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JIABR
3,1 Disclosure of Shariah compliance
by Malaysian takaful companies
Nor Aziah Abu Kasim
20 Faculty of Economics and Management, Universiti Putra Malaysia,
Selangor, Malaysia

Abstract
Purpose – This paper seeks to explore the disclosure of Shariah compliance as reported by the
Shariah Committee (SC) in the annual reports of takaful companies in Malaysia. Disclosure of Shariah
compliance is important in enhancing and protecting the Islamic identity of takaful operators, thereby
providing Muslims with an alternative insurance system. The paper also aims to discuss whether the
advisory role constrains the SC members to improve disclosure which can boost consumers’
confidence and companies’ accountability. Both confidence and accountability on Shariah compliance
would also help promote Malaysia as an Islamic financial centre.
Design/methodology/approach – Content analysis of the SCs’ reports in the 2008/2009 annual
reports of seven takaful operators in Malaysia were conducted and the findings discussed with three
officers from Bank Negara Malaysia (Central Bank of Malaysia). Subsequent to the discussion, the findings
were further clarified and confirmed with a former member of the SC through e-mail correspondence.
Findings – Disclosure of Shariah compliance by the SC reflects high conformance to the Bank Negara
Malaysia guidelines. Although the high level of conformance promotes comparability, it does not
necessarily fully address disclosure issues such as providing adequate and relevant information. Shariah
compliance by takaful companies seems to develop in much the same manner as other disclosure practices,
that is, a tendency to comply with rules rather than with principles. Related to the disclosure issue, SC
members are constrained by the advisory role and part-time basis of appointment from fully participating
in every stage of product process from its conception to its implementation.
Research limitations/implications – The paper relies heavily on Shariah compliance reported by
the SC in the annual reports of takaful companies. Nonetheless, findings were confirmed with three officers
from Bank Negara Malaysia and with a former member of the SC to enhance the findings’ credibility. In
future, interviews can be conducted with other stakeholders such as takaful managers, Islamic academics
and members of the SC to better understand the nature of disclosure practices by takaful companies.
Practical implications – Insights drawn from this study suggest the need to enhance disclosure on
Shariah compliance in the SC reports and to further strengthen the role of the SC members. As Shariah
governance mechanisms, both the SC reports and SC members can be utilised to enhance the identity
of Islamic businesses and fulfils the religious obligations.
Originality/value – This paper highlights the need for increased transparency through adequate
and relevant disclosure of Shariah compliance information in the SC report of takaful companies. It also
raises the concern that the advisory role entrusted to SC members might not be adequate for them to
effectively ensure that compliance with Shariah principles are adhered to at all times as expected by
Bank Negara Malaysia.
Keywords Disclosure, Shariah compliance, Malaysia, Takaful, Islamic identity, Governance
Paper type Research paper

Journal of Islamic Accounting and 1. Introduction

Business Research Takaful or Islamic insurance in Malaysia is legally defined as “a scheme based on
Vol. 3 No. 1, 2012
pp. 20-38 brotherhood, solidarity and mutual assistance which provides for mutual financial aid
q Emerald Group Publishing Limited
1759-0817
and assistance to the participants” (Takaful Act, 1984, p. 6). This definition highlights
DOI 10.1108/17590811211216041 the Islamic principle of takaful whereby a group of participants agree to reciprocally
guarantee each other against a certain loss or damage. In addition, the Act (p. 6) defines Disclosure
takaful as a business “whose aims and operations [. . .] do not involve any element which
is not approved by the Shariah.” As an Islamic insurance, compliance with Shariah rules
of Shariah
and principles is the cornerstone, as it is undoubtedly the distinctive characteristic that compliance
reflects the Islamic identity of takaful business (Bank Negara Malaysia, 2007).
According to Arabian Business, the global takaful market is predicted to reach
US$14.5 billion and grow by 20 percent per annum by the year 2015 (Ishak, 2007). This 21
high growth rate can be attributed to several factors, such as increase in per capita GDP,
consumers’ awareness as well as greater desire for Shariah-compliant products and
services (Bowman, 2008). Currently, takaful businesses are not geographically dispersed
and they tend to concentrate mainly in Muslim-dominated countries (Ishak, 2007). Within
Malaysia, the takaful market was only about 7 percent in 2007 compared to 39 percent in
the case of its conventional counterparts (Malaysian Takaful Association, 2008).
Takaful consumers’ confidence on the product is dependent on two criteria – first, the
operations of the business must fully comply with Shariah principles and second, the
consequential wealth and financial progress of the takaful operators[1] need to
be disclosed. Information on Shariah compliance is imperative in influencing buying
decisions amongst Muslims, increasing their understanding of their religion, improving
transparency for enhancing governance, and protecting the Islamic identity of takaful
operators. Furthermore, Shariah compliance can be used as a weapon by takaful
operators to expand their market base and compete against their counterparts.
Given the importance of Shariah compliance, this paper explores the disclosure of
Shariah compliance as reported by the Shariah Committee (SC) in the annual reports of
takaful companies in Malaysia. It aims to provide insights as to whether current
Shariah-compliant disclosure practices by the takaful operators are able to meet the
demands of relevant parties to help them make religious and economic decisions. It also
examines whether the advisory role entrusted by Bank Negara Malaysia (BNM) to SC
members is adequate to enable them to provide Shariah compliance disclosure that is
useful and relevant.
This paper contributes to the dearth in literature on Shariah compliance in the takaful
industry in Malaysia. The findings suggest that the SC reports lack detailed information
to explain the extent of (non) compliance. The current practice of disclosure appears to be
driven more by conformance to rules rather than fulfilling the role of governance and
accountability. An important insight of this study is that members of the SC, as advisors,
faced constraints and challenges to effectively ensure that compliance with Shariah
principles are adhered to at all times as expected by BNM.
The rest of the paper is organised as follows. Section 2 presents an overview of the
takaful industry in Malaysia and Section 3 elucidates the significance of Shariah
compliance. Section 4 describes the research method. Section 5 discusses the findings
based on the SC reports in the annual reports and Section 6 discusses the adequacy of
the SC’s role. The final section concludes and provides some recommendations as well
as addresses the limitations and avenues for further research.

