A REVIEW OF TAKAFUL ACCOUNTING REGULATIONS AND PRACTICES
IN MALAYSIA
Shahul Hameed bin Mohamed Ibrahim
International Islamic University Malaysia
Hairul Suhaimi Nahar
International Islamic University Malaysia
Ros Aniza Mohd. Shariff
International Islamic University Malaysia
ABSTRACT
This research undertakes an empirical investigation of the accounting practices of Takaful
Companies in Malaysia for the period 2003-2005. We start by reviewing the need for and
the development of the Takaful industry in Malaysia followed by a review of the
differences in the concepts, operations, accounting and reporting between conventional
insurance and Takaful. Our thesis is that the concepts and operations of Takaful call for a
different set of accounting and reporting practices; which we believe to be a subset of
what we term as Islamic accounting. We then compare the accounting practices
suggested by the Malaysian Financial Reporting Standards for Insurance (FRS 17 & 18)
and AAOIFI accounting standards for Islamic Insurance as well as the Bank Negara
Malaysia (Central Bank) Guidelines on Insurance and Takaful (GPI3&15 and GPT6
respectively) which includes accounting disclosures. We then extract a list of accounting
requirements from AAOIFI accounting standards for Islamic Insurance and GPT6 and
score these using the annual reports of the four Takaful operators in Malaysia. The results
show that, while AAOIFI accounting standards for Islamic Insurance are not completely
followed, the introduction of GPT6 had indirectly encouraged Malaysian Takaful
operators to abide by AAOIFI standards (which are not compulsory in Malaysia).
Further, we also report and comment on the response we obtained from the telephone
interviews of the Takaful operators we conducted to seek clarification for some of the
findings from the analysis of the annual reports.
1
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 AlIslami (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.
2
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.
In this study, the choosing of Malaysia as the country of reference is supported by
the fact that it provides an interesting cultural setting for the study of related issues on
Islamic institution of Takaful in which, its establishment forms part of the economic
Islamization process by its leaders. Being an Islamic state as claimed by many of its
leaders, Malaysia was the 6th country in the world to introduce Islamic insurance system,
right after Sudan, Saudi Arabia, Switzerland, Belgium and Bahamas (see Maysami &
Kwon, 1999). Thus, it would be interesting to see its development particularly from the
accounting and reporting perspectives after more than 20 years of Takaful existence.
The rest of this paper is organized as follows:
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.
2.0
TAKAFUL AND
DIFFERENCES
INSURANCE:
CONCEPTS
AND
OPERATIONAL
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).
3
Arrow (1980) as quoted in Siddiqi (2000) provides a conceptual definition of
insurance as an exchange of money now for money payable contingent on the occurrence
of certain events (or risks). Risk in insurance primarily refers to losses arising from
specified or defined perils. According to Arrow (1980), in providing financial protection
to insured, insurer will sell insurance coverage. Before selling it, insurer will make
advance projection on the maximum probable losses of any particular risk. Premiums are
then allocated to risk in line with coverage limit. Subsequently, premium payment is set
to be in accordance to such risks projection. Implicitly, these insurance operations
involve a process of transferring losses in advance based upon past experiences (Omar &
Dawood, 2000). By selling insurance coverage, insurance companies are basically
assuming the subject risk as stated in the insurance contract. This is reflected in the extent
to which premiums paid are then treated as insurers’ income which signifies the shift of
rights of such premiums to insurer from insured. As a legal owner to insurance funds,
insurer has full control over such funds and there is no obligation on their part to
distribute back any underwriting and investments surpluses generated to policyholders
except for in the case of claims payment and in life insurance policy which had reached
maturity and that insured survived at the maturity date. This constitutes a one way
economic relationship between insure and insured if no risks occurred since only insurer
will get the economic benefit, had the risk did not occur.
On the other hand, Islamic insurance (commonly referred to as Takaful) is
conceptually defined as an Islamic financial protection system which involves a jointguarantee scheme in providing possible indemnity or contingency against pure risk1
resulting from an unexpected occurrence of loss or damage to one’s life or property
(Billah, 2003). It operates based on concepts of Ta’awun (mutual help or co-operation),
solidarity, trusteeship, brotherhood and Tabarru’at (willingly relinquish individual rights
over the contributions paid, for collective benefits2) (Mohd Fadzli 1996a&b; Azman,
1997; Maysami & Kwon, 1999; Billah, 2003; Yon Bahiah, 2004). Takaful operator
(Islamic Insurance company) collects contributions (premiums as in insurance) from
participant(s) (policyholders) and subsequently agree to manage those contributions (i.e.
