1 Investment - Under Different Regulatory Framework A.Rahman Tolefat Head, Islamic Financial Institutions Langkawi 23 – 24 February 2006.

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Presentation transcript:

1 Investment - Under Different Regulatory Framework A.Rahman Tolefat Head, Islamic Financial Institutions Langkawi 23 – 24 February 2006

2 What Are Most Influential Factors Affecting Investment/Composition portfolio of Takaful Companies ?

3 Investment Decision and portfolio composition Ownership or control Takaful Model Size Investment Department Shari’ah restrictions Regulations

4 Research Question: Does the Regulatory framework for takaful companies restrict their investment freedom?

5 Regulatory Framework: Current Practices Directly Amount to be invested: Domestically Local currencies Indirectly Solvency margin & capital adequacy. Risk weighting method

6 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

7 Direct and Indirect Restrictions RestrictionsBahrainMalaysiaJordan Investment in certain Asset classes No15% Govt. Sukuk Na Domestic Assets No80%Na Local Currency NoYesNa Indirect Yes- Solvency NoYes-Risk Weighting

8 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.

9 Ownership Many takaful companies are controlled by Islamic banks or dominated shareholders Investment is concentrated with these related party 46% and above

10 There is a positive relationship between percentage of control and amount invested

11 These investments are also concentrated in Investment Accounts (Deposits)

12 Conflict of Interest Ownership Systematic Risk

13 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.

14 Misleading interpretation Many takaful companies have been invested in equities and real estate? - In many sources shareholders investment has mixed with participants investment.

15 Asset ClassesWith shareholders funds Without shareholders funds Cash & Investment Accounts (deposits) Na65% Govt/ Corp. Sukuk 4 – 29%35% Islamic funds %0% Equities %0% Real estate inv % 0%

16 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.

17 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?

18 Asset ClassesBahrainMalaysiaJordan Cash & Investment Accounts (deposits) 85%16%90% Government Sukuk 15%19%10% Corporate Sukuk 0%56%0% Equities 0% Other 0%9%0%

19 Charge higher premium which reduce the competitiveness Underwriting Risk Investment Return Conventional Takaful Charge higher premiums

20 Increase risk. Underwriting Risk Investment Return ConventionalTakaful Charge same premiums

21 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

22 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.

23 Research Question: Does the competencies of employees in investment department of takaful firms affect their composition of their investment Portfolio and return on investment?

24 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.

25 Other factors Very strongStrongModestWeakVery weak (1) Regulatory framework and limition imposed by regulator54321 (2) Shari'ah restrictions on investment54321 (3) Lack of investment staff and expertise54321 (4) Shareholders controlling the company whereby they require company to invest certain perentage or amount with them (5) General economic conditions54321 (6) Expection about inflation54321 (7) Investment expected rate of return54321 (9) Safety of investment54321 (10) Liqudity of investment54321 (11) Cash income on the investment54321 (12) The distribution of company's liabilities54321

26 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.

27 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%) ?

28 Thank You..