2. Overview of Takaful industry in Malaysia

On 15 June 1972, the Fatwa Committee of the National Council for Islamic Religious
Affairs Malaysia issued a fatwa[2] that conventional life insurance contradicts the
Shariah or Islamic rules[3]. A similar decree that rule the conventional insurance as
JIABR haram or unacceptable was made by the Council of Islamic Fiqh Scholars in 1975[4].
3,1 The reason why conventional insurance is considered haram[5] (unacceptable and not
permissible) is due to the presence of three elements: Gharar (uncertainty), Maisir
(gambling) and Riba (usury). Gharar refers to the uncertainty attributed to the insured
often not being informed as to how the amount of compensation paid is derived. Maisir
refers to the element of gambling arising as a consequence of the presence of gharar.
22 The notion of Riba refers to the interest paid in money lending or investing activities
where the money invested or loaned generates money as principal of service. In Islam,
riba or interest is forbidden as it concentrates wealth and promotes inequality through
exploitation (Tomkins and Abdul-Karim, 2005). Thus, the motivation for introducing
the Islamic insurance system in Malaysia is to comply with the Shariah by eliminating
those three elements which are not permissible in Islam. The fatwa acts as a catalyst
for the development of an Islamic-compliant alternative to the conventional insurance
for Muslims in Malaysia.
In 2009, the takaful industry in Malaysia celebrates its 24th anniversary. The
development of the takaful industry in Malaysia evolves over three phases (Bank
Negara Malaysia, 2005). Phase 1 (1984-1992) established the basic infrastructure for the
industry while Phase II (1993-2000) enhanced regional cooperation amongst takaful
operators. The final phase (2001-2010) introduced the Financial Sector Masterplan
(FSMP) to enhance the capacity of the takaful operators and to strengthen the legal,
Shariah and regulatory framework for takaful.
The takaful industry is an important industry in the Malaysian economy as it will
help towards realising the aim to make Malaysia as an international Islamic
financial center. The Governor of BNM, who is also the Director-General of Takaful,
stated the aim of developing the takaful industry in Malaysia to be as follows:
The aim is to create progressive world-class takaful operators that are able to successfully
position themselves as leaders in the area of takaful and thereby positioning the development
of Malaysia as the international Islamic financial centre (Bank Negara Malaysia Takaful
Annual Report, 2005, p. 9).
In line with the objective to promote Malaysia as the Islamic financial hub, competition
in the takaful market becomes increasingly intense over the years especially with the
addition of three new takaful operators in 2006. In 2008, there were eight takaful
operators in Malaysia as listed below:
(1) Syarikat Takaful Malaysia Bhd Annual Report (2008)[6].
(2) Etiqa Takaful Berhad Annual Report (2008).
(3) Takaful Ikhlas Sdn Bhd[7] (2003).
(4) CIMB Aviva Takaful Bhd Annual Report (2005).
(5) Prudential BSN Takaful Berhad Annual Report (2009).
(6) HSBC Amanah Takaful (Malaysia) Sdn Bhd Annual Reports (2008).
(7) Hong Leong Tokio Marine Takaful Bhd Annual Report (2009).
(8) MAA Takaful Bhd (2007).
Despite the importance of the takaful industry, the Malaysian Takaful Association
(2008) has reported only a steady increase in the percentage of market penetration over
the years: 4.5 percent (2003), 5.1 percent (2004), 5.6 percent (2005), 6.5 percent (2006) and Disclosure
7 percent (2007). Notwithstanding its steady growth, takaful operators’ performance is of Shariah
still relatively insignificant compared to that of conventional insurance (Bank Negara
Malaysia, 2005). In addition, the 7 percent market share remains far from the target set compliance
by BNM of 20 percent market penetration by the year 2010 (Halim, 2008).
The takaful operators face challenges in terms of both capital and expertise
development (Bowman, 2008). Other hurdles that impede the achievement of a higher 23
market penetration of takaful include lack of players, product, market awareness, low
capitalisation of takaful companies, absence of an established Re-Takaful (reinsurance),
poor culture of consumer education, a misconceived religion and inconsistent messages
from some Shariah advisories (Parker, 2006). As will be discussed in the next section,
Shariah compliance can be utilised by the Malaysian takaful operators as a competitive
advantage to increase the current low market penetration relative to their counterparts.

