of the Islamic
economics system, the Islamic insurance system (Takaful) is essentially creature of the
same economic system – the Islamic economics, formulated and established as a result of
the Islamic revivalism efforts in many Muslim and non Muslim countries. It operates
based on fundamentally different set of parameters, heavily guided by the rules of
Shari’ah (Islamic law). In Malaysia, the National Fatwa Council had resolved in 1972
that conventional insurance is a fasid practice, therefore is haram (forbidden). The above
decree was premised on the fact that there exist elements of gharar (uncertainty), maisir
(gambling) and riba (usury) which are totally in contradictory to the spirit of Shari’ah.
As such, in contrast to conventional insurance, the operational set up of Takaful is
formulated to be free from these three elements. In addition, Takaful system also employs
several Islamic elements such as Ta’awun (mutual help), Tabarru’at (willingly relinquish
individual rights over the contributions paid, for collective benefits) and Mudharabah
(profit sharing relationship) or Wakalah (principal-agent relationship).
The above concepts of gharar, maisir and riba as well as the existence of
elements of Ta’awun, Tabarru’at, Mudharabah and Wakalah in Takaful have been
moderately covered by prior academic studies. Such literatures on Takaful are reasonably
extensive. However, these studies have shown lack of focus on the specific area of
accounting and reporting for Takaful. Most of the literatures are rather theoretical in
nature which focuses on Takaful concepts and its operational aspects, leaving ample
space for research theoretically and empirically in the specific area of accounting and
reporting for Takaful. In Malaysia particularly, there are currently no specific Takaful
accounting and reporting standards. Instead, Takaful operators are required to abide by
circulars and guidelines issued by the central bank (Bank Negara Malaysia – BNM).
Nonetheless, operators are also presented with Shari’ah based accounting and reporting
standards on Islamic insurance which were produced by the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI). These standards however have
never been enforced by the Malaysian regulatory body on Takaful operators.
Nevertheless, Malaysian operators could only consider adopting it on a voluntary basis.
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This paper seeks to first; explore the nature of Takaful and its differences with
conventional insurance from the conceptual, operational, accounting as well as reporting
perspectives. Secondly; it will explore the nature of the currently available and applicable
Takaful accounting and reporting regulations in Malaysia, providing special attention to
the currently-in-use BNM type of accounting and reporting regulation on Takaful as well
as the accounting and reporting regulation on Islamic Insurance provided by AAOIFI.
Thirdly; the paper will assess the extent of compliance by Malaysian Takaful operators to
Takaful guideline (BNM type of accounting and reporting regulation on Takaful) and the
extent of acceptance to AAOIFI Islamic insurance standards and subsequently obtaining
reason(s) for operators’ full (or partial) compliance/acceptance.
Section 2 will proceed to discuss the differences between Takaful and insurance from the
conceptual and operational perspectives. This will then be followed by a brief discussion
on the background and development of Takaful in Malaysia. The 3rd section discusses, in
the context of Takaful, the conceptual insights of its accounting and reporting. The
position of accounting and reporting in Islam is highlighted and the role of BNM in
regulating Takaful industry is presented. The role of AAOIFI as the international standard
setter for Islamic financial institutions will also be noted. Section 4 outlines research
methods employed in this research. Section 5 presents findings on the comparative
analysis between insurance standards, Takaful guideline and AAOIFI standards. Section
6 discusses findings from the analysis of the conformance scoring based on annual
reports of 4 Takaful operators. Section 7 concludes the paper which includes some
suggestions for changes to the regulatory body concerned.
Literatures on Takaful are growing considerably. Most of these literatures cover almost
the same areas albeit, with slight variation in terms of focus. The topics of Takaful
concepts and its operational mechanism are the most frequently discussed topics in such
growing literatures of Takaful (For example in Ali, 1989; Mohd Fadzli 1996a&b; Azman,
1997; Maysami & Kwon, 1999; Billah, 2003; Yon Bahiah, 2004; Hairul Annuar, 2005).
Literally, conventional insurance refers to financial protection system which involves the
execution of contracts (insurance contracts) between an insurer and insured in which
insurer agree to underwrite the subject risk of such contracts (Webb et al., 1992).
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According to Omar & Dawood (2000), risk or uncertainty can be divided into Pure Risk and Speculative
Risk. The former involves the possibility of Loss or No Loss. For example, damage to property due to fire.
