Takaful Investment Portfolios: A Study of the Composition of Takaful Funds in the GCC and Malaysia

The Islamic finance sector has witnessed historic growth over the past decade. One of the most successful and fastest-growing segments has been the takaful, or Islamic insurance, industry, which is expected to grow at an average rate of 20 percent per annum, well into the future. Despite the rapid growth of Islamic insurance and mounting interest among major players in both the Islamic and conventional financial industries, much about their internal workings remains veiled in mystery. Nowhere has this been more true than in the financial structures and investment activities. Based on a groundbreaking research project begun in 2002, this book provides a clear, in-depth look at the financial structures in both the GCC and Malaysia, which together represent approximately 60 percent of the Islamic insurance industry. Featuring a gold mine of new and novel research, Takaful Investment Portfolios covers: The history of the industry, as well as various takaful models and how they work Islamic insurance practices, highlighting differences between Shari'ah-compliant and conventional insurance Critical legal and regulatory aspects of insurance contracts under Islamic law in both the GCC and Malaysian markets Major asset classes comprising investment portfolios of shareholder funds, general funds, and family funds of takaful enterprises in GCC and Malaysia Actual versus desired investment portfolio composition of all three types of funds in both regions Differences between the GCC and Malaysian takaful investment portfolios of the three fund types Recent efforts to change the composition of takaful investment portfolios and the most likely areas for future investment Expert recommendations for regulatory authorities, and Islamic banks. The first and only in-depth study of its kind, Takaful Investment Portfolios is an indispensable resource for those working within the takaful industry and other areas of Islamic finance, as well as those in the conventional insurance and finance industries.

Preface ix Acknowledgments xiii List of Abbreviations 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 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 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

Dr. AbdulRahman Khalil Tolefat began his career at the Central Bank of Bahrain. He later served as both chief executive officer and chairman of Allianz Takaful in Bahrain, the global hub for Islamic insurance (takaful) of Allianz Group. After leaving Allianz, he founded ITQAN Financial Services for which he now serves as Chairman and Managing Director. In addition, Dr. Abdul Rahman was a member of the CBB Committee that developed the insurance rulebooks in coordination with PricewaterhouseCoopers and a member of the working group between the International Association for Insurance Supervisors (IAIS) and the Islamic Financial Services Board (IFSB). Dr. Mehmet Asutay is a Reader in Middle Eastern and Islamic Political Economy and Finance at the School of Government and International Affairs, Durham University; Director of the Durham Centre for Islamic Economics and Finance; Course Director of the MA/MSc in Islamic Finance; and the Director of the Durham Islamic Finance Summer School. Also, he serves as Managing Editor of Review of Islamic Economics and Associate Editor of the American Journal of Islamic Social Sciences, and is on the Editorial Advisory Board of International Journal of Islamic and Middle Eastern Finance and Management.