Background Information
Takaful insurance companies mobilize resources with the aim of cautioning policyholders from severe risks and various forms of adversities. Sharia, the Islamic religious principle governs the operational scope of Takaful Insurance business model. The underlying principle that inspired the Muslim brothers to develop the companies revolves around the provision of the alternative and low-cost insurance services to those offered by other insurance agencies. The company’s development was also aimed at curing the problems attributable to the existing firms’ inability to observe Islamic restrictions on uncertainty, gambling and interest standards (Kader et al. 2014). However, Saudi Arabia-based companies have not been able to achieve optimal results due to numerous constraints including low capital, the high cost of operation and inferior financial management strategies. To mitigate the problems, the companies may consider embracing the Takaful financial models due to their ability to promote cost efficiency. For Takaful insurance companies to attract more capital, realize cost efficiency and serve customers better, they should identify and adopt a suitable Takaful financial model among Mudharabah, Wakalah, Hybrid, Waqf models.
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Indeed, the arrangement used by Takaful insurance is similar to the strategy that mutual insurance institutions are using in the conventional market. However, unlike the mutual funds where members pay premiums, in the Takaful arrangement, the policymakers agree to guarantee each other through contributions (Hamza 2013). The Takaful fund is created by a pool of funds that policyholders and investors contribute. The type of coverage required by the members and their circumstances determine the contribution amount made by each member. The aspects are consequential since they influence the cost of insurance premiums, compensation and general operation of the companies. From the facts, it is manifest that Takaful insurance companies may not achieve much in the absence of the Takaful financial models. What is important is for each company to choose the best suiting model to facilitate effective financial mobilization and utilization.
The Aims, Objectives, and Questions of the Research
The research aims to establish better and most efficient ways that can enable Takaful insurance companies in Saudi Arabia to operate and serve customers effectively. More specifically, the study aims at establishing the impact of Takaful financial models on cost efficiency for Saudi Arabia Takaful insurance companies. Cost management has been a problem that threatens to curtail the growth of the companies including delivery of quality services. To achieve this aim, the study will look at the extent to which various financial models affect Takaful insurance cost efficiency. Likewise, the study will explore the role of governance system in conflict resolution within Takaful companies. Understanding the problem is vital since emerging disagreements between the managers (agents) and the owners of the insurance companies (principals) have been slowing down efficient operations. According to Kader, et al. (2014), a sound financial management system can enhance the economic performance of Takaful insurers and make them realize operational efficiencies.
Research Objectives
Research objectives are the accomplishments that a study hopes to will have three aims.
1. To investigate the impact of a Takaful financial model on the cost efficiency for Takaful student.
2. To establish the effect of choosing either Mudharabah, Wakalah, Hybrid or Waqf Takaful financial models by insurance companies.
3. To identify the parameters that companies can use to choose a sustainable Takaful financial model.
4. To explore the role of good governance in promoting efficiency and cost effectiveness.
Research Questions
1. What is the impact of a Takaful financial model on the cost efficiency for Takaful student?
2. What are the specific effects of choosing either Mudharabah, Wakalah, Hybrid or Waqf Takaful financial models by insurance companies?
3. What are the parameters that companies can use to choose a sustainable Takaful financial model?
4. How will good governance help Takaful companies to enhance efficiency and cost effectiveness?
Literature Review
Mudharabah, according to Hamza (2013) is a profit-sharing Islamic business model normally applied to a commercial or a business contract between the policyholders and the Takaful insurers. Under this arrangement, the operator signs a profit-sharing contract with the Takaful insurer and the policyholder. The insurer, in this case, is referred to as “Mudharib” and is entrusted with the Takaful insurance business. The policyholder or capital provider is called “Sahibulmal,” and he is obliged to provide the Takaful contribution. Through this business model, the Sahibumal determines the profit sharing ratio. After deciding the profit sharing ratio, the Sahibumal signs a contract with Mudharib. The agreement spells out the profit to be shared including the proportion between the participating parties. In essence, the shared income is the surplus amount from underwriting and returns on investment in respect of the Takaful funds only.
In the event of a deficit, a loss or an underwriting expense of the Takaful fund, the “Sahibulman” or capital provider bears the cost (Hamza 2013). Although the operator does not bear the losses of Takaful fund, he safeguards the interest of the sahibulman to prevent the effects from jeopardizing the confidence and credibility of the Takaful insurance companies. The main benefit of using the mudharabah business model is that it provides Takaful insurance managers with incentives to engage in operational activities that promote wealth maximization. The mudharabah business model is commonly practiced in countries found in Eastern Asia such as Malaysia and Brunei.
“Wakalah” is an Arabic term which means agency. The wakalah business model facilitates the formation of joint forms agency relationships in circumstances where two parties agree to conduct business. The agency agreement exists where the operators are given the right to manage the policyholder’s contributions in a variety of Takaful products (Kader et al. 2014). Under the agency relationship arrangement, the operator is free to charge a fee for providing the contracted agency services. The charged fee is collected from the contributions that the policyholders make to the Takaful. The charges include the management expenditure fee that forms an upfront cost and it is expensed from the Takaful fund. The cost management under the model enhances the prospects of insurance companies’ ability to earn more revenue not only from the agency fee, but also, from the policy holders’ fund.
However, some instances exist when the Takaful insurances charge performance fees to expense the costs related to management of the Takaful investment fund. Partly, the fees help in supporting refund requests when cancellations occurs. THe operator uses the money to compensate the policyholders the net balance of their contribution (Alshammari 2009). The best aspect is that even when the payment is made, the operator has to deduct the upfront fee before realizing the refund money. Takaful insurers treat insurance premiums in both the mudharabah and wakalah arrangements as a donation to fund what policyholders had contributed. The insurer returns any surplus exceeding the projected Takaful fund to the policyholders as a charitable contribution or an annual policy refund (Abdullah & Yaacob 2012). Takaful insurers in both arrangements must also provide a loan without requesting for any interest for the Takaful fund when the contributions fail to meet the solvency margin minimum requirement. When such instances occur, the future annual surpluses are used to repay the loan thus cut the cost of operations.
The hybrid business model is a combination of the wakalah and mudharabah arrangements. The arrangement allows a fee to be wired to the operator as upfront charges from the Takaful fund. In exchange, the operator will have the right to share the profits obtained from investment done using the Takaful fund with the capital provider as provided by the mudharabah contract. The hybrid arrangement carries its underwriting processes using the wakalah model and the profit sharing criterion based mudharabah model for its investment activities.
On the other hand, waqf is a form of Takaful financial model that uses the principle of endowment. It permits the policyholder to participate in a Takaful product that is paid using the Takaful contribution in accordance with the endowment principle (Al-Amri & Hossain 2015). Before the contract is enforced, the operator establishes a waqf account within the Takaful fund. Similar investment to the three business models described above is used in the case of the waqf arrangement. The generated waqf fund is used to extend benefits to policyholders in accordance with the deed of waqf. In particular, the model provides incentives that guarantees issuance of financial assistance to the policyholders in case of losses.
Regarding the waqf fund, the operator is under obligation to settle all the expenses associated with the operational and underwriting from the waqf fund deductions. The operator performs all the waqf operations against a deductible wakalah fee. The fee is deducted from the contributions of the policyholders contributions. To manage the investment of the Takaful fund, the waqf operators uses Shariah-compliant investment avenues similar to Mudarib. Moreover, the waqf operator uses a profit sharing structure similar to the one provided in the mudharabah contract to shares divide return on investment.
Research Methodology
Research design
The research design is an overall strategy that supports researchers in the quest for achieving the underlying research objectives. It is also defined as a functional technique that enables researchers to integrate the diverse components of the study logically and coherently. Its ultimate goal is to promote the realization of sustainable solutions to the research problem. According to Kuada (2012), no research study can achieve quality results without a vibrant research design. The design guides the research from the preamble stages to completion. It also gives a clear blueprint or road map for data collection, measurement and analysis of the information gathered.
In consideration of the research topic that seeks to establish the impact of choosing Takaful financial model on cost efficiency for Takaful companies, qualitative research design will be used. The research design is appropriate since it will aid the attainment of quality information about the merits and demerits of the Takaful models thus influence decision-making. The technique will also promote prudent use of the limited resources to get the most valuable information about the topic (Kuada 2012). As a consequence, the quality of the decisions and findings that will be realized will facilitate the understanding of Takaful model on cost efficiency among insurance companies in Saudi Arabia.
Similarly, the technique is bound to guarantee the attainment of valid, factual and accurate information about the topic. Its suitability for the subject is attributable to its accuracy, relevance and precision. Further, qualitative research design influences the type of data collection, analysis techniques and measurement tools. For instance, it obligates the lead researcher to ensure that the data collection, examination and measurement are done within a specific framework or guideline. Besides, it will help the researcher to select a reasonable sample size to aid the study (Kuada 2012). The selection will be based on the researcher’s judgement of the individual’s ability to give credible information. It will also facilitate the selection of data collection technique, measurement and analysis including secondary sources of data gathering.