Such Risks are the subject of insurance risk protection and Takaful. On the other hand, Speculative Risk
involves the possibility of Loss, No Loss or Gain. For example, venturing into new business or gambling
on horse race. Speculative Risks that include potential Gain or Profit cannot be insured.
2
Even though the literal meaning of Tabarru’at is sadaqah or donation, however in Islamic insurance or
Takaful, it carries a different operational meaning that is the willingness to relinquish individual rights over
the contributions paid for mutual collective benefits of participants in the Takaful scheme.
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Ta’awun and Tabarru’at are concepts which illustrate the Islamic social
relationship among participants in Takaful system. Participants mutually agree to help
and guarantee each other through the relinquishing of individual rights over the
contributions paid for the mutual benefits of participants in the scheme collectively i.e.
Tabarru’at (Mohd Fadzli 1996a&b; Maysami & Kwon, 1999; Omar & Dawood, 2000;
Billah, 2003). It embraces the elements of shared responsibility, joint indemnity and
mutual protection. It is this aspect in Takaful system that makes uncertainty element
allowable under Takaful contract (Billah, 2003). This is truly in line with the objective of
achieving social and economic well being of the ummah (Islamic society). Moreover,
God is said to have stated in Qur’an thus; "Assist one another in doing of good and
righteousness. Assist not one another in sin and transgression, but keep duty to Allah"
(Qur’an 5:2).
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Insured could also be paying premium without getting any amount in return (if no
risk occurred). Insurer on the other hand could either loose if there are too many
claimants or could make huge profits when premiums collected exceeds claims (Omar &
Dawood, 2000). Therefore, the uncertainty in insurance system leads to gambling as
discussed above. Besides Gharar and Maisir, Riba could also exist in insurance and it
could be in various forms. If we go by the classification of riba by Imam As-Shafiie, then
riba in insurance relates to riba Al-Buyu’ which exist in trade (sales contract). The types
of riba are riba Al-Fadl’ (uneven exchange value – small premium in return for bigger
coverage value) and riba Al-Nasiah (deferred payment – claims payments are deferred to
period when there is occurrence of risks) (Mohd Fadzli 1996a).
In another aspect, riba could also be found in the investment operations of any
insurance companies since the sources of income to insurance (and Takaful companies)
are mainly from 2 channels – underwriting and investment. As mentioned earlier, the
underwriting scheme of conventional insurance involves the elements of gharar and
maisir. In investment, conventional insurance has no spiritual and moral sanctions in their
investment guidelines. In generating funds to maximize company’s profits whilst meeting
claims obligation, insurance companies normally placed insurance fund in interest-
bearing (riba based) investment instruments such as conventional bonds and loans as well
as non-Islamic deposits, which are not permissible in Islam (Mohd Fadzli 1996a&b;
Maysami & Kwon, 1999; Omar & Dawood, 2000). Returns on investments are also not
shared with policyholders particularly in non-investment-linked insurance policy since
insurance contract only involve the assumption of risk by insurer without the obligations
to share the profits with insured.
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Essentially, religious revival had successfully pushed for the introduction of Takaful in
Malaysia. The demand for Takaful system in the early period of its inception was inspired
mainly by the prevailing needs of Malaysian Muslims public for Shari’ah compliant
alternative to conventional insurance, besides complementing the operation of the first
Islamic bank4 that was established at that time (Mohd Fadzli, 1996a; Bank Negara
Malaysia, 2004a). In the spirit of Islamic revivalism, there was a great pressure for an
alternative product of insurance from Malaysian Muslims during 1980’s, who wanted to
practice Islam fully in their daily life. They were looking for a system of protection which
forms part of the suitable financial system that supports the establishment of credible and
sustainable Islamic based economic system (Mohd Fadzli, 1996a). Almost
simultaneously, the Malaysian National Fatwa Committee issued a decree which ruled
that life insurance in its present form is a void contract due to the presence of 3 main
elements (riba, gharar and maisir) that are contradictory to the spirit of Shari’ah.
Realizing the importance of supporting the economic growth of the ummah coupled with
the promising potential of Takaful industry, a Special Task Force was established by
Malaysian Government in 1982 to study the viability of the setting up of an Islamic
insurance company. Following the recommendations of the Task Force, Takaful Act was
enacted in 1984 which modelled after the existing Insurance Act for conventional
insurance but has been modified to conform to Shari’ah principles.
