Investment - Under

Different Regulatory
Framework
A.Rahman Tolefat
Head, Islamic Financial Institutions
Langkawi 23 24 February 2006
1

What Are Most Influential

Factors Affecting
Investment/Composition portfolio
of Takaful Companies ?

Ownership or
control

Regulations

Shariah
restrictions

Investment
Department

Investment
Decision and
portfolio
composition

Takaful
Model

Size
3

Research Question:
Does the Regulatory framework for
takaful companies restrict their
investment freedom?

Regulatory Framework: Current

Practices
Directly
Amount to be
invested:

Indirectly

Domestically

Solvency margin
& capital
adequacy.

Local
currencies

Risk weighting
method
5

Indirect Restriction: Solvency

Margin
If a company invests in a single equity/company
more than 5% of its capital, then the admissible
assets must be restricted to only 5%.
If a company invests 10
million in a one single
company and its capital
is 15 million.

Admissible:
0.5Million
Inadmissible:
9.5Million
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Direct and Indirect Restrictions

Restrictions

Bahrai
n

Malaysia Jordan

Investment in
certain Asset
classes

No

15% Govt. Na
Sukuk

Domestic
Assets

No

80%

Na

Local Currency No

Yes

Na

Indirect

No

Yes-Risk
Weighting

YesSolvenc
y

Research Question:
Does the ownership of takaful
companies affect their composition of
their investment Portfolio/Investment
decision?
H: Ownership of the takaful firms is likely
to influence investment decision in takaful
companies.
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Ownership
Many takaful companies are controlled by
Islamic banks or dominated shareholders

Investment is concentrated with

these related party

46%
and
above
9

There is a positive relationship between

percentage of control and amount
invested

10

These investments are also concentrated

in Investment Accounts (Deposits)

11

Ownership

Conflict of Interest

Systematic Risk
12

Research Question:
Does the composition of investment
Portfolio is difference between

shareholders and participants

funds?
H: There is a significance difference
between shareholders and participants
funds in term of the percentage of different
assets class in investment portfolio.
13

Misleading interpretation
Many takaful companies have been
invested in equities and real estate?
- In many sources shareholders
investment has mixed with participants
investment.
14

Asset Classes

With
Without
shareholders shareholders
funds
funds

Cash &
Investment
Accounts
(deposits)

Na

65%

Govt/ Corp. Sukuk 4 29%

35%

Islamic funds

15- 70%

0%

Equities

25- 74%

0%

Real estate inv.

2 - 42%
0%

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Shareholders
fund

Long term
investment

Participants
fund

Depend on
insurance
liabilities

- The regulation should not be

applicable to shareholders fund or
should be more flexible.

16

Research Hypothesis:
The ROI of takaful companies investment
portfolio may either not allow takaful
firms to compete in market or exposed
them to higher risk compare to
conventional?

17

Asset Classes

Bahrain Malaysi Jordan

a

Cash & Investment

Accounts (deposits)

85%

16%

90%

Government Sukuk

15%

19%

10%

Corporate Sukuk

0%

56%

0%

Equities

0%

0%

0%

Other

0%

9%

0%

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Conventional

Takaful

Charge higher premiums

Investment
Return

Underwriting
Risk

Investment
Return

Underwriting
Risk

Charge higher
premium
which reduce
the
competitivene
ss
19

Conventional

Takaful

Charge same premiums

Investment
Return

Underwriting
Risk

Investment
Return

Increase risk.

Underwriting
Risk

20

Research Question:
Does the takaful model adopted by the
compny affect the composition of their
investment Portfolio?
Yes
No

Which one is the best!

Need to unnify akaful
model
But- Underwriting prospective

21

Research Question:

Does the size of takaful of affect their

composition of their investment Portfolio
and return on investment?

H: The larger the size of the takaful firm,

the higher the ROI it is likely to achieve.
H: There is no signifcance diffences
between the percentage of assets class in
different investment portfolio of small,
medium and large takaful companies.

22

Research Question:
Does the competencies of
employees in investment department of
takaful firms affect their composition of
their investment Portfolio and return on
investment?

23

Current Practices
Investment department is treated
as a back office function.
Many CEO have concentrated on
underwriting profit.
Employees in investment
department either come from
conventional banks or underwriting
experience.
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Other factors

Very strong

Strong

Modest

Weak

Very weak

(1) Regulatory framework and limition imposed

by regulator

(2) Shari'ah restrictions on investment

(3) Lack of investment staff and expertise

(4) Shareholders controlling the company

whereby they require company to invest
certain perentage or amount with them
(5) General economic conditions

(6) Expection about inflation

(7) Investment expected rate of return

(9) Safety of investment

(10) Liqudity of investment

(11) Cash income on the investment

(12) The distribution of company's liabilities

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Research Question:
Do takaful companies desire to change he
current composition of their investment
Portfolio?
Hypothesis: There is no significance
differences between the actual and desire
composition of takaful companies
investment portfolio.
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Investment Catogry

Desired

Islamic Government Bonds

Islamic Corporate Bonds

Listed Equties

Unlisted Equties

Mutual Funds

Real Estate Investment

Related Party Investment

One year or less Instruments

Conventional Products

Others (please specify)

Total (the sum should be equal 100%)

27

Thank You ..

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