Abstract

Performance of the company is very substantive for the management. Performance

depends on the strength of the organization to get something and imagination management
in differ manners to develop a comparative vantage. The efficiency of takaful companies
has been widely and extensively analyzed in the last few decades. The major aim of this
research is to determine the factors affecting the financial performance of Takaful industry
in Pakistan. Thereby render testimonials to further fortify the resiliency of takaful sector
within the Pakistan’s financial system. Secondary source of data is used which includes
financial statements of Takaful companies from Year 2007-2014 from company web sites,

Page - 1 - of 18
Karachi stock exchange and web site of the State bank of Pakistan. Researcher considered
whole population in this study because present there are only five takaful companies listed
in Pakistan. This study led to the conclusion that financial performance of Takaful
companies of Pakistan is significantly influenced by the underwriting risk, liquidity
position and age of firms. This research may help to guide management of takaful company
in order to focus on key aspects of performance measurement.

Key Words: Performance, financial performance, Takaful

-2-
 1. Introduction:

The growth and expansion of Islamic financial institutions in the past two decades, the
interest and discussion with experts, economists and policy makers generated (Ahmad,
1981). A growing number of studies in Islamic finance and takaful (Islamic insurance) are
carried out today. Meanwhile, in the existing research can be divided into two phases.

Research in the first stage is as descriptive and focuses on conceptual issues highlight
interest-free financing (Khan & Mirakhor, 1989).

In the second stage, the classical techniques were used to examine rigorously analyze the
theoretical framework of Islamic institutions and their behavior (Hameed & Bashir, 1999).
But the lack of detailed data on the behavior of takaful and operations prevented
comprehensive empirical analysis of the experience of the last two decades (AzmatUllah,
2011).

“Many Muslims misunderstand the concept of fate. For some Muslims believe that the
future is in the hand of Allah, where they are facing with fatalistic mentality by putting
themselves in the doctrine, whether one is rich or poor, happy or sad, it is fated by Allah. It
is a good dealing with luck. In fact, efforts and prayers should precede this kind of belief”
(Iqtisad Al, 2006). For a long time, same erroneous beliefs have been consorted with
insurance. Muslim scholars and Islamic law have addressed insurance illegal, repulsive
and haram to Shariah without allowing an substitute solvent to Muslim Ummah (Khan &
Ahmed, 2001).

Performance of the company is very substantive for the management, as a consequence

that is attained by a person or persons individually in a company whilst considering its
sureness and province in accomplishing the objective, not against the law, and in
accordance with the moral and ethics (Arshad & Gondal, 2013).

Performance depends on the strength of the organization to get something and imagination
management in differ manners to develop a comparative vantage (Iswatia & Anshoria,
2007). The performance is sub-divided into two categories at the name of financial and

-3-
Non-financial performance. Variables of financial performance directly depend on company
financial reports.

The efficiency of financial companies has been widely and extensively analysed in the last
few decades. For financial companies, efficiency entails meliorated profitability, bigger
amount of funds conveyed in; meliorate prices and services caliber for consumers and
better safety in terms of better capital buff in fascinating risk (Berger & Oftek, 1995).

For the takaful (Islamic Insurance) companies, the information held on the valuation of the
companies’ performance may be used to enhance the overall efficiency of these operations
and in turn, may bestow for accomplishing its comparative edge (Lee, 2008).

2. Motivation of study

Previously there was no empirical evidence available regarding to financial performance of

Takaful companies in Pakistan. The major aim of this research is to determine the factors
affecting the financial performance of Takaful industry in Pakistan. Thereby render
testimonials to further fortify the resiliency of takaful sector within the Pakistan financial
system.

The paper is formed as follows: Section 1 reviews the germane literature; Section 2
talks about the methodology; Section 3 acquaints the results and analysis, and finally
Section 4 presents some conclusions and recommendations.

3. Literature Review:

3.1. Takaful

Takaful arises from the Islamic word kafalah, which means ‘insuring each other’ or ‘joint
assure’. In rationale, Takaful system is established on mutual co-operation, obligation,
sureness, auspices and aid between groups of participants. It is a form of reciprocal
insurance (S.Saaty & Ahmad Ansari, 2009)

-4-
Takaful is basically a risk sharing system rather than risk transfer, it works upon the rules
of brotherhood and mutual help as in the participants pool in a fund to help those who are
in financial problems. (Abdul Arif, Tapsir, & Abu Talib, 2011).

The work was commenced on takaful in Pakistan for 23 years ago but the development in
this regard was unsatisfactory. The Council of Islamic Ideology initiated reexamining the
takaful (Islamic Insurance) System from 1983 ahead. In 1992 the Council presented its
report on Takaful System. The Insurance Ordinance – 2000 specifies the term “Takaful” in
Section 2 and provides for formation of Takaful companies in the Pakistan. In
conclusion 2005 the regulatory model for Takaful was formulated in the configuration of
Takaful Rules - 2005.

3.2. Life Insurance

It’s difficult to find the literature on the financial performance of Takaful industry, so
traditional life insurance literature is used. Previous research related to insurance sector
shows that underwriting risk had statically significant positive impact on insurance sector
but size had no significant impact on it (Adams & Buckle, The determinations of corporate
financial performance in the bernude insurance market, 2003). After considering the
market and economic factors, researcher found that inflation had negative but bond’s
portfolio returns and per capita income for disposable person had positively relationship
with performance of US life insurers (Charumathi, 2012).

The different factors like size, leverage and underwriting risk were statically
significantly positive relate to the investment earnings of New Zealand stock life
insurers.

The profitability of Pakistan insurance companies is significantly and positively influenced

by volume of capital; significantly and negatively influenced by loss ratio and leverage; and
not related to age of the insurer (Malik, 2011).

-5-
 3.3. Firm Performance

Performance measurement of the company is very crucial for the management, because it
is a result that is attained by person and persons is an entity regarding the assurance and of
the obligations of those legal ones (Arshad & Gondal, 2013). The performance to acquire
depends on the force of an establishment and management of imaginations in different
ways to develop a competitive vantage.
The literature usually differentiates financial and nonfinancial performance (Kaplain,
2012). Financial performance is oft uttered in footing of increase of stock prices, turnover,
sales, or employments (Diacon, Starkey, & O'Brien, 2002), where non-financial
performance is ordinarily uttered in expenditures damage, percentage of forward-looking
sales, or self-reported ( (Abu Mansor & Radam, 2000), (Hegedoorn & Cloodt, 2003). While
both kinds of performance are much interconnected, the previous studies usually base both
financial and non financial performance to differentiate, constructs or concentrates one of
them (Sorensen & Stuart, 2000).

4. Measures of Financial Performance

There are different ways to find out financial performance of any company. For example
return assets (ROA) shows the ability how much efficiently and effectively company use
their assets and return on equity (ROE) determines how much return company takes
against their finance provider (Tangen, 2003).

4.1. The Primary Ratios

For examining the financial performance of any company the basic rations can be divided
into five following groups:
 Liquidity ratios
 Asset management ratios
 Debt management ratios
 Profitability ratios

-6-
  Market value ratios
Empirical evidence evaluates how leverage, liquidity, size, age and net claims ratio have an
impact on company financial performance (Almajali, Akamro, & Al-Soub, 2012). The
researcher has selected these factors for evaluation of financial performance because data
related for this easily get through annual financial reports of Pakistan Takaful companies.

4.2. Previous studies

The conceptual studies examine the effect of company size on profitably and risk. This
article shows the effective and efficient use of assets on the performance of Islamic banks.
Analysis of this study proved the relationship between size and performance of the bank
was significant. And significantly negative impact relation could be seen between size and
risk index (Hameed & Bashir, 1999).

Imperial result of Jordanian insurance companies (2002-2007) shows that leverage,

liquidity and size of the company have positive statically significant impacts on the
financial performance of the insurance entities, and other hand not statically significant
relation fond between financial performance and age of the company (Almajali & Alamro,
2012).

The paper examines how financial crisis impact the liquidity risk and the profitability of
Islamic banks in Malaysia during the period of 2006 to 2008. The empirical evidence finds
that the financial crisis during the period has negative impact of some extent on liquidity
risk in Islamic banks and adverse Islamic bank’s Profitability. Study shows that in the
period of crises liquidity risk, ROA and ROE tend to act in an opposite side (Ariffin,
Liquidity risk management and financial performance in Malaysia: empirical evidence from
Islamic banks, 2012).

-7-
 5. Methodology

5.1. Study sample

In this study researcher used all five Takaful companies working in Pakistan during the
period of 2007 to 2012. Firm level units were used for the analysis in this study.

5.2. Data collection

The researcher depended on the secondary source of data which include financial
statements of Takaful companies from Year 2007-2012 from company web sites, Karachi
stock exchange and web site of the state bank of Pakistan (SBP, 2012).

5.3. Depended variable

The objective of the research was to determine financial performance. In this regard the
researcher used ROA as a dependant variable.

Return on Assets (ROA): ROA is widely accepted ratio use for finding the financial
performance of the companies; this ratio was developed by Dupont in 1919. ROA
explains the firms’ ability to use their assets (BPB, 2012). It is calculated as
percentage of net Profit after tax to total assets of the firms (Malik, 2011).

5.4. Independent Variables

Examining of the factor that has impact on financial performance of the takaful companies
in Pakistan researcher used following independent variables.

1. Leverage (LV):
“It is a financial ratio that indicates the percentage of a firm's assets that are
financed through debts, this ratio” use in insurance sector (Mehari & Aemiro, 2013).
The Leverage Ratio is measured as:
Leverage Ratio= Total Debt/Total Assets

2. Underwriting Risk (UWR):

-8-
 This ratio studies the performance of Takaful companies and is calculate as:
Underwriting Risk ratio = Net claims incurred / Net earned premiums (Hardwick,
1997).

3. Liquidity (LQ):
The Liquidity Ratio measures the firm's ability to use its near cash or “quick” assets
to retire its liabilities (Ikonic, Arsic, & Milosevic, 2011). Liquidity ratio is measured
as:
Liquidity ratio = Cash and Bank Balance / Total Assets
4. Efficiency Ratio (ER)
The ratio shows the relationship between investment income and net premium. This
is one of the ratios used to measure efficiency of an insurance company (Khalifa &
Shafii, 2013).
5. Size (SZ)
Researcher use total asset as a proxy for Company Size. Company Size = Natural log
of total assets (Boyd & D., 1993).
6. Age (AG)
Age as measured by number of year since formation of the company (Majumdar,
1997).

-9-
 5.5. Research Model and expected signs

Independent variables Dependent variable

Leverage
-
(LV)

Underwriting Risk +
(UWR)

Liquidity +
(LQ)
Return on Assets
(ROA)
Efficiency Ratio -
(ER)

Age +
(AG)

Size
+
(S)

- 10 -
 5.6. Study Hypotheses

One the basis of above model the following null hypotheses are formulated for this
research

 Leverage has positive impact on Financial Performance (Return on Assets) of

Pakistani Takaful companies.

 Underwriting Risk negative impact on Financial Performance (Return on

Assets) of Pakistani Takaful companies.

 Liquidity risk positive impact on Financial Performance (Return on Assets) of

Pakistani Takaful companies.

 Efficiency Ratio negative impact on Financial Performance (Return on Assets) of

Pakistani Takaful companies.

 Age positive impact on Financial Performance (Return on Assets) of Pakistani

Takaful companies.

 Size positive impact on Financial Performance (Return on Assets) of Pakistani

Takaful companies.