Indeed, Takaful is one of the promising and developing areas in the applied socio-
economic environment (Billah, 2003). Looking at the vast potential of Takaful, and in
line with its vision of trying to be the Islamic financial hub in the region, Malaysia had
taken a big leap in introducing and developing Takaful system systematically. Learning
from the experience of other pioneers in Islamic insurance industry abroad, the first
Takaful Company was set up in 1984 – Syarikat Takaful Malaysia Sendirian Berhad
(now Berhad). 9 years later, another Takaful company was established – Takaful
Nasional Sendirian Berhad (1993), followed by Mayban Takaful Berhad (2001) and the
latest one is Takaful Ikhlas Sendirian Berhad (2003). A few other operators had also been
granted license by the central bank (BNM), the regulatory authority responsible for
overseeing and monitoring the financial service sector in Malaysia and will start
operating in near future. BNM has adopted “gradual” approach in developing Takaful
industry in Malaysia. Such approach can be specifically divided into 3 phases (Bank
Negara Malaysia, 2004a):
Phase I (1984-1992) – The primary focus during this period was the establishment of
basic infrastructure for the industry. It started with the enactment of specific regulatory
law i.e. Takaful Act 1984. This is to govern the conduct of Takaful business and it
requires the registration of Takaful operators and the establishment of Shari’ah
Committees to ensure that the business operations of any Takaful operators are in
compliance with Shari’ah principles at all times.
4
Bank Islam Malaysia Berhad (BIMB)
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Phase II (1993-2000) – This period marked the introduction of competition within the
Takaful industry. Simultaneously, the period had also shown greater cooperation among
Takaful operators in the region including the formation of ASEAN Takaful Group in
1995 and the establishment of ASEAN ReTakaful International (L) Ltd. in 1997. This has
facilitated ReTakaful (reinsurance) arrangements among Takaful operators in Malaysia
and in the region, namely Brunei, Indonesia and Singapore.
Phase III (2001-2010) – The phase had begun with the introduction of Financial Sector
Master plan (FSMP) in 2001 which, among its objectives is to enhance the capacity of
Takaful operators and to strengthen the legal, Shari’ah and regulatory framework. The
section of FSMP which relates to Islamic banking and Takaful is a roadmap towards
realizing the aspiration of Malaysia becoming an international centre for Islamic finance.
Literally defined as “peace” and “submission”, Islam requires its followers to submit to
God in everything and principally recognize the position of ALLAH as God – the only
God in Islam. Such act of bearing witness on the existence and oneness of God is termed
as Tawheed (unity of God). In Islam, God created humans for a purpose – that is to serve
God (Qur’an, 51:56). Upon creating humans, God also recognizes the position of humans
on earth as His vicegerent (Qur’an, 2:30). As God’s vicegerent, humans are granted with
worldly resources (e.g. material resources, etc.) for them to live their life according to
Shari’ah Islami’ah. According to the 5th Islamic article of faith (to believe in the
existence of the Day of Judgment), there will be another life after death i.e. the hereafter.
Humans will be resurrected and subsequently judged and rewarded (or punished)
accordingly. Hence, humans are made accountable for the use of any resources granted to
them as well as for their worldly conducts (good or otherwise). Thus, the position of
humans as vicegerent of God and the concept of dual life provide profound impact on
human behaviour in the sense that it would induce humans to act in accordance with the
rules of Islam by observing their accountability towards both, fellow humans and God.
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Hence, besides having its secular functions discussed earlier, accounting and
reporting in Islam should also play its role as a service activity which provide information
that aims at assisting humans in discharging accountability towards both, fellow humans
and God i.e. by providing information to users so that they (users) could follow God’s
commandments (Shahul, 2000). Ultimately, as an auxiliary function of economic
activities, accounting and reporting will also therefore, serve as a tool for Muslims to
achieve the very objectives of Islamic economics, which are also the objectives of
Shari’ah (Haniffa & Hudaib, 2002).
