Takaful Investment Portfolios: A Study of the Composition of Takaful Funds in the GCC and Malaysia (A Book Review )

Abdulrahman Khalil Tolefat and Mehmet Asutay. Publisher: John Wiley & Sons (2013)
ISBN-10: 1118385470 ISBN-13: 978-1118385470
Reviewed by: Camille Paldi, CEO, FAAIF Limited and Events DMCC
Managing Director, ilovetheuae.com

By: Camille Paldi.

Takaful Investment Portfolios: A Study of the Composition of Takaful Funds in the GCC and Malaysia provides an explanation and analysis of the investment of takaful funds in the GCC and Malaysia between 2002 and 2005 and explores the rationale behind such decisions. In addition, the authors discuss and analyse takaful investment trends and developments.

This book contains some useful information and statistics regarding three classes of takaful fund investments in the GCC and Malaysia including equities, sukuk and real estate over a period of several years in the early twenty first century. I had to sift through a thick maze of academic prose and pages of jargon, however, in order to get to the useful information contained in the book. Although this information is slightly outdated for industry use, it provides an insight into past trends.


The study may also reveal gaps in the asset classes for the takaful industry. After conducting a thorough analysis of the investments of takaful funds of the GCC and Malaysia from 2002-2005, the author concludes that convergence is likely in the investment behaviours of takaful companies in the GCC and Malaysia once the primary and secondary markets for sukuk develop in the GCC and an international regulatory framework is practiced. This book may be highly useful and relevant for students and academics and those practitioners wishing to get a glimpse of past industry trends.

Chapter 1: Introduction provides an overview explaining the rationale for the research aims and objectives, scope and delimitation and research methodology.

I enjoyed the academic and scholarly discussion of the takaful concept in Chapter Two: Insurance and Islamic Law: An Introduction to Takaful. There are some interesting references to the Qu’ran and Sunnah as well as to scholars of the past. I prefer, however, to see more of the author’s original opinions rather than heavy reliance on other authors. Furthermore, I want to see an explanation of the cited statement as the author is relying on another author to relay his point. For example, in Chapter Two, the author writes: ‘Moreover, it is also claimed that commercial insurance leads to negligence (Moghaizel, 1991), murder (Al-Sayed, 1986; Hassan, 1979) and is exploitative of people’s needs (Mawlawi, 1996) and that the control of government may fall to powerful insurance companies (Abdu, 1987).’ I would like to see some kind of original and authentic explanation of this statement from the viewpoint of the author. For instance, how does commercial insurance lead to negligence, murder and exploitation? Furthermore, why and how would control of government fall into the hands of powerful insurance companies and what then would these insurance companies do with the government under their control? In addition, it is always an interesting scenario to witness secular-trained academics incorporating religion into their work. The religious references are presented in quite a secular and neutral manner, which makes the book quite easy to understand and digest by anyone whether they are religious or not.

Chapter Three contains a comprehensive academic explanation of the various takaful models. In addition the author explains the differences between takaful, commercial and mutual insurance and trends and developments in the takaful industry. The entirety of Chapter Four discusses research methodology, which is geared for academics rather than industry practitioners.

Chapter Five on Exploring Investment Behaviours and Investment Portfolios of Takaful Operating Companies in the GCC and Malaysia is where I finally found the hidden treasure. The chapter is full of interesting facts and figures, analysis and comparisons regarding the investment of takaful funds in equities, sukuk, and real estate in the years 2002 – 2005. This information, however, may or may not be indicative of present and/or future trends as we are now in 2015, ten years past the period of this study. It is, however, interesting information and may be useful to academics. This book may also provide a rough idea on how to perform a feasibility study at the inception of a takaful company in a particular jurisdiction or geography or serve as a guide in conducting another similar academic study.

Although Chapter Six: Locating the Differences Between Actual and Desired Investment Portfolios contains some interesting discussion about the actual and desired investment portfolios of the GCC and Malaysia, I found that much of this chapter could be skim read and probably should have been deleted from the book.

In Chapter Seven: Contextualising the Findings, the only pertinent information includes the discussion on how takaful funds manage their liquidity and the figures for return on investment for the GCC and Malaysian Takaful Funds for the period 2002-2005.

Chapter Eight: Conclusions and Recommendations provides recommendations for regulatory authorities, takaful operating companies and Islamic banks/windows. I found these quite interesting and highly useful especially in regard to who should be making the investment decisions and the need for more legislation and regulation of the takaful industry in the UAE and globally. The author also explains the research limitations in this study. The author states that focusing the research only on the initial period of the takaful industry during the years 2002-2005 could perhaps be considered a shortcoming. Furthermore, the author explains that another limitation may lie in the sample size that was chosen. The author says that the sample is so small – less than 30 companies – that parametric statistical tests could not be used in this study. Second, even using nonparametric statistical tests, the small number of takaful companies operating in Malaysia limited the author to performing a comparison between the GCC and Malaysia. This can be seen where the author tried to study the differences between levels of actual and desired investment portfolios between the GCC and Malaysia. The author was not able to adopt the Wilcoxon Signed-Rank Test for Malaysian companies.

GUIDELINES FOR INVESTMENT MANAGEMENT FOR TAKAFUL OPERATORS

(The following is based on a paper produced by the Islamic Banking and Takaful Department at Bank Negara Malaysia)

The approach for investment management adopted by each takaful operator may vary depending on a wide range of factors, including the size, level of sophistication and complexity of the takaful operator’s investment activities. Basic principles such as accountability and responsibility of the board of directors and senior management are needed for robust risk management policy and adequate monitoring and controls by all takaful operators.

• Takaful operators should ensure that the objectives, management and activities of investments comply with Shari’ah principles at all times.
• Takaful operators should have in place investment and risk management policies describing the overall investment framework. The overall investment policies and strategies should be communicated to all staff involved in investment activities.
• In developing the investment strategy of the takaful fund, takaful operators should take into account the reasonable expectations of participants and that the investment strategy is consistent with the disclosure made under the respective products.
• Due to the different nature of the liabilities, takaful operators should have separate investment strategies for family and general takaful business in situations where both businesses are undertaken by the same entity. For family takaful business, takaful operators will also need to consider separate investment strategies for participants’ investment funds and participants’ risk funds due to potential differences in objectives of both funds. The investment strategy for participants’ risk funds would need to take into account the ability of the fund to meet takaful liabilities. The investment strategy for the participants’ investment fund would need to take into account the ability of the fund to meet future tabarru’ deductions and reasonable expectations of an investment return as well as consider whether certain products need to have a specific investment strategy which is commensurate with the risk and liability profile of such products.
• Takaful operators should have a comprehensive risk management framework that include, amongst others, the setting of investment strategies and policies, developing an oversight mechanism with appropriate review and monitoring and control procedures. The risk management framework must also cover the risks associated with investment activities that may affect the coverage of takaful liabilities and capital positions. The main risks include market, credit and liquidity risks.
• Takaful operators should have in place clear governance procedures over investment decision-making processes and ensure a proper segregation of duties to ensure sufficient checks and balances are in place within the organisation.
• As a part of good risk management and for proper monitoring and control of the investments, takaful operators should establish adequate internal controls to ensure that assets are managed in accordance with the takaful operator’s approved investment policies and in compliance with legal, accounting and relevant risk management requirements. These controls should ensure that investment procedures are subject to effective oversight – a function that is responsible for ensuring the effectiveness of the investment policies and procedures of the takaful operator as well as ensuring the implementation of investment policies is in line with approval from the board of directors. Takaful operators would need to ensure that the personnel in this oversight function are suitably qualified to perform such responsibilities.
• Takaful operators must establish contingency plans to mitigate the effects arising from deteriorating market conditions and procedures to monitor and control a takaful fund’s exposure to fluctuations in profit rates, foreign exchange rates and market prices. • The roles of the Shari’ah Committee of takaful operators should be clearly set out to ensure the effectiveness of the Shari’ah governance framework including appropriate procedures to ensure that investment portfolios are Shari’ah-compliant and screening processes to identify returns from tainted/non-halal income and the disposal of such income.
• The board of directors of the takaful operator has the ultimate accountability for the investment of takaful funds.