Takaful fund) based on certain set of guidelines. The management of Takaful fund by
operator could be based on either Mudharabah (profit sharing) or Wakalah (agency)
model. The former regards participants collectively as "Sahibul-Maal" (capital providers)
while Takaful operator as Mudharib (entrepreneur) and Takaful contributions as Ra’sul
Maal (capital to the Mudharabah contract). The latter regards Takaful operator as an
agent and Takaful participants collectively as principal. Unlike the sharing of profits in
Mudharabah model, the reward for agent in the Wakalah model is the fee payment.
1
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.
4
The striking conceptual difference between Takaful and conventional insurance is
that risks in Takaful are not exchanged by way of contribution payments to operators
(Omar & Dawood, 2000). In essence, operators are not selling and participants are not
buying any risk coverage. Thus, operators are not assuming or underwriting any risks
from participants. Rather, risks are distributed among Takaful participants whom agree to
jointly assume the risk (Mohd Fadzli 1996a&b; Maysami & Kwon, 1999; Billah, 2003).
It is in this sense that operators are considered as merely intermediary or fund managers,
managing Takaful funds on behalf of participants. As fund managers, contributions paid
by participants are regarded as ‘fund’ or ‘liability’ to operators and rights over it remains
attached to participants. Several Islamic concepts in Takaful system (but not in
conventional insurance) further differentiate Takaful from insurance conceptually.
Ta’awun, Tabarru’at, Mudharabah and Wakalah are the Islamic concepts which are
justified by Shari’ah and employed by Takaful system. Mudharabah and Wakalah for
instance depict economic contractual relationship between operators and participants.
Mudharabah concept works based on the sharing of profits between the two parties while
Wakalah concept operates based on the payment of fees.
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).
Operational wise, conventional insurance works on the basis of “risk assumption”
by insurer or the “trade of risk” (Omar & Dawood, 2000). Through the selling and buying
of insurance contracts and in the absence of Ta’awun, Tabarru’at and Mudharabah or
Wakalah, the whole system of insurance is said to have operated involving 3 basic
elements which are totally contradictory to Islamic rules of Shari’ah (Mohd Fadzli
1996a&b; Maysami & Kwon, 1999; Omar & Dawood, 2000; Billah, 2003). The elements
are “gharar” “maisir” and “riba”. According to Azman (1997), Gharar could exist in
insurance in 4 forms: Gharar in the outcome, Gharar in the existence, Gharar in the
results of the exchange and finally Gharar in the contract period3. Maisir or gambling
originates from gharar (uncertainty), and exist in insurance since profits or losses to
insurer would very much depend on chances which closely associated with claims level.
Claims are in turn, could not be controlled by insurer. Also, maisir in insurance operation
resembles to a certain extent “risk-taking” whereby insured could either receive huge
amount of money (claims payment) without an equivalent amount of input (premium
paid) (Omar & Dawood, 2000).
3
Please refer to Azman (1997) for further discussions on these four types of Gharar.
5
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 interestbearing (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.
Unlike conventional insurance, the operational mechanism of Takaful is based on
the principle of joint guarantee which employs the concepts of Ta’awun and Tabarru’at.
It indemnifies participants facing material hardship through the payment of claims
benefits using Takaful fund which are pooled by participants in the Takaful scheme. In
Takaful, participants themselves as opposed to insurer, agree to jointly guarantee among
each other. In other words, it is the participants who jointly underwrite the subject risks
and not the operator. At the end of the contract period, surplus from Takaful fund (if any)
will be distributed back to participants. Depending on the model adopted, if it is
Mudharabah model, only participants’ portion (as specified in the Mudharabah contract)
of the surplus will be distributed. If it is the Wakalah model, the surplus after deducting
the agency fees will be distributed back to participants. The use of such Islamic concepts
in addition to the concept of mutual assistance through the sharing of losses among
participants are principally, having the overall objective of eliminating (or minimizing)
uncertainty in Takaful contract (Mohd Fadzli 1996a&b; Omar & Dawood, 2000).
According to Siddiqui (2000), the rule of “large number” also plays its role i.e. what is
uncertain with regards to an individual will ceased to be uncertain with regards to a very
large number of individuals. As gharar is eliminated (or minimized), maisir (gambling)
which is the consequence of gharar, will also be avoided.