Accounting has close relationship with the social and economic values of the society
(Khan, 1994 p.1). It is in this sense that historically, the activities of accounting and
reporting are conducted in a manner appropriate to the social, economic and cultural
needs of a society in which the activities are undertaken. For example, Takaful companies
are essentially Islamic business organizations, operating in conformance with the
Shari’ah. Since accounting and reporting are the auxiliary functions of its business
operations, both of the underlying concepts and functions of accounting and reporting are
arguably, should also be in line with the spirit by which its business operations are based
upon i.e. Shari’ah. Thus, accounting and reporting in Takaful companies should also
comply with Shari’ah. This necessitates for both accounting and reporting in Takaful to
serve relatively different functions from that of its conventional counterparts i.e.
insurance companies, which are not based on Shari’ah. In the academic stream, the area
of accounting and reporting for Takaful receives little attention in the literature as
opposed to accounting and reporting for Islamic Banks (e.g. Karim, 1990; Ali, 1994;
Khan, 1994; Adnan & Gaffikin, 1997). This is hardly surprising given the fact that
Islamic banks were the first Islamic institutions that emerged as a result of Islamic
revivalism. Following its rapid development, their accounting and reporting issues were
given specific and focused attention by both practitioners as well as academicians.
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In principle, accounting and reporting for Takaful should be able to reflect the
striking difference between Takaful and insurance which lies in the existence of a pre-
specified relationship between operator and participants. Hence, accounting and reporting
for Takaful should be able to accommodate properly, such type of relationship i.e. either
Mudharabah or Wakalah. In either type, the accounting principles, method and
techniques as well as the reporting content and format should serve the spirit of justice
which is the central theme of both types, which is also one of the objectives of Shari’ah.
This would then ensure fair calculation and allocation of surplus (or fees in Wakalah
type) between operator and participants. In this regard, accounting and reporting for
Takaful should be able to guarantee the separation of funds established between
participants and operator. Different funds available in the business should be properly
separated and the management and usage of such funds should also be properly observed
since certain usage or direct expenses on one fund could not be simply absorbed by the
other. This is primarily because, the assumption of risks in Takaful system is undertaken
by participants collectively and not the operator. This affects the ownership concept over
the contributions pooled in the scheme whereby the right over such contributions remains
in the hands of participants collectively. Accounting and reporting for Takaful should
therefore be able to properly address these requirements.
In Malaysia, the enactment of Financial Reporting Act (1997) has given birth to Financial
Reporting Foundation (FRF) and Malaysian Accounting Standards Board (MASB). This
new financial reporting framework requires the role of standard setting to be undertaken
by a statutory body (MASB) independent of the accounting profession. Most of standards
issued by MASB are consistent with the international standards (International Financial
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Reporting Standards – IFRS) 5. To date, after more than 7 years of its establishment,
MASB had produced a total of 97 technical pronouncements, comprising among others
33 Standards, 1 Interpretation Bulletin, 2 Technical Releases, 1 Discussion Paper and 52
Exposure Drafts6. Interestingly, MASB had also introduced a parallel set of Islamic
accounting standards for Islamic financial institutions, the FRSi. However, as of to date,
the accounting and reporting for Takaful has not been covered by FRSi and is still being
developed. As an alternative, the Malaysian Government through its specific Takaful Act
(1984) delegated the function of formulating the accounting techniques, format and
contents of accounting disclosure of Takaful companies to the Central Bank (BNM).
Unlike other industries operating in the Malaysian economy, Malaysian financial services
industry (Islamic or otherwise) is subject to additional layer of supervision, regulation
and control, which is by the Central Bank i.e. Bank Negara Malaysia (BNM). Areas
under supervision, regulation and control by BNM include operational, accounting as
well as reporting. This is predominantly due to the nature of the industry itself which is of
paramount importance to the Malaysian economy, directly influencing the overall
Malaysian economic growth and financial stability. In this regard, the Takaful sector,
being part of Malaysia’s comprehensive Islamic financial services industry is of no
exception. This is by virtue of specific Malaysian Law – the Takaful Act 1984. In its Part
IV (Miscellaneous and General) the Act states that “The Central Bank (BNM) shall be
responsible for administering, enforcing, carrying out and giving effect to the provisions
of this Act and the Governor of the Central Bank shall be the Director General of
Takaful”.