3. Significance of Shariah compliance

Shariah can be literally translated as “the way or path” which governs every aspect of
a Muslim’s life[8]. Shariah comprises a set of Islamic rules, principles and parameters.
Muslims hold that the Holy Qur’an contains the revealed words of God and the Hadith
reveals the practices and traditions of the Prophet Muhammad. The Holy Qur’an is the
most important source of Shariah. For matters which are not addressed explicitly by
the Holy Qur’an and the Hadith, other sources of Shariah include Ijma, which
represents the consensus reached by Islamic scholars, Qiyas or ruling by analogy if the
precedence exists, and Ijtihad or legal reasoning, will be referred to.
Although it is not a finite standard, some parts of Shariah are quite specific and
require no further interpretation. Others can be of wider application and take the form
of principles and guidelines. Thus, sometimes Shariah is subjected to a further process
of interpretation and may result in multiple interpretations. In modern business
environment, the challenge for Islamic scholars is to interpret Islamic principles
in a manner that meets the modern day requirements but at the same time does not
jeopardise the protection and promotion of the Islamic identity.
The distinguishing feature of takaful is that it is a commercial venture which should be
undertaken in accordance with Shariah principles. Thus, for takaful business to become a
viable and the preferred alternative in the present competitive business environment, its
implementation must comply with Shariah rules. The importance of Shariah in business
is its emphasis on justice, goodwill and honesty and its prohibitions on uncertainties,
exploitation and fraud (Hamid et al., 1993). Shariah commands Muslims to conduct their
business in a manner which is ethical, environmentally friendly and socially responsible.
Although the pursuit of profit is not forbidden, it cannot be pursued at the expense of the
underpinning virtues of takaful which include cooperation, social guarantee, mutual
protection, mutual risk sharing and solidarity. These virtues suggest that takaful
institutions are established for a wider purpose than simply to make profit.
Dawood (2008) advocates that it is important for business to comply with Shariah in
order to meet the growing demand for Shariah-compliant products due to the growing
Muslim population and increasing awareness on the importance of Shariah
compliance. For Muslims, Shariah compliance in business is a spiritual necessity in
order to purify the income earned and expenditure incurred. Non-compliance has an
adverse impact on revenue of the institution as revenue earned from unlawful
JIABR transactions is to be given away as donation or charity[9]. Shariah compliance reflects
3,1 the purity factor of transactions and as such, enables Muslims to fulfill their religious
obligations by choosing takaful as their preferred or alternative insurance product. In
other words, as a Shariah-compliant insurance scheme, takaful provides a unique niche
that can satisfy the needs of Muslims desiring halal (permissible) insurance products.
In this respect, the takaful products are not direct substitutes to the conventional
24 insurance since the niche can be used to gain competitive advantage.
Haniffa and Hudaib (2007, pp. 102, 112-3) identify the following information to be
representative of the ethical identity of Islamic banks in the area of “Reviews by
Shariah Supervisory Board”. Ideally, the banks are expected to disclose the following
information in their annual reports:
.
Names, pictures/profile and remuneration of members.
.
Number of meetings held.
.
Examination of all business transactions ex ante and ex post and basis of
examination of the documents.
.
Examination of a sample of business transactions ex ante and ex post.
.
Report defects in product: specific and detailed.
.
Recommendation to rectify defects in product.
.
Action taken by management to rectify defects in product.
.
Attestation that profits are gained lawfully.
.
Distribution of profits and losses comply to Shariah.
.
Report signed by all members.
In another study by Maali et al. (2006), Islamic banks are expected to disclose detailed
information on unlawful or haram transactions. When full compliance is not achieved,
the nature and the reasons for the necessity of undertaking such transactions, the
amount of revenue or expenditure involved and how such revenue was disposed need
to be disclosed. The disclosure should also include the rectification done to prevent
future occurrences of non-compliance.
Although the studies conducted by Haniffa and Hudaib (2007) and Maali et al. (2006)
deal with Islamic banks, their insights are very useful to improve disclosure in the SC
report of the takaful operators. Improving disclosure on Shariah compliance is
imperative not only to differentiate amongst the takaful operators themselves but also
with that of the conventional insurance companies.

4. Research method
Against the background of the importance of both Shariah compliance and its
disclosure, this paper explores the information disclosed in the reports by the SC in the
annual reports for the year 2008/2009 of seven takaful operators in Malaysia, namely:
Syarikat Takaful Malaysia Bhd, Etiqa Takaful Bhd, Takaful Ikhlas Sdn Bhd, CIMB
Aviva Takaful Bhd, Prudential BSN Takaful Bhd, HSBC Amanah Takaful Sdn Bhd,
and Hong Leong Tokio Marine Takaful Bhd[10]. Table I shows the list of seven takaful
operators together with their brief profile.
Out of the seven takaful operators, five are formed as joint ventures with established
international or foreign institutions. Not all takaful operators are profitable
 Year of Members of Shariah Net Total
Operators incorporation Ownership Committee Auditors profit/(loss) assets

1. Syarikat Takaful 1984 Major shareholder is a local public- Shariah Advisory Body: KPMG MYR 24Ma MYR
Malaysia Berhad listed company 1. Assoc. Prof. Dr Ahmad 4B
Shahbari @ Sobri b.
Salamon
2. Abdul Hamid b. Said
3. Mohd. Bakir b. Hj.
Mansor
4. Dr Aida bt. Othman
5. Assoc. Prof. Dr Ashraf b.
Md. Hashim
(The annual report
included a section with
pictures and brief profile of
all SC members)
2. Etiqa Takaful Bhd, 1993 Joint venture between Maybank, 1.Tan Sri Dato’ Seri (Dr) Ernst & Young MYR 60M MYR
previously known as Malaysia and Fortis International Haji Prof. Dr Ismail Bin 5B
Takaful Nasional NV, The Netherlands Mohd @ Abu
(Changed to new name in 2. Dr Mohammad Deen Bin
2007) Mohd Napiah Hassan
3. Assoc. Prof. Dr Abdul
Karim bin Ali
4. Wan Mansor Wan
Mohamed
The SC met six times
during the financial year
3. Takaful Ikhlas Sdn Bhd 2003 Major shareholder is a local public- 1. Dato’ Mohd Mokhtar Ernst & Young MYR 8M MYR
listed company Shafii 986M
(continued)
Disclosure

