The conventional financial
system penalises late payments and loan defaults by charging payment interests
or riba. Nevertheless, this is not
permissible under the Islamic principles of Shariah. If charging interests are
not allowed, what tools and methods do institutions in Islamic financial
institutions, such
How do
takaful and retakaful operations deal with late loan repayments?
Unlike conventional loans
that impose interests, retakaful financial dealings impose late payment charges
for the following reasons:
● To avoid retakaful operators
being ranked in lower pecking order amongst other operators in the same treaty
settlement if the retakaful operator imposes more lenient late payment
conditions;
● To cover costs related to
the payment delay process, such as reminder notices and legal fees
● To cover losses caused by
the inability to utilise funds for other business purposes arising from the
delay.
● To instil discipline in
making payments according to the stipulated schedule.
Concept And
Challenges in Creating A Shariah-Compliant Supply Chain
Retakaful pools face a risk similar
to that of takaful pools; that is, excessive claims may consume the fund.
Hence, they need to limit their exposure by spreading the risks to other pools
through a mechanism called “retrotakaful.”
● Takaful operators on the
Shariah Advisory Board are expected to allow retakaful/retrotakaful capacity to
be sourced from conventional players on the grounds of dharura (utmost necessity) due to limited supply in the market.
● Takaful operators usually
operate with a limited appetite, causing them to reject retrotakaful exposures.
Some main factors are limited domestic business capacity, and the need to limit
financial exposure due to accepting both retrocession and retrotakaful.
● Conventional stakeholders
have significant financial strength and capacity; they could offer more
value-added capabilities to their clients than their retakaful counterparts.
Malaysian Re
as A Provider Of Retakaful Solutions
Malaysian Re, under its
Malaysian Re Retakaful Division (MRRD), is a key player in the retakaful
market, licensed to conduct both life and general retakaful business by the
Ministry of Finance. It was established to complement Malaysian Re’s
conventional reinsurance operations by extending the Shariah-compliant supply
chain to local and international takaful operators. It leverages Malaysian Re’s
underwriting best practices, which include good rating disciplines, actuarial
assessments, and appropriate pricing models/tools. Head over to https://www.malaysian-re.com.my/our-solutions/retakaful to read more.