Having such power and responsibilities, BNM regulates and supervises the
operational, accounting as well as reporting aspects of Takaful through its 2 divisions
within the BNM; the Regulation and Supervision Divisions. The former aims at
providing sound and effective framework for the operation, accounting as well as
reporting of Takaful. The latter on the other hand plays both the enforcement and
supervisory functions, primarily to ensure those rules and regulations as stipulated in the
formulated framework are well adhered to. In accounting and reporting aspects, having
the aims of enhancing the accounting practices as well as the disclosure and transparency
regime of the Takaful industry, BNM has, in addition to specific provisions regarding
accounting and reporting in the Act, requires Takaful operators to strictly adhere to
circulars and guidelines issued by BNM from time to time. In the year 2004 for example,
BNM had issued 18 circulars and 4 guidelines covering the areas of operations,
accounting, reporting as well as Shari’ah governance for Takaful operators. One of which
is the Guidelines on Takaful Reporting (Takaful Guideline No. 6 i.e. GPT6) which aims
at enhancing disclosure and transparency in operators’ financial statements. GPT6
supercedes various circulars on accounting and reporting previously issued to Takaful
operators.
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As at 13 September 2004, MASB had issued 33 accounting standards, 26 of which were adopted from 31
IASs in use today.
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http://www.masb.org.my/masbmr_pr_detail.asp?prid=29122004-171339
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The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is
an Islamic international autonomous non-profit making corporate body that prepares
accounting, auditing, governance, ethics and Shari'ah standards for Islamic financial
institutions (Pomerantz, 1997). It was established in accordance with the “Agreement of
Association” which was signed by several Islamic financial institutions on 26 February,
1990 in Algiers. As of to date, there are 18 accounting standards produced by AAOIFI in
which three 3 standards are directly relevant to Islamic insurance. Such standards are
Financial Accounting Standard (FAS) No. 12 (General Presentation and Disclosure in the
Financial Statements of Islamic Insurance Companies), FAS 13 (Disclosure of Bases for
Determining and Allocating Surplus or Deficit in Islamic Insurance Companies), and
FAS 15 (Provision and Reserves in Islamic Insurance Companies). The earliest standard
issued was FAS 12, in the year 2000.
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5.0 COMPARATIVE ANALYSIS BETWEEN FRS 17&18, GPT6 & AAOIFI FAS
12,13&15
The unique and reasonably complex nature of insurance as well as Takaful business have
prompted the responsible authorities in Malaysia (MASB and BNM) to establish specific
accounting and reporting standards and guidelines to cater for their specific accounting
and reporting needs and requirements. These standards and guidelines are FRS 17
(General Insurance business) and FRS 18 (Life Insurance business) issued by MASB for
conventional insurance which are further supplemented by various BNM insurance
guidelines (e.g. GPI3 – Insurance Accounting, GPI15 – Insurance Reporting) while for
Takaful, operators are only having BNM Takaful guideline (e.g. GPT6 – Takaful
Reporting) for their guidance. In addition, Malaysian Takaful operators are also required
to follow the relevant MASB standards (e.g. FRS standards on Investment) and BNM
insurance guidelines (e.g. GPI25 – Corporate Governance). At the international level,
AAOIFI had produced 3 specific standards for Islamic insurance i.e. FAS 12, 13&15 (all
of which relates to accounting disclosures).
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This is given the fact that Takaful system works on the basis of mutual scheme (or
fund) which participated by a group of people having the same objective of mutually
assisting each other. The function of operator in the system is limited to being an
intermediary only, and this has resulted in contributions paid by participants to be
regarded as revenue to Takaful scheme (NOT to operator!!!) which is collectively owned
by participants. As such, the contribution ownership remains attached to participants.
Effectively, contributions become liability to Takaful operator since operator is merely
intermediary whose function is to manage the fund. The nature of pre-specified
relationship also warrants for underwriting surplus and investment returns to be shared
between operator and participants. In this regard, only operator’s portion of the
underwriting and investments surpluses (Mudharib share or Wakalah fee) are transferred
to operator’s income statement, the balance goes to Takaful fund account which resides in
the liability side of operator’s balance sheet. This reflects the two way economic
relationship between the two parties.
The defined relationship also puts sanctions over the permissibility of charging
expenses incurred by operator to Takaful fund. This is because Takaful fund belongs to
participants and operator is only entitled to its portion of rewards for efforts rendered in
terms of Mudharib share or Wakalah fee. It is in this sense that the proper management of
separate fund accounting in Takaful system is really imperative. Claims and ReTakaful
are now direct expenses to Takaful scheme i.e. expenses to participants, and should not
be borne by operator. ReTakaful is effectively the shift of risk assumption function from
one Takaful scheme to the other and not from one operator to the other. In terms of
reporting, the pre specified relationship which is governed by the Islamic religious
principles demands the reporting framework of any Takaful entities to be based on the
need to portray both the financial strength (of the operator and the Takaful fund managed
by the operator) as well as the extent to which such fund has been properly managed in
accordance with the rules of Shari’ah i.e. Shari’ah adherence. These are broader than the
reporting framework of insurance which only focuses on the reporting of matters that
portray the financial strength of insurer and the insurance funds established only.