compliance
of Shariah

operators in Malaysia
Brief profile of takaful
25

Table I.
 3,1

26

Table I.
JIABR

Year of Members of Shariah Net Total

Operators incorporation Ownership Committee Auditors profit/(loss) assets

2. Datuk Nik Mustapha Nik

Hassan
3. Prof. Dr Ahmad Hidayat
Buang
4. Assoc. Prof. Dr
Shamsiah Mohamad
5. Assoc. Prof. Dr
Muhammad Naim Omar
The SC met seven times
during the year
4. CIMB Aviva Takaful 2005 Joint venture between CIMB Group, No specific disclosure on Pricewater (MYR MYR
Berhad Malaysia and Aviva plc, UK members of SC – but two houseCoopers 32 M) 652M
signatories for Shariah
Report were:
1. Sheikh Assoc. Prof. Dr
Shafaai bin Musa
2. Sheikh Prof. Dr
Mohammed Hashim
Kamali
5. Prudential BSN Takaful 2006 Joint venture between Prudential 1. Datuk Mohd Nakhaie KPMG (MYR 1M) MYR
Berhad Holdings (Prudential), UK and Bank Haji Ahmad 236M
Simpanan Nasional (BSN), Malaysia 2. Datuk Dr Mohammed
Yusoff Hussain
3. Dr Mohd Fuad Md
Sawari
4. Burhanuddin Lukma
The SC met five times
during the year
(continued)
 Year of Members of Shariah Net Total
Operators incorporation Ownership Committee Auditors profit/(loss) assets

6. HSBC Amanah Takaful
(M) Sdn Bhd
7. Hong Leong Tokio Marine
Takaful Bhd
Note: aMalaysian Ringgit
2006 Owned by HSBC Insurance (Asia No specific disclosure on KPMG (MYR MYR
Pacific) Holdings Limited (49%), members of SC – but two 14M) 303M
Jerneh Asia Berhad (31%) and signatories for Shariah
Employees Provident Fund Board of Report were:
Malaysia (EPF) (20%) 1.Dr Rusni Hassan,
2. Khairul Anuar Ahmad
2006 Joint venture between Hong Leong No specific disclosure on Pricewaterhouse- (MYR MYR
Financial Group Malaysia and Tokio members of SC – but two Coopers 1.5 M) 322M
Marine Nichido Fire Japan signatories for Shariah
Report were:
1. Assoc. Prof. Dr Ab.
Mumin Ab. Ghani
2. Assoc. Prof. Dr
Muhamad Rahimi
Osman
Disclosure

compliance
of Shariah

27

Table I.
JIABR in 2008/2009, especially, the new operators such as Prudential BSN Takaful Berhad,
3,1 HSBC Amanah Takaful Sdn Bhd and Hong Leong Tokio Marine Takaful Bhd. In terms
of size measured by total assets, Etiqa Takaful Bhd leads the list followed by Syarikat
Takaful Malaysia Bhd with total assets of MYR5 billion and MYR4 billion, respectively.
There were variations in the disclosure on SC members – three operators, CIMB
Aviva Takaful Bhd, HSBC Amanah Takaful Sdn Bhd and Hong Leong Tokio Marine
28 Takaful Bhd, neither provided specific information on SC members nor the number of
meetings held, while Syarikat Takaful Berhad provided names, pictures and brief
profile of the SC members. Etiqa, Takaful Ikhlas and Prudential BSN mentioned the
number of SC meetings held per financial year which ranged from five to seven
meetings. Etiqa Takaful called its SC the Advisory Shariah Board and Hong Leong
Marine Takaful Bhd used the term Advisory Shariah Committee. The inclusion of the
word advisory better reflect the role of SC members as advisors.
Table I shows that the independent auditors for the takaful operators were KPMG,
Ernst & Young (E&Y), and PricewaterhouseCoopers (PwC) which are classified
as the Big Four audit firms. KPMG audited three out of the seven takaful operators
while the remaining two firms audited two takaful operators each. Although the Big
Four has been associated with higher quality audit work (Francis and Yu, 2007;
Hussainey, 2009), their responsibility remains at providing reasonable assurance on
compliance with generally accepted accounting principles rather than with Shariah.
In Malaysia, independent audit on Shariah matters is not mandatory which
suggests that SC report is relied upon as an important channel of communication to
increase awareness and provide information on Shariah compliance to a variety of
stakeholders.
This study does not investigate the actual practices of Shariah compliance within
the takaful institutions but it draws only on the information communicated in the
report of the SC in their annual reports. To examine the actual practices on Shariah
compliance would require the use of in-depth case study approach. Nonetheless, the
choice of using the annual report is justified because it is expected to be potentially
influential due to its widespread distribution; accessibility for use by researchers and
its usefulness for a wide variety of external stakeholders such as customers, regulators
and the public (Haniffa and Hudaib, 2007).
The SC reports of each of the seven takaful operators were examined and compared
with the SC report as mandated by the BNM guidelines on financial statements. The
guidelines are useful as they set out the minimum disclosure requirements and
provide the following format and wording for inclusion in the report of the SC:

Report of the Shariah committee

We, ZZZ and YYY being members of the Shariah Committee of the MODEL TAKAFUL
BERHAD do hereby confirm on behalf of the members of the Committee that in our opinion
the operations of the Company’s business for the period January 20x4 to 31 December 20x4
have been conducted in conformity with the Shariah requirements.
On behalf of Committee
ZZZ
Member
YYY
Chairman
Although this paper relies heavily on annual reports, it also seeks further clarification Disclosure
and confirmation on the findings through a discussion held with three officers from of Shariah
BNM’s Insurance and Takaful Supervision Department whose role is to monitor the
operations of takaful based on the rules established by BNM, and to oversee that compliance
relevant information on Shariah compliance for customers’ decision-making is
adequately disclosed (Ishak, 2007; Yap, 2007). The purpose of this discussion is to
highlight the findings on the comparison between the SC reports and the requirements 29
of the guidelines. An e-mail correspondence with questions especially related to the role
of the SC as advisor was sent to an ex-member of the SC for further clarification and
confirmation. Both the discussion on the disclosure on Shariah compliance and the
feedback received on the role of the SC enhanced the credibility of the findings. For
suggesting future improvements in disclosure, insights were drawn from the work
done by Haniffa and Hudaib (2007) and Maali et al. (2006).
Institutional theory (Meyer and Rowan, 1977) is useful to help explain why the
disclosure in the SC reports is as it is. Institutional isomorphism (DiMaggio and Powell,
1991) is the mechanism through which an organisation adopts practices that are
common to other organisations facing the same institutional pressures. DiMaggio and
Powell (1991) classify the type of isomorphism according to the source that the
institutional pressures emanate from. Coercive isomorphism is primarily related to the
conformance of organisational behaviour with the political and regulative influences
exerted by institutions such as, the government regulator through its regulations,
policies and directives. Mimetic isomorphism refers to copying the practices of
successful, similar organisations for reducing uncertainty, and normative isomorphism
means complying with the expectations and norms of society and professional bodies.
The abovementioned isomorphisms constitute the three means through which
organisations can change to become similar to other firms – through first, following
rules and legislations; second, copying best practices; and finally, conforming to social
norms and expectations. Scott (2001) provides reasons for conformance to be to
enhance legitimacy, reduce fear of threat and hope for additional resources. Due to the
similarity of the SC reports, not only with the BNM guidelines but also with that of
other takaful companies, the concept of isomorphisms drawn from the institutional
theory is useful and is used in this paper for discussing the findings.

5. Findings and discussion

The BNM guidelines on financial statements for takaful operators[11] aim to promote
disclosure and transparency as well as standardisation of financial statements. The
guidelines have been enforced since 2004 and are applicable to takaful operators
registered under the Takaful Act (1984) for preparing their financial statements as
mandated by the Companies Act 1965. An important requirement of the guidelines is
the inclusion of the report on Shariah compliance by the SC in the annual report[12].
Thus, the annual report becomes a means to disclose information about the takaful
operators’ distinctive compliance with Shariah tenets (Grais and Pellegrini, 2006) and
to increase public awareness of Shariah compliance.
A comparison of the SC reports with the BNM’s guidelines on financial statements
for takaful operators revealed that all, with the exception of one, reflected high
conformance (to the extent that it was almost a verbatim reproduction). As a result, the
six SC reports were not only standardised, provided minimum disclosure but also
JIABR tended to be wholly driven by the imperative to conform to the rules, specifically by the
3,1 relevant BNM guidelines. Six takaful operators had two SC members signed the reports
but one operator, Prudential BSN Takaful Bhd, had only one SC member signed the
report. This variation suggests that not all members of the SC, which ranges from three
to seven members, in all the seven takaful companies signed the reports.
The excerpts of the SCs’ reports, with very similar content, for six takaful operators
30 are reproduced in Table II below.
Unlike the other six takaful operators, Hong Leong Marine Takaful Bhd differed
from the rest in terms of the content of its SC report. First, it highlights that the review
on Shariah compliance was conducted for products introduced during the stipulated
year. Second, the report clearly stated that the company’s management, not the SC, was
responsible for ensuring that the company conducted its business in accordance with
Shariah rules. Third, their opinion was based only on the information made available
to them by the company. Thus, they could only advise on matters and issues that were
brought to them for deliberations. Fourth, with these caveats, their opinion should
provide only reasonable assurance that the company has not violated the Shariah
rules. The excerpt of the report for Hong Leong Tokio Marine Takaful Bhd Annual
Report (2009, p. 16) as it appeared is as below:
“In the name of Allah, The Beneficent, The Merciful”

To the Shareholders of Hong Leong Tokio Marine Takaful Berhad,

In compliance with the letter of appointment, we are required to submit the following report:

We have reviewed the principles and the contracts relating to the transactions and applications
introduced by the Company during the financial year ended 30 June 2009. We have also
conducted our review to form an opinion as to whether the Company has complied with Shariah
rules and principles and with the specific fatwas, rulings and guidelines issued by us.

The Company’s management is responsible for ensuring that the Company conducts its
business in accordance with Shariah rules and principles. It is our responsibility to form an
independent opinion and report, based on our review of the operations of the Company.

We performed our review on the basis of information and explanations provided to us which
are deemed essential together with sufficient evidence to give reasonable assurance that the
Company has not violated Shariah rules and principles.

In our opinion:

(a) the contracts, transactions and dealings entered into by the Company during the financial
year ended 30 June 2009 that we have reviewed are in compliance with the Shariah rules
and principles;

(b) the main sources and investments of the Company disclosed to us conform to the basis
that had been approved by us in accordance with Shariah rules and principles;

We beg Allah the Almighty to grant us all the success and straight-forwardness.

ASSOC. PROF. DR. AB. MUMIN AB. GHANI Chairman Shariah Advisory Committee.

ASSOC. PROF. DR. MUHAMAD RAHIMI OSMAN Member Shariah Advisory Commitee.
 Shariah Committee, Shariah Committee, Shari’ah Committee
Shariah Advisory Prudential BSN HSBC Amanah Takaful Shariah Committee, Takaful Ikhlas Sdn Shariah Committee,
Body, Syarikat Takaful Takaful Berhad (Malaysia) Sdn Bhd CIMB Aviva Takaful Bhd 2009, p. 14:(called Etiqa Takaful
Malaysia Bhd Annual Annual Report (2009, p. Annual Reports (2008, Bhd Annual Report Statement of Shari’ah Berhad Annual Report
Report (2008, p. 85): 10): p. 51): (2009, p. 11) Committee) (2008, p. 16):

