View source for Investment - Under Different Regulatory Framework by A.Rah

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


Regulations                   Ownership or

                                  control

                Investment

                Decision and

 Shari’ah                        Takaful

                  portfolio

restrictions

                composition       Model

     Investment              Size

     Department

                                          3


Research Question:

 Does the Regulatory framework for

     takaful companies restrict their

          investment freedom?

                                      4


Regulatory Framework: Current

               Practices

    Directly                 Indirectly

 Amount to be

 invested:               •Solvency margin

                         & capital

 •Domestically           adequacy.

 •Local                  •Risk weighting

 currencies              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  Admissible:

     million in a one single   0.5Million

     company and its capital  Inadmissible:

     is 15 million.             9.5Million

                                                 6


Direct and Indirect Restrictions

 Restrictions    Bahrain Malaysia   Jordan

 Investment in   No       15% Govt. Na

 certain Asset            Sukuk

 classes

 Domestic Assets No       80%       Na

 Local Currency  No       Yes       Na

 Indirect        Yes-     No        Yes-Risk

                 Solvency           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

                                       46%

 Investment is concentrated with       and

 these related party                  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         Without

                    shareholders shareholders

                    funds        funds

Cash & Investment   Na           65%

Accounts (deposits)

Govt/ Corp. Sukuk   4 – 29%      35%

Islamic funds       15- 70%      0%

Equities            25- 74%      0%

Real estate inv.    2 - 42%

                                 0%

                                              15


   Shareholders

                           Long term

       fund                investment

                            Depend on

   Participants             insurance

      fund

                            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   85%     16%      90%

Accounts (deposits)

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            Investment  Charge higher

                        Return

                                  premium which

                                  reduce the

                                  competitiveness

 Underwriting        Underwriting

     Risk                Risk

                                              19


Conventional           Takaful

        Charge same premiums

  Investment

    Return           Investment  Increase risk.

                       Return

 Underwriting       Underwriting

     Risk               Risk

                                             20


Research Question:

    Does the takaful model adopted by the

    compny affect the composition of their

            investment Portfolio?

 Yes              Which one is the best!

                  Need to unnify akaful

 No

                  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