Data collection
Both primary and secondary data collection techniques will be adopted to aid the research. The techniques will be used concurrently to enhance the researcher’s ability to obtain in-depth but impactful information about the topic of discussion (Zozus 2017). For instance, the primary data collection technique to be used include interviewing and monkey surveys. The rationale behind the methods is to obtain first-hand information on the issue that motivates the study from reliable sources. The respondents within the identified sample size will be approached randomly with both open and closed-ended questions. The random presentation of the questions will be on suitability basis for purposes of obtaining valuable evidence.
Subsequently, the researcher will consider various print materials such as journals, books, peer reviews and web articles as secondary data gathering techniques. The sources will be accessed through databases and online libraries such as EMERALD, ProQuest, academic search Elite and Cochrane Database. They are some of the most appropriate data sources with relevant materials that would foster the understanding of how Takaful will affect financial model on the cost efficiency in Saudi Arabia.
Sampling methodology
Every study has a method for selecting the sample members from a designated population who are to be engaged in information gathering arbitrarily, and this study is not an exception. The study will adopt a random sampling technique that will enable the researcher to gather information from resourceful persons among the population of interest (Zozus 2017). The importance of arbitrary sampling is that no one prepares answers to the questions before the material day. The people involved are innocent, and the information they give is a product of what they think, perceive and genuine view on issues. No form of biasness is manifest under the methodology in most instances. Therefore, the technique remains one sure way of enabling the study to have credible findings with the potential of influencing positive decision making. From a sample size of 60 people, the researcher will randomly present survey questions to 30 respondents. This means that the probability of one being selected will be a half. The number will comprise 10 insurance customers or policyholders, 10 managers of insurance companies, 5 financial experts, 5 employees of the insurance companies.
Data analysis/Tools
Data analysis is an elaborate process of discovering useful information from the gathered information. The process involves inspection, transformation, cleansing and modelling of data. In today’s competitive business environment, data analysis plays a vital role in shaping decisions made relating to productivity and performance (Kuada 2012). It enables companies to act rightfully at the appropriate time and develop consumer-oriented performance strategies. For this study, the thematic synthesis will be applicable to assist in exploring the questions. For secondary resources, the technique will advance proper summarization of the selected articles to be used. However, the researcher will use Ms Word, Excel, and SPSS where applicable for purposes of conducting primary data analysis. The selection of the tools is based on their ability to aid the generation of quality representational diagrams, figures, tables and graphs. The statistical and graphical representation will promote a sufficient understanding of the findings.
Steps That Will Be Taken and Justification of the Methodological Approach
For a study to be successful, a clear plan of activity must be in place to safeguard its sanctity. The plan should provide a framework or a guideline upon which information is gathered and analysed to advance accountability in financial management as in the case of this research. Therefore, the steps that will be undertaken include:
• Identification of the problem to be under study
• Establishment of the research design and overall methodology
• Identification of data collection techniques
• Sampling procedures and technique
• Establishment of viable tools for data analysis
The steps are justified because of their ability to ensure that every aspect of the research concerning information gathering is above board. They will give the researcher an excellent opportunity to collect data using qualitative aligned tools or techniques, process the information, analyze and interpret. This will result in achieving transformative findings socially, economically and structurally (Kuada 2012). Particularly, the selection of the qualitative research design is recommendable since it rides on nothing less but quality. This means that the findings will have the requisite authenticity, validity and credibility to influence financial decisions. The findings will support the rationale of financial philosophy that obligates organizations to base their decisions on factual, reliable and quality information.
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References
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waqf Model in Takaful Industry: An Analysis. Procedia-Social and Behavioral Sciences, 65, pp.1040-1045.
Al-Amri, K. and Hossain, M.Z., 2015. A survey of the Islamic insurance literature–takaful.
Alshammari, A.A., Alhabshi, S.M.B.S.J. and Saiti, B., 2019. The impact of competition on cost
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Hamza, H., 2013. Sharia governance in Islamic banks: effectiveness and supervision
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Kader, H.A., Adams, M., Hardwick, P. and Kwon, W.J., 2014. Cost efficiency and board
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Kuada, J. E 2012, Research methodology – a project guide for university students, New York: Samfundslitteratur.
Srivastava, T & Rego, S 2011, Business research methodology, New Delhi, Tata McGraw-Hill Education.
Zozus, M 2017, The Data Book Collection and Management of Research Data, New York: Portland CRC Press.