Risk assess the risks faced by financial institutions

 

Risk management can be defined as a
systematic approach to managing risks that threaten the assets and income of a
business or entrepreneurship. There are five types of risks in business have been
identified that are relevant to takaful
as follows:

1.    
Underwriting risk

2.    
Operational risks

3.    
Credit risk

4.    
Liquidity risk

5.    
Market risk

 

Underwriting risk and
operational risk are directly related to the operations of the takaful company.
Whereas, credit risk, liquidity risk and market risk are associated with the
company’s investment activities. All types of risk in takaful require specific
risk management strategies and need to be managed individually.

 

The effectively
manage the risks in takaful include the following steps:

1.    
Identifying
risks

2.    
Managing
risks

3.    
Enhancing
risks management culture in takaful industry

 

The three
current practical challenges in risk management which is confronting takaful
operators as follows:

 

1.              
Shari’ah
Based Challenges

Practically, most of the risk management techniques
are not applicable to Islamic financial institutions due to Shariah compliance
requirements. Therefore, Shari’ah-based challenge to risk management was
created for takaful companies. These challenges arise because Shari’ah
prohibits the use of certain instruments such as derivatives involving futures,
options, swaps; and debt sales, but these instruments are considered beneficial
in conventional risk management.

 

2.              
Internal Controls

Internal controls are
important to recognize and assess the risks faced by financial institutions
including takaful companies. The existence of effective internal controls can
prevent takaful companies from systemic crises and enable them to be aware of
the possible problems and risks they may face in the future. To have an
effective internal control mechanism, the takaful company must ensure that
Shariah controls are in addition to all statutory regulations. It urges Syariah
audit requirements as part of an on-going system of internal control.

 

 

3. Corporate Governance

The structure of corporate
governance determines the distribution of rights and responsibilities of the board
of director (BOD), managers, shareholders and other stakeholders. While effective
corporate governance will ensure the independence BOD which will develops
policies and implements strategies for risk management. The lack of effective
corporate governance framework prevent the independence of the BOD and thereby
poses a challenge to risk management. It continues to increase operating risks
which may lead to operational failures due to BOD’s inability to implement
unbiased and independent decisions for the best interests of all stakeholders.
Takaful companies are faced with additional challenges related to the Shariah
Supervisory Board’s corporate governance where it requires more need to
incorporate corporate governance culture to address issues related to the
Takaful industry.