Surplus in One Takaful Fund, Deficit in Another
Takaful Barakah operates a family takaful fund and a general takaful fund under a wakala contract with a 30% surplus-sharing incentive fee for the operator. The family fund has an actuarial surplus of USD 1.8 million after claims and reserves; the general fund has a deficit of USD 600,000 because of two large fire claims. The operator’s shareholder fund has already lent USD 600,000 as a qard to the general fund. The CEO proposes to use USD 600,000 of the family fund surplus to repay the qard, then pay the operator 30% of the remaining USD 1.2 million as a performance fee and distribute the rest to family participants. General fund participants will receive nothing. A participant complains that family contributions are subsidising general risks. The actuary notes that the family surplus includes a USD 200,000 reserve release that may not be distributable.
1. Assess the proposed allocation against takaful principles and the wakala contract.
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The proposal is not acceptable as presented. Family and general takaful funds are segregated pools; family participants’ surplus cannot be used to repay a qard advanced to the general fund. That would cross-subsidise general risks with family contributions and is likely to breach the wakala contract and takaful principles. The qard should be recovered from the general fund’s future surplus, subject to terms approved by the operator’s board and Sharia committee. The operator’s 30% incentive fee, if valid, must be calculated only on the distributable surplus of the relevant fund and after the qard and reserve adjustments. The USD 200,000 reserve release should be excluded until the actuary confirms it is distributable. The family surplus should be distributed to family participants after the operator’s contractual share, and general participants should not receive a surplus while their fund is in deficit. Any change to the allocation needs participant consent where required and Sharia approval.
2. What governance and disclosure should the operator adopt?
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The board should separate the two funds in reporting and decision-making. The Sharia committee should review the qard terms and the incentive fee. The actuary should certify the surplus and the status of the reserve release. Disclosure should explain the deficit, the qard, the recovery plan, the reserve release and the basis of distribution. The participant complaint should be handled through a documented complaints process, with a response that does not reveal other participants’ data. The operator should also test whether the two large fire claims were priced and reinsured adequately. If the qard is not expected to be recovered, the shareholder fund should recognise an impairment rather than silently transferring the burden. The CEO’s proposal should be minuted as rejected or amended, with the rationale recorded.
3. How should the qard and the surplus be presented in the takaful operator’s financial statements?
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The qard is a liability of the general fund to the shareholder fund and an asset of the shareholder fund; it should not be eliminated unless repayment is certain. The family and general funds should be presented separately, with surplus attributable to participants and the operator’s share shown as a liability or distribution. Under AAOIFI FAS 12 and FAS 13, the operator should disclose the basis for determining and allocating surplus or deficit, the qard and the reserves. The USD 200,000 reserve release should remain in the fund until its status is confirmed. Any operator fee should be recognised only when the entitlement is established and approved.