We, Datuk Abdul I, Mohd Nakhaie Hj We, Dr Rusni Hassan We, Sheikh Assoc We, Mohd Mokhtar bin We, Y Bhg. Tan Sri Dato’
Hamid b. Said and Ahmad being the and En. Khairul Anuar Porfessor Dr Shafaai b Shafii and Ahmad Seri (Dr) Haji Harussani
Mohd Bakir Haji Chairman of Shariah Ahmad, being two of Musa and Seikh Prof. Hidayat bin Buang, bin Haji Zakaria and Y
Mansor, being two of Committee of the members of Shariah Dr Mohammad Hashim being two of the Bts Penolong Prof. Dr
the members of Shariah Prudential BSN Committee of HSBC Kamali, being members members of Shari’ah Ismail bin Mohd @ Abu
Advisory Body of Takaful Berhad, do Amanah Takaful Sdn of the Shariah Committee of Takaful Hassan, being members
Syarikat Takaful hereby confirm on Bhd, do hereby confirm Committee of CIMB Ikhlas Sdn Bhd, do of the Shariah
Malaysia Berhad, do behalf of the on behalf of the Aviva Takaful, do hereby confirm on Committee of Etiqa
hereby confirm on Committee, to the best Committee, that in our hereby confirm on behalf of the Takaful Berhad
behalf of the Body, that of my knowledge and opinion, the operations behalf of the members Committee, that in our (formerly known as
in our opinion, the belief, the operations of of the Company’s of the Committee that opinion, the operations Takaful Nasional
operations of the the Company’s business for the year in our opinion the of the Company’s Berhad), do hereby
Company for the year business for the year ended 31 December operations of the business for the year report on behalf of the
ended 30 June 2008 ended 31 December 2008 have been Company’s business for ended 31 March 2009 Committee that in our
have been conducted in 2008 have been conducted in the financial year ended have been conducted in opinion, the activities of
conformity with conducted in conformity with 31 December 2009 have conformity with the Company’s business
Shariah requirements conformity with Shariah requirements been conducted in Shari’ah requirements for the financial year
Shariah requirements conformity with the ended 30 June 2008 have
Shariah been conducted in
conformity with the
requirements of Shariah
On behalf of the On behalf of the On behalf of the On behalf of the On behalf of the Signed on behalf of the
Shariah Advisory Committee: Committee: Committee, Shari’ah Committee: Committee
Body:
1. Datuk Abdul Hamid 1. Datuk Mohd Nakhaie 1. Dr Rusni Hassan 1. Sheikh Assoc Prof. 1. Mohd Mokhtar bin 1. Y Bhg Dato’ Seri (Dr)
b. Said Haji Ahmad 2. En. Khairul Anuar Dr Shafaai b Musa Shafii Harussani Zakaria
2. Mohd Bakir Haji Ahmad 2. Sheikh Prof. Dr 2. Ahmad Hidayat bin 2. Prof. Dr Ismail bin
Mansor Mohammad Hashim Buang Haji Zakaria bin Mohd
Kamali @ Abu Hassan
Disclosure

compliance

report
Report of the Shariah
of Shariah

Committee in annual
31

Table II.
JIABR Unlike others, the SC report of Hong Leong Marine Takaful Bhd did not conform to the
3,1 exact wording and format as stated in the BNM guidelines. Although the report was not
verbatim, the SC has not violated the BNM’s requirements because the report has provided
reasonable assurance that the company has not violated Shariah rules and principles.
Hong Leong Marine Takaful Bhd is a joint venture between Hong Leong Financial Group
Malaysia and Tokio Marine Nichido Fire Japan. Ethnically, it is owned by Chinese and
32 Japanese, respectively. Perhaps, the peculiarity in ethnicity ownership, which is Chinese
and Japanese, respectively, might contribute to a more detailed report which even reminded
that the management rather than the SC has the responsibility to comply with Shariah.
In general, the disclosure in the reports of the SC contained a sentence which was
intended to confirm compliance. The term “Statement of SC” used by Takaful Ikhlas Sdn
Bhd befits the content of the report as it contained only a statement to inform
conformance. Although the disclosure is brief, it still reflects a high compliance with and
almost a verbatim reproduction of the report as set out in the BNM guidelines on
financial statements for takaful operators. In this respect, the disclosure of information
tends to be driven by regulations or rules rather than principles. As such, the disclosure
on Shariah compliance in the report by SC tends to be mandatory rather than voluntary.
Drawing insights from institutional theory, conformance due to regulatory
pressures, such as the BNM guidelines demonstrates coercive isomorphism. The
takaful companies comply because of the coercive nature of the regulation, and to
minimise the threat that the BNM may withdraw their license to operate. Since there is
high similarity in the SC reports between the takaful operators, conformance is also due
to following the norms or normative isomorphism. Furthermore, there appears to be
mimetic isomorphism with the operators imitating the practices of others to reflect the
appropriate way of organising to enable them to secure legitimacy and resources, and
to avoid the fear of negative sanctions (Meyer and Rowan, 1977; DiMaggio and Powell,
1991; Scott, 2001). Thus, isomorphisms driven by the rules, norms or imitation resulted
in several potential benefits for the takaful operators.
Given that the BNM guidelines set out the minimum disclosure requirements, the
disclosure by the seven takaful organisations, at best, achieves only the minimum level of
disclosure. Merely meeting the minimum disclosure as part of the mandatory requirement
has resulted in standardised and very brief reports. These reports are comparable but
unable to detail the extent of Shariah compliance for the external stakeholders to assess
the performance of the takaful operators on Shariah compliance matters. The limited
information may not facilitate the operators to achieve the purpose of organisational
transparency and stakeholder engagement or dialogue (Hess, 2007).
The overriding concern with compliance to the relevant BNM guidelines do not
augur well with the importance of being transparent to help the external stakeholders
including consumers, investors and participants make religious and economic
decisions. More importantly, the minimal information makes it difficult for investors to
hold the takaful operators accountable for their management of the business in
accordance with the spirit of Shariah. Although these reports met the aim of BNM
guidelines for promoting standardisation, they failed on the aims for enhancing
disclosure and transparency. In this context, the reports of the SC are limited in its
function as a governance (accountability) mechanism. More disclosure is needed
especially when the operators are currently not mandated to have an external and
independent review of Shariah compliance.
 Besides its limited use for accountability purposes, the brief nature of the SC report Disclosure
also failed to address the following pertinent questions on compliance to Shariah: of Shariah
.
Does the SC’s statement mean that there is full Shariah compliance in all aspects compliance
of business operations and transactions?
.
What are the activities that have been conducted prior to arriving at the
confirmation?
33
.
To what extent is the SC involved in decision-making relating to Shariah
compliance and how have their decisions been implemented in the daily operations?
.
In the event of non-compliance, has any explanation on its occurrence and the
actions taken to rectify, resolve and prevent similar future occurrences been
provided?
.
Has the distribution of profits and losses been made entirely in accordance to the
Shariah?