5.7. Data Analysis

Depending on study, regressing analysis is used to enquire the affect of independent

variable on depended variable. The study of the collected data from Pakistan Takaful
companies financial statement will examine different basic static techniques in order to
identify and interpret the relationship between depended and independent variables such
as means, standard deviation, T test and Minimum & Maximum and will also perform
calculation of correlation of the variables.

- 11 -
 5.8. Regression analysis:

Simple linear regression analysis is done for Return on Assets (ROA) with Leverage (LV),
Underwriting Risk (UWR), Liquidity (LQ), Efficiency Ratio (ER), Size (SZ) and Age (A).

5.9. Regression model is:

ROA = 𝛽o +𝛽1LV +𝛽2UWP +𝛽3 LQ +𝛽4ER +𝛽5S+𝛽6A + έ

5.10. Results & Discussion:

Table 1: Descriptive Statistics

N Minimum Maximum Mean Std. Deviation

ROA 29 -13.08 9.72 -2.3090 5.76406

LV 29 .01 .89 .4445 .25747

UWR 26 -26.11 157.41 70.4292 50.94757

LQ 29 3.81 58.00 35.2369 15.83418

ER 27 -968.91 901.19 6.1548 260.17583

A 29 1.00 6.00 3.4138 1.70120

S 29 11.19 15.18 13.2540 .67333

Table l shows the descriptive statistics for the variable study in this research. Return on
Assets averaged -2.3090 with ranged of -13.08 to 9.72. Leverage averaged .44 ranged from
.0.1 to .89, Underwriting Risk averaged 70.43 with minimum -26.11 and maximum 157.41,
Liquidity had an average of 35.24 and range from 3.81 to 58, the Efficiency Ratio of the firm
had averaged 6.15 and range was minimum -968.9 to maximum 901.19, the Size the firms
averaged out 13.25 with minimum 11.19 – maximum 15.18 (SZ) and averaged from Age of
the firm had 3.41 with ranged from 11.19 – 15.18.

- 12 -
 Table ll: Correlations

ROA LV UWR LQ ER A SZ

ROA Pearson
1
Correlation

Sig. (2-tailed)

LV Pearson
.265 1
Correlation

Sig. (2-tailed) .165

UWR Pearson
.395* .064 1
Correlation

Sig. (2-tailed) .046 .756

LQ Pearson
.237 .333 -.102 1
Correlation

Sig. (2-tailed) .216 .078 .620

ER Pearson
-.092 .019 .390* -.135 1
Correlation

Sig. (2-tailed) .649 .926 .049 .502

A Pearson
.376* .698** .047 -.048 .023 1
Correlation

Sig. (2-tailed) .045 .000 .821 .803 .910

SZ Pearson .487*
.040 .572** -.285 .078 .104 1
Correlation *

Sig. (2-tailed) .836 .001 .159 .687 .607 .007

*. Correlation is significant at the 0.05 level (2-tailed).

**. Correlation is significant at the 0.01 level (2-tailed).

Table ll shows that correlation between dependent and independent variables of Takaful
industry of Pakistan for the period of 2007 to 2012. Table shows that Leverage,

- 13 -
Underwriting Risk, Liquidity, Size and Age of the firm were having positive correlation with
Return on Assets but Efficiency Ratio having negative.

Table lll: Model Summary

Adjusted R Std. error of the

Model R R Square Square Estimate

1 .735a .540 .394 4.69817

a. Predictors: (Constant), SZ, LQ, UWR, A, ER, LV

Table lll show the model summary of regression run in this research for Takaful
Companies. Table shows the value of R is 73.5% and R Square is 54%, and std. error of the
model is 4.69. Value of R shows that 73.5% dependent variable changed due to that
independent variable they used in this research.

Table lV: ANOVAb

Sum of Mean
Model Squares df Square F Sig.

