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1
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 ..