The above questions are not intended to be exhaustive but they serve to highlight the
necessity and perhaps the urgency to make the SC report more informative. Besides
addressing the above questions, the disclosure can be further improved by including
the expected information drawn from Haniffa and Hudaib (2007, pp. 102, 112-13).

6. Discussion of findings regarding the role of SC

As mentioned earlier, the information on Shariah compliance is imperative in
influencing the buying decisions amongst Muslims, increase their understanding of their
religion, protecting the Islamic identity of takaful operators, and improving
transparency for strengthening corporate governance. As a means of strengthening
corporate governance, especially with regard to Shariah matters, BNM issued guidelines
on the governance of the SC for Islamic financial institutions[13] which have been
enforced since 1 September 2005. Essentially, the guidelines require the establishment of
the SC and demand for more transparency.
Malaysia implements a two-tier SC system (Bank Negara Malaysia, 2007). The
first-tier is the Shariah Advisory Council (SAC) of BNM which was officially launched
on 1 May 1997. The second-tier is the SC within the takaful operators’ institutions. The
Central Bank of Malaysia Act 1958 and the Takaful Act (1984) were amended in 2003
to reinforce the role of the SAC and also to provide legal recognition as an authoritative
body on Shariah matters relating to Islamic banking and finance. The SAC is the
highest authority that can issue authoritative opinions or edicts on Islamic insurance. It
has the authority to harmonise any differences of Shariah interpretation for matters
within its jurisdiction.
The SAC is made up of 11 members and is led by the Chairman who is assisted by
his deputy. The appointment tenure for each member is for two years with the
possibility of extension. In practice, the appointment duration of the member varies
from two to ten years. It is also noted that the same SAC caters to the Shariah needs of
both the Islamic banking and takaful industries. The Takaful Act (1984), however, does
not provide for the resolution of disputes between takaful companies and their
customers. This is governed by the civil law because jurisdiction of the Shariah
court is still limited to matters of personal and family law and only over Muslims
(Connors, 1988).
JIABR The Director General of Takaful is the Governor of BNM. As a consequence, the
3,1 takaful operations are subjected to the supervision and regulation of BNM through the
enactment of the Takaful Act (1984). With regard to Shariah compliance, Section 8 of
the Takaful Act (1984, pp. 10-11) states that:
The Director General shall also refuse to register an applicant unless he is satisfied – that
there is in the Articles of Association of the takaful operator concerned provision for the
34 establishment of a Syariah advisory body, as may be approved by the Director General, to
advise an operator on the operations of its takaful business in order to ensure that it does not
involve in any element which is not approved by the Syariah [. . .]
Each SC must comprise between three and seven members, appointed with the
approval of the BNM for a renewable term of two years; has one elected Chair for a
two-year term, and a minimum of one officer who will be the secretary to the SC. Based
on the titles to the names of the SC members in the annual reports for the year
2008/2009, the majority are academics from local institutions of higher learning.
The Takaful Act (1984) therefore, legally mandates the formation of SC to be an
in-house religious advisor on Shariah matters for takaful institutions. The SC is
expected to provide day-to-day advice and guidance to ensure that all takaful activities
comply with Shariah. It is a mechanism to enhance and ensure that Shariah is
complied with as the SC is entrusted with the responsibility to:
[. . .] ensure that the business operations of a takaful operator are in compliance with Shariah
principles at all times (Bank Negara Malaysia, 2005, p. 5).
From the legal perspective, ensuring Shariah compliance at all times is not easy given
that the mandatory role of SC is only as advisors. As advisors, they do not have the legal
power to enforce. Without such power, the SC has to sometimes rely on the power of
moral persuasion[14]. This limited role is explained further by an ex-member of the SC:
Under the law, SC members are not the company directors of the takaful operator, SC members
are merely advisors to ascertain Shariah-compliant ONLY on matters which the takaful
operator requests the SC members to deliberate. SC as a body has no legal power under the
Companies Act 1965. Its legal existence is derived only from the requirement under the Takaful
Act (1984) but not much is mentioned about its powers and jurisdictions. As such, its role is
merely advisory upon requests. If no request is made, the SC does not deliberate.
As the SC reports were very brief, it gave the impression that all transactions have
been examined and certified to be Shariah-compliant with no instances of Shariah
non-compliance. Detailed information on compliance is desirable but might not be
achievable since the SC members are appointed on a part-time basis. Due to this
part-time nature of appointment, it can be expected that members of the SC are
constrained by time to fully participate in the process of ensuring Shariah compliance
and to be fully involved in every stage of the product process from its conception to its
implementation. In addition, it is contestable that management will bring to the
attention of the SC every matter with Shariah implications. Even if it does, it is equally
contestable that there is sufficient time for the SC to be extensive in its examination.
The SC report should include any caveat that will enable the investors and public to
have a better understanding of the role played by the SC in confirming compliance.
The BNM guidelines on the governance of SC for Islamic financial institutions require
Shariah-compliant endorsement from the SC as part of the approval procedures for any
new takaful product. It appears that the endorsement is required merely at the product Disclosure
launching stage. From this perspective, members of the SC play an effective role only at of Shariah
the approval stage of new products. Therefore, there is a need to not only explain the
extent of involvement but also to increase the participation of the SC members in the compliance
process of establishing rulings on Shariah compliance. For strengthening internal
corporate governance, the SC can play an extended role to certify permissible financial
instruments (those that are in accord with Islamic precepts) thereby verifying whether 35
transactions comply with fatawa, dispose non-Shariah compliant earnings and advise
on distribution of income among shareholders (Grais and Pellegrini, 2006). In this
regard, if the existing advisory role is extended, the SC functions somewhat as an
extension of the normal audit committee.

7. Conclusion
This study examined the disclosure on Shariah compliance as reported by the SC in the
annual reports for the year 2008/2009 of seven takaful companies. It addresses the issue
of whether the current disclosure sufficiently captures the underlying philosophy
and principles of the takaful business. In addition, it discusses the adequacy of the
advisory role played by the SC members for assessing and reporting on Shariah
compliance.
One limitation of the research is its heavy reliance on the annual report as evidence
of public disclosure on Shariah compliance. This limitation should be borne in mind
when evaluating the findings and suggestions of this study. Interviews can be
conducted with other stakeholders as mentioned earlier. A review of internal
documents on Shariah compliance is also useful. These mixed methods of data
collection should provide a more holistic understanding on how and why the present
disclosure is as it is. Findings from such a research are more in-depth, thereby useful
for providing more meaningful suggestions for future practices.
Arguably, Shariah compliance has developed in much the same manner as other
disclosure practices, that is, compliance with rules rather than with principles. While
the distinctive and confidence feature of takaful business draws heavily on Shariah
compliance to be reported by the SC through the annual report, evidence suggests that
it fails to do so. As it is, there is a lack of information to facilitate investors and other
external stakeholders to make well-informed decisions and to enable them to ascertain
whether takaful is indeed a Shariah-compliant insurance. To move forward in
improving disclosure, information as suggested by Haniffa and Hudaib (2007) and
Maali et al. (2006) can be considered for inclusion in future studies.
In spite of the BNM’s expectation that SC members ensure compliance at all times,
their role is only as advisors. As advisors, they had to rely on moral persuasion which
is inadequate to ensure compliance as expected by BNM. Without first strengthening
the role of the SC, the SC reports will continue to be very brief and highly motivated by
the need to show conformity with BNM guidelines.
This paper, which discusses the disclosure of information on Shariah compliance,
should be useful for educating the public in general and the investor in particular on the
importance of Shariah-compliant rulings by the Shariah advisories for takaful business.
This paper suggests that more transparency is needed through more disclosure in the
reports of SC and highlights the concern that the advisory role is inadequate to enable
the SC members to effectively ensure Shariah compliance.
JIABR List of abbreviations
3,1 BNM ¼ Bank Negara Malaysia
MTA ¼ Malaysian Takaful Association
FSMP ¼ Financial Sector Masterplan
36
SC ¼ Shariah Committee
SAC ¼ Shariah Advisory Committee

Acknowledgements
The author would like to record sincere gratitude to three officers: Zulkepli Saad,
Azizul Azman Abd Shukor and Afiza Abdullah from the Insurance and Takaful
Supervision Department of Bank Negara Malaysia for their involvement in the
discussion of the findings. The author would also like to thank Professor Frank Clarke
and Associate Professor Hashanah Ismail for all their support and assistance. Finally,
this paper would not be possible without the comments and feedback from Professor
Ros Haniffa. However, any errors or omissions in this paper rest solely with the author.

Notes
1. Operators or companies are used interchangeably.
2. Shariah decrees pronounced by a Shariah scholar or religious authorities (plural: fatawa).
3. Information is obtained from the presentation entitled “Introduction to Takaful Operations”
by an officer from BNM on 17 July 2008.
4. Information from WBS3043 Chapter 7, wwm.edu.my/alib/wbs3043/wbs/304c7 (accessed
15 December 2008).
5. Unlawful transactions which are not permissible under Shariah.
6. The word Bhd indicates that the company is formed as a public limited company and listed
on the Main Board of Bursa Malaysia.
7. Sdn Bhd indicates that the takaful operator is a private limited company. Unlike the public
limited company, the shares of the company are not offered for sale to the public.
8. Shariah is the path or way given by God to human beings, the path by which human beings
search God’s Will (refer to www.musawah.org/glossary.asp).
9. Based on undated presentation by Ansari (2008).
10. The eighth takaful company, which is MAA Takaful Bhd, was excluded due to
unavailability of its on-line annual report. Consequently, this paper examines seven SC
reports.
11. JPIT/GPT6 BNM Guidelines on financial statements for takaful operators.
12. However, this report is not required to be part of consolidated financial statements for
takaful operators which are subsidiaries of public-listed company.
13. BNM/DFI/GPS 1 Guidelines on the Governance of SC.
14. The word moral persuasion was used by an officer from BNM during an informal
conversation when he was asked about the role of SC within takaful organisations.
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the Asia-Pacific Conference on Accounting I, 2 October, Kota Bharu, Kelantan, Malaysia.
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annual.asp (accessed 1 March 2011).
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the future”, paper presented at International Takaful Summit, 2 November, London, UK.

About the author

Nor Aziah Abu Kasim is an Associate Professor at the Faculty of Economics and Management,
Universiti Putra Malaysia. Nor Aziah Abu Kasim can be contacted at: noraziah@econ.upm.edu.my

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