There are various definitions
for the word capital. Generally, capital refers to assets owned by a company which
will be used to finance daily operations (through creating products / services). As capital plays important roles in an
economic growth, having adequate capital is crucial for the Takaful Operator (TO) in order to fund an operational expense and
eventually contributes to the smoothness of takaful operation.
The takaful operation largely involves with
managing claims from the participants. The numbers of claims as well as claims amount
is highly fluctuate due to many factors. The TO must ensure that the amount of
assets in the takaful fund able to pay all the claims arises. In addition, the
fund also would be able to support the heavier claims outflow (the claims
numbers is higher than expected) by using the surplus in the takaful fund.
Thus, it is important to have buffer in the fund in order to accommodate any
After joining the takaful scheme, the main
concern of the participants of course is to pay their claims according to the
agreed contract. The takaful fund will be deemed to be insolvent when the
liabilities are higher than assets. In other word, the fund is not able to pay
the claims when its due. Therefore, the TO has a responsibility to bear any
deficiency or deficit by injecting capital into the takaful fund through qard hasan (interest-free loan). The TO provides
the qard hasan by using (source from)
shareholder’s fund (operator’s fund) in order to cover the deficiency. This is one
of the reason the takaful industry is highly regulated by Bank Negara Malaysia
mainly on the requirement on minimum required adequacy capital. Bank Negara
Malaysia has developed the The Risk-Based Capital Framework for Takaful
Operators. The Framework sets out among others manner to compute capital
adequacy position of the takaful operators, including to set and measure
Supervisory Target Capital Level and Individual Target Capital Level. Hence, the solvency of the takaful fund and the TO’s financial position need to
be remain at healthy levels at all times.
Normally, rapid growth of the business is considered
a good thing. However, for TOs, they need to manage the business growth carefully.
For instance, they need to find balance between launching aggressive marketing
campaign and willingness of the shareholders to provide capital. Even though
the TOs have more capital, that’s mean more coverage can be offered to
potential customers as well as more risks can be cover (because of the shareholder
fund’s capacity can cover the volume of the business transaction), however, in
point of view of shareholders, they are not comfortable with this situation and
always have concern they might lose their investment.
To conclude, having adequate capital is
essential to TOs not only to support the smoothness of daily operations but
also plays important roles in business growth. However, the challenges faced by
the TOs among others is to manage the available capitals towards the positive
direction that could support the business expansion plan for short term and long
term as well.