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The above differences in terms of accounting and reporting are reflected in both
the Malaysian insurance standards and BNM Takaful guideline respectively, which forms
part of the accounting and reporting regulations for insurance and Takaful in Malaysia.
With respect to Takaful accounting and reporting regulations in Malaysia, it is observed
that the accounting and reporting regulations currently available and applicable to
Malaysian operators are of 2 types. The first is the accounting and reporting regulation
provided by BNM and secondly the accounting and reporting regulation issued by
AAOIFI. The latter becomes applicable since the former is considered by BNM as the
minimum guideline only and that operators are allowed to adopt any other relevant
standards provided that it does not contradict the prevailing requirements stipulated in its
circulars and guidelines, provisions of the Takaful Act 1984 and more importantly the
Shari’ah requirements. The accounting and reporting regulation provided by BNM is by
virtue of the enactment of Takaful Act, 1984 which confers BNM the role of formulating
the accounting and reporting framework as well as undertaking the supervision and
enforcement functions through the issuance of circulars and guidelines for operators’
adoption. The nature of the accounting and reporting regulation provided by BNM are
argued to be based on a hybrid framework whereby in addition to Takaful circulars and
guidelines, operators are also required to adhere to insurance guidelines (GPI). This is
particularly true in the case of certain reporting aspects (e.g. corporate governance
reporting). In addition, the only Takaful accounting and reporting guideline i.e. GPT6 is
noted to have resembled much of the conventional insurance guideline i.e. GPI15.
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The damage to Takaful system will be more severe if we consider from the moral
hazards perspective. Operator’s position as an intermediary effectively demands for
accounting and reporting in Takaful to function as tools in minimizing information
asymmetry in the relationship between operator and participants. This is essentially to
avoid the creation of moral hazards activities such as the misuse of participants’ funds. If
the reporting requirements in Takaful for instance, resembled much of the insurance
reporting attributes, which do not cater for the pre-specified relationship and the
subsequent specific disclosures that the relationship warrants (e.g. the method of surplus
sharing and the treatment of management expenses), then it is argued that the information
asymmetric would exist and subsequently, governance in Takaful companies will be
seriously at stake.
When compared with the 2nd type of regulation (i.e. AAOIFI), the analysis suggest
that AAOIFI type of regulation on accounting and reporting is less detailed in terms of
accounting treatment over certain areas of the Islamic insurance operations (e.g.
ReTakaful), but more holistic, focused and specific in some other relatively important
reporting areas which are vital to the unique nature of the Islamic insurance operations. In
terms of scope, AOOIFI standards cover almost all of areas covered under GPT6 albeit in
a different structure and focus. The areas which AAOIFI standards are smaller in scope
relative to GPT6 are on the specific accounting treatment on reinsurance, management
expenses and acquisition costs, which AAOIFI does not specifically provides for. This is
perhaps such areas are rather technical and variations of practices are still acceptable so
long as it is within the boundary of Shari’ah. Moreover, by not providing specific
requirements over such technical accounting aspects would make AAOIFI standards
more universal and flexible, thus increasing its acceptability level. However, in terms of
holisticity, focus and specificity, AAOIFI standards are argued to be more holistic,
focused and specific albeit less detailed compared to GPT6. This is demonstrated in the
introduction of AAOIFI FAS 13 and 15 in which it covers comprehensively the specific
and important areas of surplus or deficit in Islamic insurance companies and provisions
and reserves respectively. These reflect their prioritized focus on areas which are
important to the specific nature of the Islamic insurance operations.
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It should be noted that the segregation of period analyzed into pre and post is for the purpose of
examining the nature of GPT 6 which is argued in the earlier section to have replicated GPI 15.