6
Takaful: Malaysia’s Progress of Development
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 socioeconomic 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)
7
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.
3.0
ACCOUNTING AND REPORTING FOR TAKAFUL: ITS CONCEPTUAL
INSIGHTS
3.1
Islam, Accounting & Reporting and The Islamic Accounting
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.
As a matter of fact, Islam is more than just merely a religion as it is been
commonly understood. Rather, it is a social order with a complete code of life (Al
Buraey, 1990). Due to the nature of Islam as a complete guidance on life, worldly
activities including (but not limited to) accounting and reporting must also find its
position and relevance in Islam and its functions should transcend beyond that of worldly
purposes. From a secular perspective, the position of accounting could be seen
conceptually as a mechanism in discharging and portraying the state of accountability of
enterprise due to the separation of ownership and control. Reporting on the other hand
relates to accounting disclosure through a proper presentation format to relevant users if
it is viewed specifically from the perspective of accounting discipline. Both however find
its position as tools in discharging and portraying the state of accountability of an
enterprise.
8
In another dimension, accounting and reporting also functions as a means in
providing useful information so that accounting users are equipped with necessary
information in making any subsequent related decisions. In this regard, the position and
functions of accounting and reporting in a secular dimension are generally limited to only
for worldly aims and purposes. However, the position of accounting and reporting in
Islam is argued to be extremely important and unambiguous and it has wider functions.
This is reflected in the number of recurrence of the word “hisab” or “account” mentions
by God in His glorious book i.e. the Holy Qur’an. According to Ros Aniza (2003), such
word appears more than 80 times in various verses of the Holy Qur’an. “Hisab” is the
root word of “Al-Muhasabah” in Arabic which refers to “accounting”. “Account” in
Islam relates to “man’s obligations as God’s vicegerent to “account” to God on all
matters pertaining to their endeavours for which every man is accountable” (Ros Aniza,
2003 p.25). This is given the fact that humans are trustee (or steward) to God and
therefore, humans agree to assume the responsibility of being vicegerents on earth in
covenant with God (Abdul Rahim, 2003).
According to Abdul Rahim (2003), accounting and reporting in Islam is expected
to be influenced by both the way the economic system is organized and the philosophy
underpinning its system. Since in Islam, the economy is organized in a way that it aims at
achieving the Shari’ah objectives i.e. falah – comprehensive welfare in both, this world
and hereafter (Abdul Rahim (2003), hayyatan tayyibah (good life) and Al-Adl – social
justice (Haniffa & Hudaib, 2002), it warrants all economic activities to be religiously and
morally directed towards the achieving of those objectives. As a result, the process of
accounting and reporting upon economic activities in Islam demands for ethical and
religious values to be regarded as a norm and economic relationship as moral relationship
with spiritual attachment (Abdul Rahim, 2003). These were driven by the fact that Islam
does not recognize the separation between sacred and secular (Al Attas, 1993),
necessitating for worldly activities including accounting and reporting to be shaped and
guided by sacred (religious) aims and to be regarded as an act of worship (ibadah). These
will ensure accounting and reporting in Islam to operate in line with the spirit of
Shari’ah, paving path for the attainment of falah, hayyatan tayyibah and Al-Adl.
One unique characteristic of the concept of accounting and reporting in Islam
could also be seen in the existence of two angles (Raqib and A’tid) monitoring and taking
account of all human deeds thoroughly at all times. In hereafter, those accounts will be
presented (reported) before God and humans will be judged accordingly. Similarly, in
business transactions, each transaction should be accurately and properly recorded and
accounted for. At the end of accounting period, a set of accounting documents will be
drawn and both, directors and management of the company (as shareholders’ trustee) will
be judged accordingly by shareholders who will then act (either to reward or otherwise)
on management and directors, based on results stated in those accounting documents.
Thus, “account” in Islam resembles “accounting” in the sense that every Muslims are
responsible to do their duties as prescribed in the Qur’an since such responsibilities will
be questioned, judged and rewarded (or punished) in the hereafter. This is effectively the
accountability concept. In Islam, “accountability” is embedded in the concept of humans
as God’s vicegerent on earth.
