Reform of Retakaful Industry

Abstract

One of the fundamentals in the risk management system for a takaful company is that it needs to cede its risks to the second level of risk carriers (retakaful companies). At the same time, being a sharī‘ah-compliant company, the expectation is that its operational chain is in line with Islamic rules and principles. However, due to limitations on the maturity of the retakaful market, sharī‘ah scholars have used the precept of necessity (ḍarūrah) in the use of conventional reinsurance. The permissibility of using conventional reinsurance has been adopted for decades, going back to the establishment of takaful. However, this practice has, to a certain extent, weakened the perception of the sharī‘ah compliance aspect of takaful. This article aims to enhance the arrangement of the takaful industry practices in relation to the fatwā on the permissibly of using conventional reinsurance based on the precept of ḍarūrah. It has employed a qualitative method, in the form of semi-structured interviews, to explore the views of six sharī‘ah scholars on whether the concept of ḍarūrah is still applicable. It is found that the majority of scholars, i.e., five, were not provided information or analysis that could have facilitated them in assessing and making the informed decision on the applicability of the precept of ḍarūrah in the use of conventional reinsurance. There is a consensus among the scholars on the given proposals to enhance the current practices of the market and boost the retakaful market. This study introduces new perspectives pertinent to review the retakaful industry’s legitimacy.