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The nature of BNM’s regulatory framework on Takaful and its circular could best
be used to explain such low level of conformance that is; prior to the introduction of
GPT6, operators were required to follow BNM circulars on Takaful accounting and
reporting. Such circulars only provide minimum guideline on the accounting and
reporting aspects. Further disclosures if deemed necessary are allowed within its
regulatory framework. Owing to the flexible nature of BNM circulars and its regulatory
framework on the aspects of accounting and reporting for Takaful, it makes the first
operator’s accounting and reporting practices as reflected in its annual reports for 2003
and 2004 to be rather different from the requirements set out in GPT6 (and also different
from the practices of other operators). This has resulted in the overall low level of
conformance recorded during that period. During the post GPT6 period, improvement on
the overall conformance level was observed. The substantial increase in conformance was
due to the impact of operators’ 1st time adoption of GPT6 which came into effect the year
earlier. Detailed analysis shows that the improvement was directly attributed by
immediate response to GPT6 by all 4 operators. Unlike the 1st and 3rd operators, the 2nd
and 4th operator did not fully comply with requirements set out in GPT6. That explains
why only 98.5% of the overall conformance was achieved during the post period.
The improved conformance level during the post period provides an indication on
the effectiveness of the supervisory functions of BNM over the accounting and reporting
practices of Malaysian Takaful operators, through its department of Insurance supervision
which undertakes the supervisory role over both the insurance and Takaful industries. It is
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also obvious that GPT6 had to a great extent, minimized the divergence in terms of
accounting and reporting practices among Malaysian Takaful operators i.e. harmonized
the practices. This is illustrated by the fact that, during the pre period, the 1st operator
only managed to score 82% conformance level, the lowest among the 4 operators. The 3rd
operator on the other hand complied with 100% of GPT6, the highest among the 4. This
had resulted in a percentage divergence of almost 22% during the pre period. However,
during the post period, the percentage of divergence had shrunk to only 3% with the
highest conformance level being 100% and the lowest was 97%.
On AAOIFI standards, the results indicate that the average number of items
complied with had increased, albeit marginally from year to year. This is on the back of
decreasing average number of applicable items, subsequently translating into an overall
increasing conformance trend over the 3 years period. The relatively low average of
conformance level could be explained by the fact that AAOIFI standards are not
mandatory to be adopted in Malaysia; rather it can only be adopted on a voluntary basis.
Even so, due to operators’ attitude towards minimum guidelines – they just follow the
minimum prescribed rules. Thus, any additional, non-compulsory standards (such as
AAOIFI) are considered as less relevant, hence not followed. Further analysis reveals
that, consistent with the overall low conformance level to AAOIFI standards, there was a
relatively low conformance level shown by all operators towards AAOIFI standards with
all operators managed to only score less than 80% through out the 3 years period. During
2003 and 2004, the highest percentage ever achieved by operators was 77% (4th operator)
and the lowest was 65% (1st operator) with a percentage margin difference of 18%.
However in 2005, the percentage margin difference reduced to 10% with the lowest
percentage of conformance achieved by one of the operators was 70% and the highest
being 77%. This indicates that, the introduction of GPT6 had, to a certain extent,
minimized the differences in terms of accounting and reporting practices (with reference
to AAOIFI standards) among Malaysian Takaful operators whilst it had also indirectly, to
a certain extent, brought Malaysian operators closer towards adopting AAOIFI standards
on Islamic Insurance.
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imperative for operators to clearly disclose the components of UCR and claims by
providing breakdown details for each class of risks arranged under the general Takaful
scheme. This would enhance transparency in their disclosure practices which will
subsequently further assist participants to make better appropriate judgments and
decisions, if necessary.
The telephone interviews also reveals that operators are unaware that they did not
abide by GPT6 requirement which requires operators to confirm that “Shari’ah rulings
and precepts had prevailed at all times over the other applicable approved accounting
standards and guidelines” during the reporting period. They claimed that their non-
conformance did not trigger any non-compliance issue during BNM on-site audit and
hence operators considered what they had disclosed as sufficient. This could be explained
by the fact that BNM on-site auditing exercise on Takaful companies was undertaken by
Insurance supervision staffs and they might not have the necessary Shari’ah background
to consider the importance of providing confirmation statement as required by GPT6. As
discussed earlier, besides operations, accounting and reporting in Takaful companies
must also be subject to Shari’ah and that Shari’ah must have the upper hand in all
aspects. If operators did not confirm that Shari’ah rulings and precepts had prevailed at
all times over the other applicable approved accounting standards and guidelines, users
might have the impression that the Shari’ah adherence of the operators is questionable.
This is extremely important since adherence to Shari’ah constitutes the main striking
difference between insurance and Takaful.