9
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 therefore, is not a new phenomenon in Islam and to Islamic society
(Zaid, 1997). So do the concept of reporting. Both accounting and reporting find its
position and functions well attached and embedded in the concept of “vicegerent” and
“Islam as a way of life”. The introduction and promotion of a new aspect in the field of
accounting termed as the “Islamic Accounting” is seen as a direct manifestation of Islam
as a way of life. As summarized and defined by Shahul & Yaya (2005), Islamic
accounting is “the process which provides appropriate information (not necessarily
limited to financial data) to stakeholders of an entity which will enable them to ensure
that the entity is continuously operating within the bounds of Shari’ah and subsequently
ensuring the entity’s ability to achieve the Islamic socioeconomic objectives” i.e.
Shari’ah objectives. In addition, accounting and reporting in Islam are also tools, which
enable Muslims to evaluate their own accountabilities, to both fellow humans and God
(Shahul, 2000; Abdul Rahim, 2003). Hence, accounting and reporting in the context of
Islamic accounting carries holistic and wider functions from the secular view point, and
having a position well attached to sacred aims of achieving the Shari’ah objectives.
3.2
Accounting and reporting in Islamic Institutions of Takaful – Its conceptual
insights
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.
10
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 prespecified 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 addition, reporting in Takaful requires for a more comprehensive disclosure
compared to insurance reporting. The focus of reporting should be on both, the Shari’ah
adherence and the financial strength (of both the operator and the Takaful funds
established). In essence, participants in Takaful scheme should rightfully be entitled to
several rights, including receiving regular flow of information on underwriting strategies,
investment objectives and policies relating to Takaful funds, operational guidelines that
govern the relationship between operator and participants, and the basis of allocation of
profits (if Mudharabah model) between the two parties and the basis of fees payment (if
Wakalah model). More importantly, adequate disclosure of information in which
participants will be better able to assess the potential risks and rewards attached to their
contributions paid, as well as on the extent on adherence to Shari’ah over the
management of such contributions and subsequently making appropriate decisions to
protect their own interest, if the situation warrants. In this regard, it is argued that the
accounting and reporting for Takaful is consistent with the attributes of Islamic
accounting. The processes of accounting and reporting in Takaful companies should
provide appropriate information (financial or otherwise, economic and Shari’ah related)
to its stakeholders. The processes should also enable operators to ensure that they will
continuously operating within the bounds of Shari’ah.
3.3
Malaysian Takaful Accounting & Reporting Regulations
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
11
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).
3.4
The Role of 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.
5
As at 13 September 2004, MASB had issued 33 accounting standards, 26 of which were adopted from 31
IASs in use today.
6
http://www.masb.org.my/masbmr_pr_detail.asp?prid=29122004-171339
12
In the absence of specific and established Takaful accounting and reporting
standards in Malaysia, Takaful operators are only left with BNM circulars and guidelines.
Nonetheless, operators are also presented with Shari’ah based, non-legal backed
accounting and reporting standards produced by the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI). These standards however, have
never been enforced on operators for their adoption by BNM but it did indirectly allowed
operators to adopt AAOIFI standards on a voluntary basis.
3.5
AAOIFI Standards on Islamic Insurance
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.
4.0
RESEARCH METHODOLOGY
In general, a mixture of various research methods will be used in this study. To
achieve the 1st research objective, literatures on concepts and operational aspects of
Takaful and insurance respectively will be reviewed. The understanding on the
conceptual and operational aspects of both insurance and Takaful would then be extended
to accounting and reporting in order to build a linkage between those concepts and
operational aspects and that of accounting and reporting. This will also be assisted by the
comparative study between insurance standards and Takaful guideline. For the 2nd
research objective, it involves the process of reviewing the Takaful Act, relevant MASB
standards on insurance, relevant BNM guidelines and circulars on accounting and
reporting for Takaful, the survey on BNM corporate reports and website as well as the
reviewing of relevant AAOIFI standards on Islamic insurance. In addition, the relevant
guideline on accounting and reporting for Takaful and the relevant AAOIFI standards on
Islamic insurance will also be critically examined and subsequently compared. These are
expected to provide reasonable coverage on the nature of accounting and reporting
regulations currently available for adoption by Takaful operators in Malaysia. Finally, in
building the empirical evidence on the extent of compliance to BNM guideline and the
extent of acceptance to AAOIFI standards on Islamic insurance, and subsequently
seeking reason(s) for such extent of compliance and acceptance, two steps are required.
First, a scoring of conformance to BNM guideline and AAOIFI standards on Islamic
insurance based on three consecutive years (2003-2005) of Takaful operators’ annual
reports will be conducted.
