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Investment - Under Different Regulatory Framework

A.Rahman Tolefat Head, Islamic Financial Institutions

Langkawi 23 – 24 February 2006

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What Are Most Influential Factors Affecting

Investment/Composition portfolio of Takaful Companies ?

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Investment Decision and

portfolio composition

Ownership or control

Takaful

Model

SizeInvestment Department

Shari’ah restrictions

Regulations

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Research Question:

Does the Regulatory framework for takaful companies restrict their

investment freedom?

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Regulatory Framework: Current Practices

Directly

Amount to be invested:

•Domestically

•Local currencies

Indirectly

•Solvency margin & capital adequacy.

•Risk weighting method

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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 Bahrain

Malaysia Jordan

Investment in certain Asset classes

No 15% Govt. Sukuk

Na

Domestic Assets

No 80% Na

Local Currency No Yes Na

Indirect Yes-Solvency

No Yes-Risk Weighting

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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

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There is a positive relationship between percentage of control and amount

investedRelationship between ownership nd amount invested

0

5

10

15

20

25

RP(1) RP(2) RP(3)

Related Party

Ownership%

Amount invested

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These investments are also concentrated in Investment Accounts (Deposits)

Deposits Equties investments others

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Conflict of Interest

Ownership

Systematic Risk

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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.

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Misleading interpretation

Many takaful companies have been invested in equities and real estate?

- In many sources shareholders investment has mixed with participants investment.

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Asset Classes With shareholders funds

Without shareholders 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

Depend on insurance liabilities

Participants fund

- The regulation should not be applicable to shareholders fund or should be more flexible.

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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?

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Asset Classes Bahrain Malaysia

Jordan

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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Charge higher premium which reduce the competitiveness

Underwriting Risk

Underwriting Risk

Investment Return

Investment Return

Conventional TakafulCharge higher premiums

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Increase risk.

Underwriting Risk

Underwriting Risk

Investment Return

Investment Return

Conventional Takaful

Charge same premiums

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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

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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.

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Research Question:

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

investment?

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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 stron

g StrongModes

t Weak

Very weak

(1) Regulatory framework and limition imposed by regulator 5 4 3 2 1

(2) Shari'ah restrictions on investment 5 4 3 2 1

(3) Lack of investment staff and expertise 5 4 3 2 1

(4) Shareholders controlling the company whereby they require company to invest certain perentage or amount with them 5 4 3 2 1

(5) General economic conditions 5 4 3 2 1

(6) Expection about inflation 5 4 3 2 1

(7) Investment expected rate of return 5 4 3 2 1

(9) Safety of investment 5 4 3 2 1

(10) Liqudity of investment 5 4 3 2 1

(11) Cash income on the investment 5 4 3 2 1

(12) The distribution of company's liabilities 5 4 3 2 1

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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%) ? 

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Thank You ..