Takaful Investment Portfolios

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3 Takaful Investment Portfolios

4 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at

5 Takaful Investment Portfolios A Study of the Composition of Takaful Funds in the GCC and Malaysia ABDULRAHMAN KHALIL TOLEFAT MEHMET ASUTAY

6 Cover image: Ranjan Chari/iStockphoto Cover design: Leiva-Sposato Copyright 2013 by John Wiley & Sons Singapore Pte. Ltd. Published by John Wiley & Sons Singapore Pte. Ltd. 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to the Publisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore , tel: , fax: , enquiry@wiley.com. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor the author shall be liable for any damages arising herefrom. Other Wiley Editorial Offices John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom John Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada John Wiley & Sons Australia Ltd., 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D Weinheim, Germany ISBN (Cloth) ISBN (epdf) ISBN (Mobi) ISBN (epub) Typeset in 10/12 pt. SabonLTStd by MPS Limited, Chennai, India Printed in Singapore by Ho Printing Pte. Ltd., Singapore

7 Contents Preface Acknowledgments List of Abbreviations ix xiii xv CHAPTER 1 Introduction 1 Rationale for Researching Investment Portfolio Composition of Takaful Companies 1 Aims and Objectives 4 Scope and Delimitation 5 Research Methodology 6 Overview of the Book 6 CHAPTER 2 Insurance and Islamic Law: An Introduction to Takaful 9 The Concept of Insurance in Islamic Sources 9 Views of Contemporary Jurists on the Insurance Contract 13 Arguments Regarding the Validity or Invalidity of Commercial Insurance 15 Conclusion 27 Notes 28 CHAPTER 3 Takaful Models and Implementations, Trends, and Developments 31 Takaful Undertaking Principles 31 Islamic Insurance Operational Models 32 Differences Between Takaful and Other Forms of Insurance 44 Trends and Developments in the Takaful Industry 45 Conclusion 52 Notes 53 v

8 vi CONTENTS CHAPTER 4 Research Methodology 55 Methodological Shortcomings of the Literature 56 Research Strategy 56 Research Questions, Objectives, and Hypotheses 57 Research Design 58 Sampling Strategy 59 Research Methods 61 Quantitative Data Analysis 68 Qualitative Data Analysis 70 Conclusion 70 Notes 71 CHAPTER 5 Exploring Investment Behaviours and Investment Portfolios of Takaful Operating Companies in the GCC and Malaysia 73 Total Investment Portfolio of Takaful Operating Companies for All Funds 74 Investments in Shareholders Fund 75 General Fund 86 Family Funds 94 Conclusion 97 CHAPTER 6 Locating the Differences Between Actual and Desired Investment Portfolios 99 Shareholders Fund 101 General Fund 106 Family Funds 111 Conclusion 114 CHAPTER 7 Contextualising the Findings 117 Overall Portfolio Compositions 117 Investment Accounts 125 Investment in Sukuks 129

9 Contents vii Investment in Equities 134 Return on Investment (ROI) 138 Mutual Funds/Unit Trusts 140 Real Estate Investments 141 Conclusion 142 Notes 143 CHAPTER 8 Conclusion and Recommendations 145 Main Findings of the Study 145 Recommendations of the Study 149 Research Limitations 153 Recommendations for Future Research 153 Conclusion 154 Note 155 Appendix A 157 Appendix B 163 Appendix C 215 Bibliography 217 About the Authors 223 Index 225

11 Preface I slamic finance emerged as an alternative financing method in the postcolonial period with the objective of developing an Islamic moral economy system in accordance with the norms, values, and principles of Islam. This constructivist strategy produced its first institution in the form of an Islamic social bank (Mith Ghamr Bank) in the early 1960s in Egypt. However, the development trajectory of Islamic finance is marked with the establishment of the first Islamic commercial bank in 1975, which defined the model to be followed in the future of Islamic banking and finance (IBF). Since then, IBF has made important inroads in mainstream banking and the global financial centres. Once considered a voodoo economy by BBC, it is now an everyday news subject. With over 500 IBF institutions, the asset base of the industry has passed the trillion-dollar threshold to US$1.2 as reported by The Banker (2011). While IBF has compromised on its value proposition due to the observed convergence between IBF and conventional finance, it has managed to get the attention of bankers, financiers, and business people all over the world. The product development and diversity provide a great opportunity for IBF to sustain its growth, as evidenced with the modest yet positive performance it has shown during the global financial crisis. An important aspect of Islamic finance is the insurance, for which takaful as an Islamic alternative has been functioning in civil society on the peripheries of the Muslim world for a long time. However, the institutionalisation of takaful operating companies is also a new phenomenon limited to only about three decades. The scepticism regarding insurance in the Muslim world can be considered an important factor in the slower growth and late development of Islamic insurance or takaful in the Muslim world. However, in particular in the GCC region and Malaysia, the takaful industry has shown a robust growth in the recent years, and its development has been possible with the facilitatory regulations and standards issued by these countries. The developments in IBF also contributed to its expansion, growth, and development. Ernst & Young s World Takaful Industry Report 2012 states that the takaful industry will reach the US$12 billion threshold by the end of Such impressive growth is expected to continue with a positive attitude being developed ix