13
Secondly, telephone interviews with accounting staffs of Takaful operators will
also be conducted. This is to obtain consensus over the reasons for full (or partial)
compliance or acceptance of the standards and guideline in question. On the scoring of
conformance, both BNM guideline and AAOIFI standards will be transformed into
scoring lists. Such lists comprise of items which are relevant to the specific nature of
Takaful operations. The items are classified into several categories which reflect the
specific operational mechanism of the Takaful system. A score of ‘0’ will be given to
company which do not comply and ‘1’ for company which complies. Then, the
percentage is used to gauge the extent of compliance and acceptance to standards and
guideline concerned.
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).
Comparisons between the requirements attribute in Malaysian FRS insurance
standards and BNM’s GPT6 provides justification on the accounting and reporting
differences between insurance and Takaful. Apparently, the accounting and reporting for
Takaful are dissimilar from insurance. The dissimilarities originate from the unique
operational aspect of Takaful which requires the establishment of a pre-specified
relationship between operator and participants. This brings about the differences in the
task of “risk assumption” and the “contributions ownership” which influences and affects
both the accounting and reporting aspects of the Takaful system. Essentially, 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
primarily because risks in Islam could not be exchangeable and constitute as subject in
the Islamic commercial contract since it will lead to the existence of gharar (uncertainty).
As such, to avoid having sales contract as in insurance, Takaful does not have any sales
contract, rather a combination of Ta’awun and Tabarru’at contracts among participants
and Mudharabah or Wakalah contract between operator and participants. The operatorparticipants relationship of either Mudharabah or Wakalah in Takaful necessitates for
risks to be assumed by participants collectively and not operator.
14
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.
In contrast, since the insurer-insured relationship in insurance is based on a direct
seller and buyer relationship, premiums paid by policyholders (insured) are considered as
revenue to insurer and not to the insurance fund. This signifies the shift of ownership
over such premiums from insured to insurer, who is now the legal owner of such
premiums. As a result, it makes the responsibility of assuming the risks to lie on the
shoulders of insurer. Hence, claims and reinsurance are now becoming direct expenses to
insurer since they legally owned the insurance fund. In terms of surplus allocation,
insurer is not obliged to share with policyholders both the underwriting surplus and
investment returns. This is with the exception of investment linked policies (in life
insurance) in which the agreed portion of investment surplus is shared with
policyholders. Also, there is no sanction on the permissibility of charging management
expenses to insurance funds since the fund is legally and effectively belongs to insurer.
15
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.
Comparing BNM’s Takaful accounting and reporting regulation with that of
conventional insurance accounting and reporting regulations (provided by both MASB
and BNM), it is argued that in terms of scope, is less comprehensive since insurance has
its own specific accounting and reporting standards produced by MASB and such
standards are further supplemented by BNM circulars and guidelines. Such
comprehensive regulation on insurance accounting and reporting was notably the result
of the reasonably important and well established insurance industry which has been in
Malaysia for more than 60 years. However, it is rather unfortunate to note that Takaful
industry which is equally important to the Malaysian economy is still lacking in terms of
accounting and reporting regulation. It is only after 20 years of Takaful existence in
Malaysia that operators are having its owned, standardized guideline on accounting and
reporting through the introduction of GPT6 in July 2004. Even so, it was predominantly
developed in a conventional manner whereby many of its underlying concepts in the
reporting format do not clearly represent the unique characteristic of Takaful operation
which essentially operates based on different set of parameters. This is supported by the
fact that GPT6 had to a certain extent, replicated the requirements in GPI15. As such, it
does not clearly represent the pre-specified relationship of either Mudharabah or
Wakalah which is considered as the unique and the main striking difference between
insurance and Takaful. In this regard, it is argued that the insuring public particularly the
non Muslims (or even the Muslims) would not be able to fully differentiate the
underlying concepts between insurance and Takaful system and subsequently unable to
appreciate the comparative advantage of opting for Takaful system as opposed to the
conventional insurance system.
16
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.
