Takaful funds are invested only in Shariah-compliant assets such as sukuk, real estate, Islamic bank deposits or screened equities, and the returns go to participants according to the wakala or mudaraba model set out in the contract.
Two funds, two investment approaches
IFSB-14 distinguishes the participants' risk fund, or PRF, which pools underwriting risk, from the participants' investment fund, or PIF, specific to family products with savings. In the latter, the investment risk is borne by the participants themselves.
Permitted asset classes
According to the State Life FAQ in Pakistan, takaful operators invest contributions in real estate, with Islamic banks, in Shariah-compliant equities and in approved securities such as sukuk. Conventional interest-bearing bonds are ruled out.
Sectors excluded from the portfolio
Beyond interest, sector screens apply. South African magazine COVER notes that takaful funds cannot finance companies earning revenue from alcohol, tobacco, pornography or weapons. The operator's Shariah board approves these screens.
Why the ban on interest shapes everything
A conventional insurer's investment income may include riba, the prohibited interest. Takaful must seek interest-free returns, which steers it towards sukuk, real estate and Islamic financing, within a narrower investment universe.
Wakala: the operator manages, participants benefit
In the agency model, the operator receives a wakala fee for managing the funds on behalf of participants. Investment profits stay in the fund, and the final surplus goes entirely to participants, according to State Life.
Mudaraba: sharing investment profits
The mudaraba model makes the operator a manager paid through a share of profits, with participants regarded by the IFSB as owners of the funds. Under this arrangement, the surplus is shared between shareholders and participants according to a stated ratio.
The individual account in family takaful
For life cover with savings, part of the contribution goes to the risk fund and the rest to the participant's investment account. The value of this account follows the compliant assets selected; it can fall, because the operator does not guarantee investment risk.
Qard hasan and fund solvency
If losses push the risk fund into deficit, the operator injects a qard, an interest-free loan drawn from the shareholders' fund. Under IFSB-14, this loan is repaid only from future surpluses, which spares participants an interest-bearing debt.
The Malaysian framework: no cross-subsidies
In Malaysia, the draft operational framework published by Bank Negara Malaysia in May 2018 requires the surpluses and deficits of each takaful fund to be kept separate. Returns from one fund therefore cannot quietly cover the losses of another.
A surplus framed by regulation
Also in Malaysia, the operator may take at most 50% of a risk fund surplus, according to Actuarial Partners. In Pakistan, the surplus is shared among participants in proportion to their contributions, after deducting the claims they have already received.
Market risk, the main weak spot
Moody's estimated in 2026 that, for Middle Eastern Islamic insurers, exposure to regional conflicts lies mainly in investment portfolios, since war claims are generally excluded. The quality of investments therefore determines how sound the fund is.
Accounting standards and transparency
AAOIFI's FAS 43, effective since 1 January 2025, deals with accounting for takaful, including retakaful held by the participants' fund. Read together with FAS 42, it governs how the funds and their income are presented.
Assessing the investment policy before signing up
- Ask the licensed operator for the portfolio breakdown by asset class: sukuk, real estate, equities, Islamic deposits.
- Check the list of excluded sectors and the name of the Shariah board that approves the screens.
- Identify whether the contract follows the wakala, mudaraba or hybrid model, and note the profit-sharing ratio.
- For a family product, separate the portion allocated to the risk fund from the amount paid into the investment account.
- Review the track record of returns and surplus distributions in previous financial years.
- Read the clauses on qard and on how a risk fund deficit is handled.
What weighs on net returns
| Component | Effect on the participant | Drivers of variation |
|---|---|---|
| Wakala fee | Reduces the share of the contribution placed in the fund | Operator's fee schedule and product type |
| Mudaraba share of profits | Lowers the return distributed | Contractual ratio and asset performance |
| Investment account charges | Reduces accumulated savings | Fund chosen and amount invested |
| Deduction from surplus | Limits the surplus returned | Indicative: 50% cap in Malaysia |
| Qard repayment | Delays surplus distribution | Size of the past deficit |
Documents to request on investments
- The investment policy approved by the Shariah board
- The financial statements of the participants' fund
- The annual statement of the individual investment account
- The sheet showing the mudaraba sharing ratio or the wakala rate
- The latest Shariah audit report
- The terms covering qard and deficits
Misjudgements about takaful funds
- Believing the capital in a takaful investment account is guaranteed, when IFSB-14 places investment risk on participants.
- Comparing a takaful return with a guaranteed bank rate without allowing for wakala fees and the mudaraba share.
- Forgetting that a deficit covered by a qard will be repaid from future surpluses, which reduces later distributions.
- Relying on a fund's Islamic label without checking the list of excluded sectors or the Shariah approval.
- Confusing the underwriting surplus, which comes from claims experience, with investment profits, which follow different sharing rules.
Takaful investments: your questions
Can takaful funds hold conventional bonds?
In principle no, because these securities pay interest treated as riba. Operators use sukuk and other approved instruments. The investment policy approved by the operator's Shariah board should specify which assets are permitted and which are excluded.
Who receives the investment profits?
The participants, to the extent the contract provides. Under wakala, the operator is paid a fee and the surplus goes to participants; under mudaraba, it takes an agreed share of profits. The ratio should be in writing before you sign up.
What happens if the investments lose value?
For the risk fund, the operator may grant an interest-free qard, repayable from future surpluses. For the savings account of a family product, the participant bears the fall, since the investment risk belongs to them under IFSB-14.
How large are takaful assets within Islamic finance?
According to the IFSB, Islamic insurance assets grew by 16.9% in 2024, within an Islamic financial services industry worth USD 3,880 billion. In 2022 Iran held the largest stock of takaful assets, around USD 39 billion, according to Atlas Magazine.