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The study observes that concepts, operations, accounting and reporting between
insurance and Takaful are dissimilar. The dissimilarities originate from the concept of
insurer-insured or operator-participants relationship in which Takaful system requires the
establishment of a pre specified relationship between operator and participants as
opposed to direct seller and buyer relationship in insurance system. This brings about the
differences in the task of “risk assumption” and the “premiums/contributions ownership”
which influences and affects both the accounting and reporting aspects of both the
insurance and Takaful system. Essentially, Takaful accounting reflects the striking
difference in terms of the operational mechanisms in Takaful which is based on the pre-
specified relationship between operator and participants. Takaful reporting on the other
hand covers wider focus than that of insurance which includes additional aspect of
Shari’ah adherence. This is consistent with the central theme of Islamic accounting
which includes processes that ensure operators’ survival within the boundary of Shari’ah.
Hence, Takaful accounting and reporting by its nature is arguably the subset of Islamic
accounting.
The findings of this study on the nature of the currently available and applicable
Takaful accounting and reporting regulations in Malaysia have important implications on
policy development in Malaysia, particularly on Takaful standard which is still being
developed. Noting the unavailability of established and specific accounting and reporting
standards for Takaful in Malaysia coupled with the nature of BNM type of regulation
which was analyzed to be predominantly developed in a conventional manner – despite
the relative importance of Takaful industry to the economy of the ummah, it becomes
extremely imperative for the pace of development of the Takaful standard being
developed to be accelerated. In developing the Takaful standard, it is argued that both
types of regulations (i.e. BNM’s GPT6 and AAOIFI standards) could serve as a
foundation for MASB in developing such standards. A mixture of sound requirements
from both types of regulations would be able to provide a holistic and comprehensive
Takaful standard without which, operators will be left with non codified accounting and
reporting requirements which are not at a level equivalent to the international best
practice. As a result, comparison on both the financial performance and Shari’ah
adherence based on operators’ annual reports across local and international level would
be difficult. This is expected to jeopardize the Malaysian Takaful industry as a whole in
times of financial market liberalization which will take place sooner.
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Alternatively, the regulatory authority (BNM & MASB) should consider adopting
(with modification, if necessary) the readily available AAOIFI Islamic insurance
standards which were analyzed to be more holistic, focused and more reflective of the
underlying nature of Takaful. This would save a lot of the precious time needed for
MASB to come out with a whole new body of Takaful standard. In addition, for
immediate corrective measure, it is also suggested that the Malaysian regulatory body
(both MASB & BNM) should at the very least, consider enforcing AAOIFI standards as a
complementary to GPT6 and be part of its existing hybrid framework. This is practical
and reasonable given the fact that many requirements in both types of regulations share
similar attributes and it does not contradict each other. Moreover, AAOIFI standards are
considered as the international benchmark for Shari’ah based accounting and reporting
standards for Islamic institutions such as Takaful companies. The additional accounting
and reporting requirements in AAOIFI over GPT6 if adopted would be able to cover
several areas which GPT6 seems not to addressed, particularly on the reporting of the
pre-defined contractual relationship between operator and participants. This would
subsequently bring the accounting and reporting practices of Malaysian operators closer
to international best practice.
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The other explanation would be, equivalent to the case of Islamic accounting
standards (FRSi), the Malaysian government tends to produce their own standard, rather
than adopting the readily available Islamic accounting standards produced by the
International Islamic regulatory body such as AAOIFI. This perhaps the manifestation of
its “Malaysia Boleh – Malaysia can do attitude” campaign which provides that Malaysia
as a developing country is able to do everything by its own, including its own accounting
and reporting guideline for Takaful companies without relying on others – even if it takes
the conventional insurance guideline to be the model of Takaful guideline. More
importantly, the non acceptance to AAOIFI standards also signals considerable lack of
coordination between AAOIFI and the Central Banks of Islamic countries, particularly
the BNM in this case. Tracing back one of the basic functions of AAOIFI, among others
is to promote the formulated standards to other Islamic countries through various
promotional mechanisms including strategic coordination with the central banks of
Islamic countries. In this regards, it is suggested that AAOIFI should consider optimizing
its efforts through various plausible means in promoting its Shari’ah based standards
which are considered to be the international benchmark of the accounting and reporting
standards for Islamic financial institutions such as Takaful. This should include the
marketing of its standards directly towards core users i.e. Islamic banks and Takaful
companies. Else, the holistic standards will only be adopted by a smaller group of entities
operating in the Middle East regions only.
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