Part 1

- Risk management is the act to avoid risk, control risk, reduce risk or finance risk
- In financial planning, risk management is also known as wealth protection
- It implies the act of protecting the wealth from any harm resulting from pure risk. Hence, it is one of the most crucial areas in financial planning
- Financial planners, therefore, need to identify and evaluate the risks relating to particular client and ensure the client properly understand the significance of failing to adequately protect their wealth.

Islamic view on Risk Management and Takaful


- Many Muslims misunderstand the concept of fate. They believe that the future is in the hand of God.
- While it is true that only Allah knows the future, believing that everybody’s future is fated by Allah is incorrect.
- In fact, Muslims are asked to work hard in order to be able to change their conditions. This is clearly mentioned in the Qur’an, Surah Ar-Ra’d, verse 11:
“… Verily never will God change the condition of a people until they change it themselves (with their own souls)…"


- In this verse, Muslims are told that Allah will never change their condition, unless they themselves put the effort to change
- Submission to Allah, of course, has a positive effect on human behavior as it will lead to peace and contentment. Undoubtedly, one has to submit every single thing to Allah
- However, submission to Allah should be done only after he had stretched out his hand to do the best effort as he can to change himself, so that he would be able to manage and to cope with unforeseen calamities or misfortune.


- The Prophet (s.a.w) once asked a Bedouin who had left his camel untied, “Why don’t you tie your camel?” The Bedouin answered, “I put my trust in God.” The Prophet (s.a.w) then said, “Tie up your camel first then put your trust in God”
- This hadith reveals not only how should Muslims accept their fate but it also indicates how do Muslims reduce the risk of loss and calamities
- The story of Prophet Ya'qub, the father of Prophet Yusuf, tells us about risk management as Ya'qub commanded his sons to enter Egypt from different gates in order to avoid being detected by enemies.

- The history of the Prophet (s.a.w) is also full of lessons on how Muslims should manage the risks
- In the history of the Prophet's migration to Madinah, the Prophet reduced the risk of Muslims being detected by the enemies by segregating the movement of Muslims in small numbers. Knowing the plan of Quraish to kill him that night, the Prophet avoided the risk of getting killed by asking Ali to sleep in his bed during the night. It was reported that as night advanced, the Quraish posted assassins around the Prophet's house. They kept vigil all night long, waiting to kill him the moment he left his house early in the morning, peeping now and then through a hole in the door to make sure that he was still lying in his bed.

Managing Risk via Takaful

- In Islamic financial planning, one way to reduce the risk of loss financially is by participating in takaful
- Takaful literally means mutually guarantee and solidarity
- It has been defined by the Takaful Act 1984 as "a scheme based on mutual assistance, which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for the purpose“
- Thus it is a sharing of risk scheme whereby participants mutually agree to protect one another from unexpected future material risk .
- Takaful plan is the alternative to insurance in conventional financial planning.
- In takaful plan, the participant would pay particular amount of money as contribution partly to risk fund using the concept of tabbaru' (donation) and partly to investment fund with a mutual agreement that, the kafiil is under a legal responsibility to provide for the participant's a financial protection against unexpected loss, should it happen within the agreed period.
- However, in a case whereby the loss does not occur to the participants within this specific period, the participants are entitled for the whole amount of paid premium, together with the share of profits made out of the cumulated paid premium based on the principle of Mudharabah.