The Insurance Commission (IC) has issued strict new mandates requiring local insurers to isolate Shari’ah-compliant assets from conventional business lines, a move intended to bolster the integrity of the nascent domestic Islamic finance sector.

In a circular letter, the regulator ordered insurance companies to implement an absolute firewall between participants’ funds—which comprise all Takaful-related assets—and shareholder capital.

The directive is designed to prevent the commingling of assets, ensuring that funds governed by Islamic law remain legally and operationally distinct from the broader pool of conventional insurance capital.

Under the new framework, the capital held within a participants’ fund must be entirely segregated from the shareholders of Takaful window operators.

The commission specified that these funds cannot be invested in or merged with any other assets held by conventional insurers or mutual benefit associations. This structural separation is intended to ensure that Takaful assets are utilized exclusively for the mutual protection and financial interests of the participants, adhering to the religious prohibition against interest and uncertainty.

The regulatory requirements extend beyond a simple split between Islamic and conventional operations. The IC has imposed a second tier of internal segregation within the Takaful operations themselves. Insurance providers are now obligated to maintain independent and distinct accounting records for the participants’ risk fund and the participants’ investment fund.

The risk fund, fueled by donations known as Tabarru’, is dedicated strictly to risk pooling, claim payouts, and retakaful costs.

Conversely, the investment fund is earmarked for savings and investment accounts designed to generate Shari’ah-compliant returns for participants.

By mandating this granular level of record-keeping, the regulator aims to provide a clear audit trail and prevent the cross-subsidization of investment losses with risk-pooling capital.

The commission further tightened financial oversight by prohibiting the reclassification of an operator's earned management income, or Wakalah, and investment profit shares, known as Mudarabah, into interest-free loans.

These loans, or Qard Hasan, are typically used to plug temporary deficits in the fund. The IC stated that under no circumstances may contractual fees or profit entitlements be offset against or relabeled as these support obligations. This provision is intended to prevent operators from using their fees to mask underlying fund deficits or misrepresent their financial support to participants.

The guidelines are effective immediately, with the IC requiring full compliance for the reporting period ending Dec. 31, 2025. This timeline forces local insurers to quickly overhaul their internal accounting and asset management systems to meet the rigorous standards of the Islamic financial market.