Risk-Based Capital Framework for Takaful Operators

The Risk-Based Capital Framework for Takaful Operators (Framework) sets Bank Negara Malaysia (the Bank)’s expectation for licensed takaful operators to maintain a level of capital adequacy commensurate with the risk profile of their takaful operations and to act as a financial buffer for takaful exposures. This Framework aims to achieve the following objectives:
(a) enable all obligations under a takaful contract to be met;
(b) provide flexibility for a licensed takaful operator to operate at different risk levels in line with its business strategies, provided it holds an appropriate level of capital and observes prudential safeguards; and
(c) ensure the development of a strong takaful industry that promotes public confidence and contributes to the overall stability of the financial system.

This Framework has been developed based on a standardised approach to be applied by all licensed takaful operators. A primary consideration in the development of this Framework is the fiduciary duty of the licensed takaful operator towards the participants to ensure appropriate management of the takaful funds and the overall takaful business operations, in line with the objectives of Shariah. In particular, this Framework is designed to ensure that a licensed takaful operator has an appropriate amount of capital to meet the responsibility of covering the costs of running the takaful operations as well as any potential interest-free loan (qard) in the unlikely event of a deficit in the takaful funds.

This Framework also recognises the ownership and obligations of the various funds in the takaful operations, as well as the extent to which the funds are impacted by the different risks involved in the takaful operations. This Framework is designed with the following considerations in determining the capital adequacy position for a licensed takaful operator:

(a) the capital required for shareholders’ fund is reflective of the risks directly borne by the licensed takaful operator, whilst the capital required for individual takaful fund is reflective of the risks borne by those takaful funds. For a takaful fund, where the capital required is not adequately covered by capital available within that takaful fund, the excess capital required is a proxy for the potential qard that may need to be extended by the licensed takaful operator in the future; and
(b) the capital available in the shareholders’ fund is fully available to support risks borne by the licensed takaful operator as well as the potential qard to the takaful funds as proxy by the excess capital required for the takaful funds. The capital available in a takaful fund is available only to meet the risks of the takaful fund itself and acts to reduce the potential qard that may need to be extended by the licensed takaful operator in the future.
To this effect, this Framework recognises that a lower amount of capital available needs to be held by shareholders to support potential qard obligations where takaful funds are stronger and have its own resources.

This Framework sets out the:
(a) manner to compute capital adequacy position of the licensed takaful operator, including the components of capital eligible for recognition in the computation as well as the applicable risk charges for each risk exposure;
(b) expectation for a licensed takaful operator to meet Supervisory Target Capital Level;
(c) expectation for a licensed takaful operator to set and measure Individual Target Capital Level that reflects the risk profile and risk management practices of a licensed takaful operator;
(d) possible actions that can be taken by the Bank in cases of breach of the Supervisory Target Capital Level and Individual Target Capital Level; and
(e) prudential limits for investment and individual counterparty limits.

The adoption and effective implementation of sound risk management practices and market conduct governance within a licensed takaful operator by the board of directors and senior management of a licensed takaful operator is key in supporting the implementation of this Framework.

This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking