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 ?
2
Ownership or
control
Regulations
Shari’ah
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?
4
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
6
Direct and Indirect Restrictions
Restrictions
Investment in
certain Asset
classes
Domestic Assets
Bahrain Malaysia
Jordan
No
15% Govt.
Sukuk
Na
No
80%
Na
Local Currency
No
Yes
Na
Indirect
YesSolvency
No
Yes-Risk
Weighting
7
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.
8
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
Relationship between ownership nd amount invested
25
20
15
Ownership%
10
Amount invested
5
0
RP(1)
RP(2)
RP(3)
Related Party
10
These investments are also concentrated
in Investment Accounts (Deposits)
Deposits
Equties investments
others
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
shareholders
funds
Without
shareholders
funds
Cash & Investment
Accounts (deposits)
Govt/ Corp. Sukuk
Na
65%
4 – 29%
35%
Islamic funds
15- 70%
0%
Equities
25- 74%
0%
Real estate inv.
2 - 42%
0%
15
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
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%
18
Conventional
Takaful
Charge higher premiums
Investment
Return
Underwriting
Risk
Investment
Return
Charge higher
premium which
reduce the
competitiveness
Underwriting
Risk
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.
24
Other factors
Very strong
Strong
Modest
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
25
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.
26
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 ..
28