1 Regression 491.629 6 81.938 3.712 .013a

Residual 419.383 19 22.073

Total 911.012 25

a. Predictors: (Constant), SZ, LQ, UWR, A, ER, LV

b. Dependent Variable: ROA

- 14 -
Table IV show the result of ANOVA. The value of F test (3.712) of the model is significant.

Table V: Coefficientsa

Un standardized Standardized
Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) -6.121 31.833 -.192 .850

LV -.821 7.602 -.031 -.108 .915

UWR .058 .023 .493 2.581 .018

LQ .125 .083 .323 1.498 .050

ER -.009 .007 -.298 -1.378 .184

A 2.238 .834 .602 2.682 .015

SZ -.961 2.429 -.091 -.396 .697

a. Dependent Variable: ROA

Above table V indicate the results of regression run in this study, results are present in
following table:

The regression result clearly shows that there is a negative (Shui, 2004), and
relationship between the return on assets and the insurance (Elango, et al., 2008).
leverage but not statically significant.

The regression result clearly shows that there is a positive and (Malik, 2011), (Adams &
statically significant relationship between the return on assets and Buckle, 2003),
the takaful underwriting risk. (Charunmathi, 2012)

The regression result clearly shows that there is a positive and (Bilal, at al., 2013),
statically significant relationship between the return on assets and (Malik, 2011),
liquidity position of takaful companies . (Charunmathi, 2012)

The regression result clearly shows that there is a negative but not (Bilal, at al., 2013),
statically significant relationship between the return on assets and (Adams & Buckle, 2003),

- 15 -
efficiency ratio of takaful firms .

The regression result clearly shows that there is a positive and (Bilal, at al., 2013),
statically significant relationship between the return on assets and (Malik, 2011),
age of takaful firms . (Charunmathi, 2012)

The regression result clearly shows that there is a negative but not (Adams & Buckle, 2003),
statically significant relationship between the return on assets and
size of takaful firms .

6. Conclusion and Scope of Future Study:

This study led to the conclusion that financial performance of Takaful companies of
Pakistan is significantly influenced by the underwriting risk, liquidity position and age of
firms. Takaful sector of Pakistan is not mature. There is not any possibility to generalize the
results of this study due to limited data availability (Only five companies and 7 year age).

This study has considered only six independent variables relating to firm’s performance of
takaful in Pakistan. Future research studies may consider more variables, in the form of
both financial and non financial element. Takaful is the Islamic way of insurance so in
future, studies may developed some compliance variables that impact the firm’s
performance like Shariah board etc.