12 x PREFACE in the Muslim world to overcome the observed skepticism toward insurance in general and takaful in particular. The efficiency and effectiveness of the takaful industry is directly related to the way the companies manage the funds collected. The diverse Shari ah complaint products available paved the way for the efficient investment of these funds, which will further contribute to the development of the takaful industry. It is observed that there is a gap between the ideal or the expected asset allocation of takaful operating companies and their actual investment or asset portfolios. As Asaria (2012) suggests, the ideal asset allocation should be: cash, 10 15%; debt securities, 60 70%; equity, 10 20%; and alternative assets, 5 10%. However, the experience and observations demonstrate that the asset allocation of takaful companies is approximately: cash, 40 45%; debt securities, 10 15%; equity, 25 30%; and alternative assets, 10 20% (Asaria, 2012). Thus, there is a gap between the desired and actual asset or investment portfolios of takaful operating companies, which was more visible in the last decade. This observed gap provided the motivation for this study on the emergent years of the takaful industry in the middle of the past decade. The research presented in this study aims to explore, examine, and analyse the investment behavior and hence the asset composition of the takaful operating companies in the GCC and Malaysia with the objective of identifying the observed gap between the desired and actual asset allocation or portfolios of the takaful companies from 2002 to While the research was completed in 2009, the availability of the data and also the low willingness of takaful operating companies and their managers for disclosure necessitated focusing on the period for which better data was available, and hence the scope of the research is limited to It should be noted that this was the expansionary period for IBF industry as well, which has had implications for the development of the takaful industry. The findings, implications, and recommendations of this research should, therefore, be understood and contextualised within this period, namely Despite being historical, this will help to reveal the behaviour of the takaful companies in the emergent period. Therefore, it is suggested in the conclusion chapter that this research can be repeated with a larger sample within a more matured takaful industry to search for the change that has taken place in the asset allocation or the investment behaviours of the takaful companies. The subject matter, method of analysis, and findings presented in this study should be considered an important and early contribution to the nascent literature on takaful and on the performance and operations of the takaful operating companies. It is hoped that the subject matter can be taken up by other researchers to examine more recent years so that the

13 Preface xi development trajectories in the asset allocation and investment behaviours of takaful companies can be located. This book is not on takaful itself, and therefore does not aim to discuss takaful as a financial instrument and institution. It is a book developed out of research based on the exploration and analysis of the investment behaviour and portfolio composition of takaful companies. Hence, it should be considered an empirical research based book. We hope that the material and the findings presented in this book can shed some light on our understanding of the portfolio composition and investment behaviours of takaful companies, which are also related to the development of and product diversity in the IBF industry. Dr. Abdul Rahman Tolefat Founder and Chairman, Itqan Asset Management, Bahrain Dr. Mehmet Asutay Reader, Middle Eastern and Islamic Political Economy and Finance; Director, Durham Islamic Finance Doctoral Training Centre, Durham University, UK

15 Acknowledgments E ach research project is a result of hard work and effort not only by people who conduct the research but also by a number of other individuals that provide physical but also spiritual support. We are grateful to all of those who in one way or another directly or indirectly supported this research through their own particular ways. We are thankful to all of the participants who provided valuable primary data in relation to the portfolios of takaful operating companies in the initial formation years of the industry, as the published data were scattered and not satisfactory to conduct this research. Their contribution is highly appreciated and acknowledged in this study. We would like to put on record our gratitude for our development editor Gemma Rosey at John Wiley & Sons Singapore Pte. Ltd. for her patience with us in the completion of this work, and for her continuous help and support. We are grateful to our families in particular for their support in every way, as this project was completed at the expense of the time that was supposed to be spent with them. Abdulrahman acknowledges the sacrifices made by his wife Manar while contributing to his professional achievements and in the completion of this project. His children, Saud and Aisha, always remained his source of inspiration despite using time for the completion of this project rather than enjoying it with them. Mehmet is grateful to his wife, Nihal, as due to this and many other projects she has sacrificed a great deal, yet she believed that I was doing the right thing. xiii

Takaful Investment Portfolios

Takaful Investment Portfolios Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally