Management of Takaful Funds: Policies & Procedures

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

INTRODUCTION

Nowadays, there are so many insurance companies that responsible to give security and protection but majority of it operated against the law. Then, Islam comes with Takaful, which is an instrument of security and gives protection, which follows Shari’ah rules. It becomes popular since Muslims have realized the important of security and protection in their daily life and their family and descendent.

The market has potential of offering suitable Islamic investment, which is in line with Shari’ah principle. The available investment options will not limit the factor for product design but the approach to investment management will face differences compare with the conventional approach. Then, the market also has the potential in offering suitable Islamic investments although the products may have to be altered to suit the nature of liabilities.

In Malaysia, well-known Takaful companies are Takaful Malaysia and Takaful Nasional. Bank Islam owns around 70% of the Takaful Malaysia share and the shareholders own the balance. While for Takaful Nasional, 80% owned by Malaysia National Insurance (MNI) and 20% is owned by Yayasan Pembangunan Ekonomi Islam Malaysia (YAPEIM).

Investment activities are one of the sources of the Takaful fund. The investment of Takaful Fund, which objectively to serve society with security and played a role as protector must take into account many relevant factors, which are:

These factors might different from one country to another country. It is because other country will face difference difficulties and environment. This paper will discuss mainly in the investment policies by referring to the Takaful Malaysia and Takaful Nasional model. Here, we will focus at the ratio in allocating the fund, guidelines and procedures, types of investment and some issues.

2) OBJECTIVES

The objectives in investment of Takaful fund are to ensure the General Takaful Fund, Takaful Fund and the Shareholder’s Fund is invested in line with the Shariah and guidelines. According to Shariah, investment activities are based on Mudharabah (profit sharing).

3) SEGREMENTATION OF TAKAFUL FUND

Takaful funds will be segregated into three types:

Takaful Malaysia Berhad involved in various types of Takaful fund, which based on the principle of Mudharabah under General Takaful Fund. This scheme will be implemented for one year term according to the enhancement, provide a good financial which can be use to cover defined risk. Property, which is owned by personal or corporate such as stores, factory, house, vehicles and etc, can be covered by Takaful schemes, which is provided according to the type of the property or asset.

For Family Takaful, it was divided into two sectors, namely individual and group sectors. For individual, the products are Takaful mortgage Plan and Takaful plan for Education and Takaful Rawat. For group, which may be participated by corporate body only, the schemes are group Takaful Plan, The Group Hospital Relations and Surgical Takaful Plan. Others are like supplementary contracts indoors to the individual plans and the Takaful Medical and Health plan.

Takaful company derives its income from the investment of the shareholders fund and its share its profit in consideration for managing the General Takaful business and Family Takaful business under the profit sharing contract of Mudharabah. Under Takaful operation, the operating expenses incurred by the company are not charge to the respective Takaful fund but borne entirely by the shareholders fund since the base of the contract is in line with the principle of Mudharabah.

GENERAL

GROUP

SHAREHOLDER

4) ELEMENTS OF ISLAMIC INVESTMENT

In investing the Takaful funds, we have to follow some Islamic regulations that are based from principle of Shariah. This is to avoid any elements that are prevented by Islam being practiced. Each of the funds has to face strict process to ensure their success and approved it legalization.

To ensure the genuine and to avoid misleading of the Takaful funds, few principles must be given serious attention to guide then Takaful investment. The principles are:

Other examples of areas that are prohibited by the Shariah are ethical and ecological issues like products based on animal testing, abuse of human rights and social and other issues like tobacco, pork, alcohol and pornography.

The Shariah involvement is desirable at all stages in order to create and maintain consumer confidence in the genuineness of the application of the Islamic principle of Takaful Fund. In export and import business, all practices that are prohibited in the line of Shariah are not allowed. Takaful operation will not be successful if it is consider as lawful.

Takaful business not involved with investors who deal with alcohol and liquor business. For example, restaurant businesses, which provide alcohol to its customer, are prohibited.

TAKAFUL

Here, the wise application of Islamic financial system is very important to ensure the instrument become more marketable. So, government and private sectors must be more supportive in dealing with Islamic financial system issues to ensure it was legally practiced.

5) GUIDELINES AND PROCEDURES

There are 3 major regulatory or supervisory bodies, which determine the guidelines and procedures of the investment policy for Takaful companies in Malaysia:

Takaful operator will examine and make a research on every previous investment they received and from there it will decide whether they want to continue with it or not. This is because every company did not only focused on providing a financial security against risk, but at the same time focusing on getting a high return in all investment they involved in.

5.1) SHARIAH SUPERVISORY COUNCIL (SSC)

Shariah Supervisory Board (SSC) is one body that has been appointed by the Bank Negara Malaysia to administer all the investment made by the Takaful Company. SSC is created to make sure all the investments made are in line with the Shariah’s principle. As the main objectives of the Takaful operation is to avoid any element that will lead to the principle against the Shariah rules.

Other role of SSC is, they will scrutinize all investment vehicles, procedures and operations, which all must be in accordance with the Islamic Shariah guidelines. Therefore, SSC will come out with the updated list of the approved securities listed in the Kuala Lumpur Stock Exchange (KLSE) and Malaysia Exchange of Securities Dealing and Automated Quotation (MESDAQ) and others, which has been classified as the approved securities. Some of the companies are Ajinomoto Sdn. Bhd., Nestle, Renong Sdn. Bhd., and a few more.

On the other side, the companies or securities will be excluded from the list of approved securities if they involved in any of the elements:

1) The companies operate based on riba (interest) such as activities of financial institutions like commercial bank, merchant bank and finance companies. This is stated clearly in the Quranic verses, Surah Al-Baqarah (2:275):

Those who devour usury will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are Companions of the Fire; they will abide therein (forever).

2) Operation involving any element of gambling, which had been strictly prohibited by the Shariah rules because the gamblers are hoping for the materialgain.

3) Activities involving the manufacture or sale of Haram good such as liquor, pork and meat that did not slaughtered according to Islam.

4) Operation containing element of uncertainty such as in the conventional insurance practices. Whereas, the Takaful practices only provide financial security against a defined risk.

These are confirmed by the Quranic verses, Surah Al-Maidah (5:90):

O ye who believe! Intoxicants and gambling, (dedication of) stones, and (divination by) arrows, are an abomination of Satan's handiwork: eschew such (abomination) that ye may prosper.

There is a case that if the companies whose activities comprise both the permissibleand non‑permissible elements, the SSC applied several additional criteria as follows:

1) The core activities of the company must not against the Shariah principle. Furthermore, the Haram element must be very small compared to the core activities. For example, a company that selling clothes to certain group of people such as high standard group. This company deprived the right of others from buying their clothes.

2) The public perception or image of the company must be good. Meaning that, even though it still involve small element of Haram, its reputation as a good company is maintained and people did not has any doubt regarding its ability and capability in managing the company's operation.

3) The core activities of the company have importance and benefit (maslahah) to the Muslim Ummah and the country itself. Moreover, the Haram element is very small and involves matters such as 'urf (custom) and the rights of non-Muslim community which are accepted by Islam.

As a conclusion, the SSC will advise the investors when they should dispose securities that have not been proven. Whenever the announcement have been made, while the value of the securities held exceeds the value when it were purchased, the investors who hold such non‑approved securities must liquidate it immediately.

On the other hand, if the value of the securities at the time of the announcement is lover than the value at the time it was purchased by the investor, he can hold on those securities until the initial capital is realized. This is based on the taubat guideline and on the acquisition of initial capital from the riba base assets as outlined by Allah s. w. t in the Holy Quran. But to other people the concept of taubat cannot easily be applied as a reason to make a wrong doings. It is accepted only when someone didn't realized they have commit a sin or in situation of dharurah.

5.2) TAKAFUL ACT (1984)

The statutory requirements governing the investment activity are as outlined in Sections 13, 17, 18 and the First Schedule of the Takaful Act (1984). The Takaful investment should involve Takaful operator that will manage the fund to be invested and the participants that provide the contribution.

As for the Takaful operator, once the companies enter the Takaful business, they should pay the deposits, which the amount prescribed by the Ministry of Finance. All these money must be in form of cash.

An operator that made a deposit may at any time substitute for any asset comprised in the deposit cash or securities specified. As long as the value of the deposit is not reduce to an amount below what is required by the act.

While foregoing subsections of securities can include any form of investment that not contrary to the Shariah principle, which are not involve uncertainty (gharar), gambling (maisir) and other thing that is not allowed by Islamic teaching.

5.3) BANK NEGARA MALAYSIA (BNM) & GOVERNMENT POLICY

Bank Negara Malaysia is one body that operates under the Ministry of Finance and responsible in dealing with the monetary affairs. Other than that, BNM also bound for planning and formulation of budgeting by using the monetary policy.

Every year, Federal Treasury under the Ministry of Finance will, come out with Belanjawan Negara, which is the budget that will be spending by the government though out one year. It covers all sectors in the economics and social such as public facilities, education and so on.

Therefore, each time Federal Treasury came out with a new Budget Report, all the companies in Malaysia will see and examine it, as it will affect their own companies' policies. The same also occur to the Takaful Company because they will change or revise again their own policy by referring to the government policy. For example if for a particular year, government want to concentrate on the housing project thus, Takaful Company will invest more in the housing project.

6) TYPES OF INVESTMENT

There are several ways of investment done by Takaful operator dealing with the fund in the Takaful operation. It must be approved by Shariah laws and must not contain any prohibited subjects. Takaful investment can be divided into two categories, which are short term and long-term investment. All proposals for long term investment as stated above must be presented at the Investment Committee Meeting for submission and recommendation to the Boards of Directors. Meanwhile for the short term investment items as stated above is made based on daily cash position and to be authorized by the respective bank account signatories.

6.1) SHORT TERM INVESTMENT

6.1.1) GOVERNMENT INVESTMENTS CERTIFICATES (GIC)

This type of investment is similar to the bond in the conventional practices. The different is that the GIC is issued on the principle of Al-Qardul Hassan. Upon maturity, the owner will redeem the GIC. The GIC is one of the short-term investments in Takaful fund beside an investment in the fixed deposit account.

6.1.2) INVESTMENT ACCOUNTS WITH BIMB

The placement in may be made for any of the following tenure depending on the cash flow requirements:

The profits will receive upon maturity of the tenure for 1, 3, 9 and 12 moths. For others, interim profits will receive half yearly according to rate declared for 6 months tenure and any difference in the amount of profits between the interim rates and the actual rate declared will be credited on its maturity. The investments unit must ensure that:

A ledger shall be maintained for recording or placements, renewal and maturity and reconciled monthly with the general ledger accounts.

6.1.3) ISLAMIC ACCEPTED BILLS (IAB)

IAB are investment in instrument issued by BIMB. IAB does not have fixed tenures, however does not normally exceed 90 days. Profits are received upon maturity. The instruction to credit the maturity proceed into the respective bank account must be made on or before maturity dates. A similar ledger shall be maintained as stated above.

6.2) LONG TERM INVESMENT

6.2.1) QUOTED SHARE

Investment in quoted shares comprises transaction of those managed by Al-Wakalah under the portfolio management and a relatively small transaction handled directly by the Finance Department. Monthly reports for the respective funds must be received from Al-Wakalah so that the income and expense figure can be taken up in the accounts. The opening and closing balances of each portfolio must tally with the general ledger. The investments under Al-Wakalah portfolio management shall be reviewed at the beginning of each financial year and additional capital injection will be maid to maintain the level of investment not less than 15% of the assets of each fund. The procedures in respect of transaction handled directly by the finance Departments are as follows:

The information regarding dividends declaration may be obtained from the relevant Publications such as Business Times and the Investor’s Digest monthly magazines.

6.2.2) PROPERTIES

These are investments in office and building (shop lots) rented to BIMB. Proposal for the purchase of the property must be supported by a valuation report undertaken by a registered value. Upon approval by the Board, solicitors must be appointed to act on the Company’s behalf in dealing with the purchase transaction as well as to provide legal advice in order to ensure that the Company’s interests are protected.

The solicitors shall do a search on the land title to ensure that the property is free from any encumbrances and proper approval of the land has been obtained. The solicitor shall also undertake the Sale and Purchase Agreements, the Transfer Deed and other related legal documents. The original documents of title and the Sale and Purchase Agreement duty signed and stamped must be kept in locked safe.

The tenant undertakes the maintenance of the properties if it is so stated in the Tenancy Agreement. The present guideline on the rental is based on minimum return of percentage (%) per annum. The Administration and its renewal as well as ensuring the rental are collected accordingly. Separate Property Register shall be maintained for the various funds and reconciled with the general ledger accounts.

6.2.3) FINANCING FACILITY

The statutory requirements governing financials facilities are outlines in Section 18 andFirst Schedule of Takaful Act (1984) and BNM circular JPI: 4/ 1994. For Bai’Bithamanin Ajil (BBA) secured by landed properties, as current valuation report must be obtained. The property value must exceed the amount of total principle and profit. In evaluating the financing proposal for clients the following must be considered:

Solicitors appointed by BIMB, as manger, if the financing is arranged on a syndication basis prepare the legal documents. The standard documents are as follows:

The disbursement for the financing shall be made upon advice from the syndication manager, after execution of legal documents and after fulfillment of all pre-disbursement conditions. The original copies of legal document must be kept in locked safe. A financing repayment schedule shall be prepared for each financing facility and reconciled monthly with the general ledger accounts.

6.2.4) OTHER FIXED ASSETS

These are assets purchased for the company’s operation and recorded in the following registers:

The costs and cumulated depreciation balances of the respective registers shall be reconciled with the general ledger accounts.

7) RATIO IN ALLOCATING INVESTMENT

Investment is one of the important components in the Takaful operation as it will result either the company will survive or not. After all the premiums are being collected, the Takaful operator will invest. Investment Department (Takaful Malaysia) or Equity Investment and Research (Takaful Nasional) are the two departments that played important role in making decision on allocating the investment. Usually all the allocation is based on the Takaful Act (1984), Bank Negara Malaysia (BNM) Policy and company’s Shariah Supervisory Council.

Based on the guidelines issued by the BNM and Takaful Act (1984), the investment was allocated to quoted shares (30%), unit trust and financing (20%), property (20%), MGIC-bond (15%) and levy-freedom (5%). Takaful Malaysia gives this percentage and it may be or may not be revised in every investment policy period.

7.1) QUOTED SHARES

Quoted shares are the largest portions that will be invested by Takaful operator. Takaful operator will invest in the quoted shares for about 30%. This percentage will differ in every policy period since it depends on how successful the investment will be. Takaful operator will decide to invest more for the portion in the next period if the investment gives a high return. Takaful operator cannot invest on all the companies listed in the KLSE, as they have to follow requirement given by the Shariah Supervisory Council (SSC). Here, only companies that are approved by SSC are allowed to be invested. The reasons are to ensure this investment is free from any element of riba, gharar and fraud.

7.2) PROPERTY

Takaful operator will invest around 30% of its investment in property sector. Still, the percentage is not the same for every year since it depends on the government policy like Annual Budget Report. Here, if the government interested to focus in the properties sector for the particular year, so Takaful operator have to follow the order and concentrate more on it.

7.3) UNIT TRUST AND PROJECT FINANCING

Financing activities are similar to provide financing facilities. Takaful operator will act as rabbul-maal by giving a capital to a company on the basis of the contract of mudharabah. Here, Takaful operator will invest 20% of the financing activities and unit trust. Here, the parties involved also shared the liability, profit and loss based on their agreement, which means Takaful operator also can be a partner based on the contract of musharakah.

Takaful operator will invest on companies that they think will give them a high return or in another way it shows Takaful operator will select only a company that has a bright future and prospect and importantly in line of Shariah. Takaful operator also involved in investment in unit trust. From the time being, they involved with Amanah Saham Mara and Amanah Saham Darul Naim. As example, Takaful operator has invested in the long-term investment like highway construction which have a high return and also a short-term investment.

7.4) MALAYSIA GOVERNMENT INVESTMENT CERTIFICATES (MGIC)

Around 15% will go to the Malaysia Government Investment Certificates (MGIC) besides than the investment that the company has made. Bank Negara Malaysia issued MGIC on the contract of Qardhul Hassan. MGIC is a long-term investment and same as government bond with a term of 3 to 5 years to be matured. Its operation is like basic of lenders and borrowers. Takaful operator will act as lender and the government will act as borrowers. Interest rate are fixed upon the agreement and its make the investment safer, less risky and better compared to the quoted shares and properties.

7.5) SHORT TERM INVESTMENT (SIA & GIA)

Takaful operator also involved in short term investment although the profit is low compared to long-term investment. Example of the investment is fixed deposits. This type of investment faced low risk and volatility of interest rate changes is also low and it results to less profit. Other examples are Special Islamic Account (SIA) and General Islamic Account (GIA), which were practices by Takaful Nasional. Here, short-term investment for SIA is around three months period and the GIA investment is around two to three years.

However, type of investment account depends on the financial situation of the particular fund. If the company wants to use money in short period, they will invest in the SIA account. But, if the company not in need for money, they will invest in GIA account. Another decision on whether to invest in SIA or GIA is the profitability index prediction. If the profitability index looks like to increase in the future, the company will invest in the SIA account. If the profitability index shows it face a decreasing scenario, Takaful operator will make investment in GIA account in order to achieve a high return.

7.6) LEVY

Levy’s is to give more freedom to the Takaful Company. It is where they are not engage or tie up with all the rules prepared by the Bank Negara Malaysia and other supervisory board. 5% will happen to act as freedom to them whether they want to invest in any account that they think profitable or they just keep it. It is up to them to decide what they want to do with the remaining 5%. However, same as other investment, the percentage is not fixed and it depends on the situation and current economic condition.

RATIO IN ALLOCATING THE INVESTMENT

Takaful Fund (%) Company (%)

1. Quoted shares 30 30

2. Loans (other than policy loan) 20 20

3. Single borrower of group of Borrowers 5 5

4. Unit/property trust 10 10

5. Property 30 30

6. Quoted shares in Particular company 5 (investor’s equity) 5 (investor’s equity)

*The percentages are given by the Takaful Malaysia and it may be or may not revise in every investment policy period.

8) RECOMMENDATION (Arising Issue)

Year 1997 has been a challenging period especially for Asian countries. It was the year that welcomes to Asia's year of deflation. Since then many drastic changes taking place from time to time. The sudden crash in stock market has created many imbalances to the global economy of one country.

Many firms have to be close for temporally until the economy recover and some of the companies especially those, which was industrial base, have to stop from operating and this cause many people to be unemployed.

As for the banking sectors which also facing the similar problem, many debtors fail to pay back their debt due to high rate of interest rate, resulting the bad debts to be increasing. Many people find themselves in serious debt as they have loss most of their money in stock market and this was one of the reasons why they couldn't settle their debts.

Islamic insurance for example Takaful Malaysia, they still gaining some return even during the economic slow down. As before this, the company can earn returns around 7 percent and now still earning profit but decline by 4 percent that is 3 percent. There was no losses incur until now. In fact now it is known that there is increasing in number of people who are interested in buying the Takaful policy.

It is recorded that many non-Muslims who are willing to be one of the policyholder and this is allowed and most welcome in Islam. As long as the operation and the person who operates the fund (Takaful operator) is a Muslim and it is manage according to the Shariah principle there will be no problem of having a non-Muslim policyholder. At the same time, during the operation, that is managing the fund; there is no special advantage for those who are non‑Muslims, as they will be treated equally with the Muslims.

In Islam, it is most welcome to provide help or securities to those are in need including the non-Muslims. This is clearly shown during the period of second Caliph, SayyidinaUmar (r.a), there was once he saw a non Muslim who was very poor, asking for food and SayyidinaUmar command the government to contribute some of the Zakat payment to the non Muslim. This is allowable based on Quranic verse, Surah Al-Taubah (9:60), and the word masakin, which is refer to both Muslims and non-Muslims:

Alms are for the poor and the needy, and those employed to administer the (funds); for those whose hearts have been (recently) reconciled (to the truth); for those in bondage and in debt; in the cause of Allah; and for the wayfarer: (thus is it) ordained by Allah, and Allah is full of knowledge and wisdom.

Allah also said in the Quran, Surah Al-Maidah (5:2):

O ye who believe! Violate not the sanctity of the Symbols of Allah, nor of the sacred month, nor of the animals brought for sacrifice, nor the garlands that mark out such animals, nor the people resorting to the Sacred House, seeking of the bounty and good pleasure of their Lord. But when ye are clear of the Sacred Precincts and of pilgrim grab, ye may hunt, and let not the hatred of some people in (once) shutting you out of the Sacred Mosque lead you to transgression (and hostility on your part). Help ye one another in righteousness and piety, but help ye not one another in sin and rancor: fear Allah: for Allah is strict in punishment.