- 16 -
 7. References
1 Abdul Arif, M., Tapsir, R., & Abu Talib, M. K. (2011). Risk an risk management of
Takaful industry. Annual Summit on Business and Entrepreneurial Studies , 364-372.
2 Abu Mansor, S., & Radam, A. (2000). Productivity and Efficiency Performance of the
Malaysian Life Insurance Industry. Jurnal Ekonomi Malaysia , 93-105.
3 Adams, M., & Buckle, M. (2000). The determinations of corporate financial
performance in the bernude insurance market. Applied financial economics , 13, 133-
143.
4 Ahmad, K. (1981). Studies in Islamic Economics. Jadah: International Center for
Research in Islamic Economics.
5 Almajali, A. Y., Akamro, S. A., & Al-Soub, Y. Z. (2012). Factor affecting the financial
performance of Jordanin insurance companies listed at Amman stock exchange.
Journal of management rerserch , 266-289.
6 Ariffin, N. M. (2012). Liqidity risk management and financial performance in malaysia.
Arab international journal of social sciences , 68-75.
7 Arshad, Z., & Gondal, M. Y. (2013). Impact Of Working Capital Management On
Profitability A Case Of The Pakistan Cement Industry. Interdisciplinary Journal of
Contemporary Research in Business, 5 (2), 384-390.
8 AzmatUllah. (2011). Takaful In Light of Shariah. Karachi: Adera Al-Maroof Karachi.
9 Berger, P., & Oftek, E. (1995). Diversifications effect on firm value. Journal of Financial ,
39-65.
10 Boyd, J., & D., R. (1993). Size and Performance of Banking Firms: Testing the Prediction
of the Theory. Journal of Monetary Economics , 47-67.
11 BPB. (2012). Financial management. bpb publisher.
12 Charumathi, B. (2012). On the determinations of profitability of indian life insurance-
An empirical study. World Congress on Engineering, (pp. 1-6). London.
13 Diacon, S., Starkey, K., & O'Brien, C. (2002). Size and Efficiency in European Long-Term
Insurance Companies: An International Comparison. The Geneva Papers on Risk and
Insurance , 27 (3), 444-466.
14 Elango, B. Yu-Luen, Ma and Nat, P. An invetigation into the diversification-performance
relationship in the U.S. poperty-liability insurance industry, The Journal of Risk and
Insurance, 75, (3), 567-591, 2008.
15 Hameed, A., & Bashir, M. (1999). Risk and profitability measures in islamic banks: the
case of two sudanese banks. Islamic economic studies , 6 (2), 2-24.
16 Hardwick, P. (1997). Measuring cost inefficiency in the UK life insurance industry.
Applied Financial Economics , 81-112.
17 Hegedoorn, J., & Cloodt, M. (2003). Measuring innovative performance: Is there an
advantage in using multiple indicators?Research Policy., (pp. 1365-1379). Knobena.
18 Ikonic, D., Arsic, N., & Milosevic, S. (2011). Growth Potential and Profitability Analysis

- 17 -
 of Insurance Companies in the Republic of Serbia. Chinese Business Review , 10 (11),
998-1008.
19 Iqtisad Al, i. (2006, October 26). Risk Management in Islam. Retrieved Nov 25, 2013,
from www.islamic-world.net: www.islamic-world.net/economics/takaful.htm
20 Iswatia, S., & Anshoria, M. (2007). The Influence of Intellectual Capital to Financial
performance at insurance companies in Jakarta stock exchange. 13th Asia Pacific
Management Conference, (pp. 1-10). Melbourne, Australia.
21 Kaplain. (2012). Managerial Accounting. Kaplain Publisher.
22 Khalifa, K. M., & Shafii, Z. (2013). Financial Performance and Identify Affecting Factors
in this Performance of Non-oil Manufacturing Companies Listed on Libyan Stock
Market (LSM). European Journal of Business and Management , 5 (12), 82-99.
23 Khan, M., & Mirakhor, A. (1989). The Financial System and Monetary Policy in an
Islamic Economy. Islamic Econ , 39-57.
24 Khan, T., & Ahmed, H. (2001). Risk Management and analysis of issues in Islamic
financial industry. Jeddah- Sadudi Arabia: Islamic Research and Training Institute.
25 Lee, S. (2008). Ownership Structure and Financial Performance: Evidence from Panel
Data of South korea. Corporate Ownership and Cntrol , 1-30.
26 Majumdar, S. (1997). The Impact of Size and Age on Firm-Level Performance: Some
Evidence from India. Review of Industrial Organization , 231-241.
27 Malik, H. (2011). DETERMINANTS OF INSURANCE COMPANIES PROFITABILITY AN
ANALYSIS OF INSURANCE SECTOR OF PAKISTAN. Academic Research International , 1
(3), 315-321.
28 Mehari, D., & Aemiro, T. (2013). Firm specific factors that determine insurance
company's performance in ethiopia. Europen Scitific Jurnal , 9 (10), 245-255.
29 S.Saaty, A., & Ahmad Ansari, Z. (2009). Takaful-An Islamic Way of Insurance-
Developments, Growth, Challenges and.
30 SBP. (2012). Financial statement analysis of financial sector. Lahore: State Bank of
Pakistn.
31 Shiu, Y. (2004), “Determinants of United Kigdom General Insurance Company
Performance” , British Acturial Journal, 10, 1079-1110.

- 18 -