In FAS 12 for instance, the “Statement of policyholders’ surplus (deficit)” and
“Statement of sources and uses of funds in the Zakah and charity fund” are classified as
“Main Statements” in its component of financial statements, but GPT6 relegated them to
“Notes to the Accounts” section, referred to as the “Takaful Fund Accounts” and “Zakah”
respectively. “Statement of policyholders’ surplus (deficit)” is basically the Islamic
insurance fund account which contains items reflecting its movement. This is considered
important to policyholders since they are the owner of the funds and perhaps this is the
reason why AAOIFI requires the statement to be the main statement. This as discussed
earlier, primarily reflects AAOIFI prioritized focus and emphasis on areas which deemed
to be important to the specific nature of the Islamic insurance operations. In FAS 13, the
requirements are far more comprehensive and relatively more transparent than GPT6. It
prescribes clearly the disclosure requirements on the nature of relationship between
policyholders and operator and its subsequent implications on the operational aspects of
Islamic insurance.
17
Such requirements are premised on the underlying objective of determining and
protecting rights and obligations of both parties i.e. policyholders and operator. Having
no equivalent section in GPT6, this area is however only been addressed minimally by
GPT6. For example, its reporting format indirectly requires disclosure of the reward
amount entitled by operator out of the surplus, but the nature of relationship between
policyholders and operator is still left unaddressed. As a matter of fact, GPT6 does not
even require operators to specify in operator’s financial statement, their model of
operation i.e. either Mudharabah or Wakalah. Such information need to be inferred from
the allocation of surplus amount provided in the financial statements. This would render
the financial statements of Takaful companies to be less useful since Islamic insurance
system operates based on the concept of funds which requires the relationship between
participants and operator who manage those funds to be clearly specified. In essence, this
is not in line with the suggested conceptual insights on Takaful accounting and reporting
as discussed in the earlier section. In addition, FAS 15 demonstrates the well structured
nature and the relative focus of AAOIFI standards compared to GPT6 by way of clearly
separating the provisions and reserves items. It also introduces 2 additional reserves
which are not clearly referred to by either Malaysian FRS standards or GPT6. This is
essentially to provide extra precautionary measure in cushioning the impact of
uncertainty over the occurrence of risks in Islamic insurance system.
6.0 RESULTS & DISCUSSIONS ON CONFORMANCE SCORING AND
TELEPHONE INTERVIEWS
Tables below tabulate trend of conformance/acceptance of 4 Malaysian Takaful operators
to both GPT6 and AAOIFI standards on Islamic Insurance over 3 years period (2003 to
2005). Since GPT6 was introduced in July 2004 and that the latest annual report date
(financial year end) among the 4 operators was June, thus it makes 2003 and 2004 as the
“pre GPT6 period” and 2005 as its “post period”7. The results indicate that, prior to the
introduction of GPT6, constant trend of conformance was observed and it was at a
reasonably high percentage of 91%. This could be explained by the fact that ever since
their inception, operators have been following BNM accounting and reporting circulars
for Takaful which were developed based on GPI15 and that GPT6 is basically the
replication of GPI15 (as argued in the earlier section) in many reporting aspects with only
slight modification to suit Takaful principles. As such, it explains the reasonably high
level of conformance to GPT6 even before its introduction. The percentage however
represents the average for all the first 3 operators’ conformance (4th operator only issued
their 1st annual report in 2004). Detailed analysis shows that the percentage was dragged
down by the relatively low conformance level during the pre period by the 1st operator in
which it only managed to get slightly above 80% score.
7
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.
18
Table 6.1 – Analysis on Conformance/Acceptance Trend – Malaysian Takaful Guideline
& AAOIFI Standards (For all Operators)
Malaysian Guideline
Pre Period
Post Period
AOIFI Standards
2003
2004
2005
2003
2004
2005
Total Number of Items Complied With
91
120
134
76
103
106
Total Number of Applicable Items
98
130
136
109
144
143
Average Number of Items Complied With
30
30
33.5
25
25.8
26.5
Average Number of Applicable Items
33
33
34
36
36
35.8
Average Percentage of Conformance
91%
91%
98.5%
70%
72%
74%
Table 6.2 – Analysis on Conformance/Acceptance Trend – Malaysian Takaful Guideline
& AAOIFI Standards (By Operator)
Malaysian Guideline
Pre Period
2003
2004
Post Period
2005
AAOIFI Standards
2003
2004
2005
Operator 1
82%
82%
100%
65%
65%
73%
Operator 2
97%
97%
97%
68%
Operator 3
100%
100%
100%
76%
68%
76%
70%
76%
Operator 4
N/A
90%
97%
N/A
77%
77%
Average Percentage of Conformance
91%
91%
98.5%
70%
72%
74%
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
19
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.
Detailed analysis on GPT6 reveals that non conformance could be found in
several disclosure areas. Among others, they includes the reporting on unearned
contributions reserve (UCR), net outstanding claims and claims incurred, disclosure on
investment for each fund available, Zakah disclosure and the disclosure on the
confirmation statement that Shari’ah rulings and precepts should prevails at all times
over the other applicable approved accounting standards and guidelines. Telephone
interviews were then arranged with operators to get explanation on their nonconformance. Upon inquiring the operators concerned regarding UCR and claims, they
explained that since the various classes of risks arranged under the general Takaful
business have already been considered as one unit Takaful scheme, and that participants
collectively, willingly relinquished their individual rights over the contributions paid (i.e.
tabarru’at), hence separate UCR and claims disclosure for each class of risks are deemed
as unnecessary. However, it is argued that given the nature of UCR and claims which are
an expenses to the Takaful fund, and that participants should have the rights to know
what constitutes the elements which reduces the surplus attributable to them, then it is
20
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.
On the non-conformance to disclosure requirement regarding investment, the
operator concerned argued that their emphasis of investment reporting on shareholders’
fund only was due to the fact that the annual report is only for the reporting on the
business operations of the entity i.e. operator. Takaful fund is considered as a different
entity and the role of the company is only to manage the fund. As such, the disclosure of
information on investment income (in the respective Takaful funds’ revenue account) is
deemed to be sufficient. Thus, the information on the value of each investment for
respective funds and its movement are considered as unnecessary. In this regard we
argued that comprehensive reporting on cost value and the movement of each investment
types for each Takaful fund managed by an operator is reasonably important and
necessary. The reason is that, as the ultimate owner of the Takaful fund from which the
investment monies were sourced, participants should rightfully be entitled to
comprehensive information regarding the investment which should cover the information
on its cost value, related expenses incurred as well as its income or losses generated,
separately for each funds available. In this respect, GPT6 has rightfully considered such
information as part of its disclosure requirements. Information on investment income, its
related expenses, surplus and losses will only explain part of the story regarding
investment i.e. the viability and profitability of the investment portfolio. The cost value
and its movement are also necessary in providing the complete picture on the position of
the investment on a certain date (annual report date). As such, both aspects (profitability
and position) of the investment should be made known to participants.
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 nonconformance 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.
21
7.0 CONCLUSIONS & RECOMMENDATIONS
Current study is designed to elucidate the differences between insurance and
Takaful from 4 defined perspectives – concepts, operations, accounting and reporting.
The paper also explored the nature of the currently available and applicable Takaful
accounting and reporting regulations in Malaysia with the focus on BNM and AAOIFI
types of regulations. In addition, it also builds empirical evidence on the extent of
compliance and acceptance of Malaysian operators towards each type of regulations.
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 prespecified 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.
22
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.
The results of telephone interviews also highlighted several weaknesses in BNM’s
supervisory processes. The “NO non-compliance” status given to operators despite the
fact that operators did not provide the confirmation statement on the superiority of
Shari’ah requirements over and above other applicable approved accounting standards
and guidelines during BNM on-site audit indicates lack of coordination between its
regulation and supervision division. In this case, the Insurance supervision staffs did not
consider the importance of providing confirmation statement as required by GPT6 which
was developed by the Islamic Banking & Takaful department (belongs to Regulation
division of BNM). As such, it is suggested that Insurance supervision staffs of BNM
should at least understand the whole operational aspects of Takaful business and its
relationship with the Shari’ah and more importantly the importance of each requirements
set out in any current and future guidelines formulated by the Islamic Banking and
Takaful department of BNM (Regulation Division). For this reason, better coordination
between the two departments is extremely imperative.
In addition, findings on conformance towards AAOIFI standards suggest that
AAOIFI Islamic insurance standards (which were analyzed and found out to be better in
certain aspect compared to GPT6) are less accepted by Malaysian Takaful operators. This
is primarily because BNM neither directed nor recommended for such standards to be
adopted by operators, even in the event of operators are operating without comprehensive
and codified rules on accounting and reporting, at least until July 2004 (the date which
GPT6 was introduced). The decision not to recommend AAOIFI standards is however
seems to be logical (albeit intriguing) since GPT6 was introduced only 4 years after the
introduction of the 1st AAOIFI standard on Islamic insurance i.e. FAS 12. BNM might
not want to affect the consistency of accounting and reporting practices of operators by
having to adopt different set of standards and guideline within a short period of time.
23
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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