Funds and Investment Objectives

The takaful/Islamic insurance company has two distinct types of fund, each with a different liability profile and therefore different objectives. These are as follows:

  • One or more Participant Takaful Funds
  • The Shareholder Fund

Participant Takaful Funds

The basic objective of each Participant Takaful Fund is the pooling of risk. Risk contributions, net of wakalah fees, is paid into the fund and is used to pay out benefits to participants resulting from various contingencies. A balance is consequently built up in each fund due to the following reasons:

  1. Risk contributions relating to any contingency are calculated by adding a margin to the expected cost, so as to minimize the chance of the actual cost being greater than the sum of pooled contributions. The excess contributions are then used to:
  • Build up contingency reserves so as to provide a further buffer against the fund going into a deficit; and
  • Distribute surpluses to participants where the actual cost of benefits paid out less the required increase in reserves is less than the fund’s income.
  1. In some cases, flat risk contributions are received over a number of years whereas the expected cost has risen over the period. Hence there is a saving in initial years which is then subsequently spent in future years.
  2. Even where the risk contribution relates to a short period, there is a time gap between contributions received and benefits paid, resulting in reserves being temporarily retained within the fund.

Given that there are some funds retained within each PTF, the company invests these in order to earn a return on these funds so as to reduce the eventual cost of covering the risks the PTF is designed to cover. The investment objective of each PTF is to earn a suitable rate of return while ensuring preservation of the amount being invested.

Shareholders’ Fund

One of the basic objectives of the Shareholder’s Fund is to provide a buffer against any contingency in any of the PTFs. In case of any deficit in any PTF, there is a provision of Qard-Hasan (interest free loan) to be paid out from the Shareholder’s Fund to the PTF. Therefore, it is necessary to ensure that the assets covering this risk are invested in risk-free liquid assets.

The other objective of the Fund is to cover the initial costs that were incurred on building infrastructure as well as initial cost overruns (excess of actual expenses vs wakala fees receivable, the latter building up over time as business volumes grow). Therefore, a portion of fund needs to be invested in risk-free liquid securities to cover the expenses of the Company.

The Fund is also required to meet any minimum capital requirement applicable to the Company. 

The excess of capital, over the amount required to manage expenses and to cover risk of Qard-Hasan as well as any minimum capital requirement, is invested in relatively risky assets to generate high returns for the Shareholders.

Principles and Common Aspects of Strategy

The investment strategy for each fund is based on the following principles:

Principles Relating to Compliance with Islamic Shariah

  1. Investments made are compliant and must be compliant at all times with Islamic Shariah as advised by the Shariah Advisory Board and determined by the Investment committee.
  2. Where direct investments are made, no investments are and will be made in interest bearing securities.
  3. Where direct investments are made in equities, as a general rule, individual companies whose activities are prohibited or are involved in sectors whose activities are prohibited (“Haram”), are not invested in. These prohibited activities are:
  • alcohol and tobacco related products
  • casino, hotel and gambling
  • conventional banking and financial institutions
  • money markets
  • pork related products
  • weapons related products
  • leisure and illicit film industry
  • conventional insurance and home financing

Those companies which are highly leveraged are also be deleted and from the remaining stocks.

  • No investments are made in conventional derivatives.
  • Investments are approved by the Islamic Shariah Consultant and have financial ratios which comply with filters that are prescribed by Islamic Shariah.
  • While the Fund is not prohibited from entering into leveraging arrangements, the nature of the leveraging complies with Islamic Shari’a principles and the Fund may leverage up to 20% (but not greater than 20%) of its Net Asset Value at any relevant time in order to take advantage of investment opportunities or meet short-term cash flow needs.
  • Investments made in mutual funds managed by third parties are also Shariah compliant and follow the principles set out for direct investments.

Principles Relating to Investment Risk

The Fund involves itself in matters concerning shareholder rights (and the exercise thereof) in companies in which the Portfolio invests where consider it appropriate for the Portfolio to do so: dividends received from the Portfolio’s investments may also be reinvested.

When considered to be necessary or appropriate the Fund may hedge currency and/or other portfolio related risks within an Islamic framework but it will not have an exposure to naked derivatives (including options), nor will the Portfolio write options, unless part of a hedging strategy.

  1. Investments are only made in instruments which are relatively secure. For this purpose, the following guidelines apply:
  • Deposits and investments in murabaha investments are only made in Islamic banks which have rating by Standard & Poors of BBB or above.
  • Investment in equities is only made if the issuing company is clearly solvent.

Process – Ensuring Adherence to Shariah Principles

In order to ensure adherence to Shariah Principles relating to investments, the following process involving the Shariah Supervisory Board (SSB) is put in place:

  • The SSB approves the Shariah Principles relating to Investments as outlined above, this including parameters for equity investments in conventional businesses (i.e. as to the level of debt that the subject of the investment may carry);
  • The SSB reviews any investment proposals to give “in principal” approval for the investment;
  • The SSB reviews the documentation for any major investments prior to it being signed;
  • The SSB provides periodic monitoring of investments to ensure that there is continuing Shari’ah compliance.

The fund’s Islamic Investment guidelines and criteria may change from time to time on the advice of the Fatwa and Shariah Advisory Board of Takaful.

Investment Strategy – Participant Takaful Funds

As indicated in paragraph above, the investment objective is to earn a return commensurate with maintaining the principal invested. Therefore, the fund needs to be invested in risk free liquid assets which provide low return but guaranteed payment of principal amount.

The Fund is also potentially faced with the term-mismatch risk. The Fund comprises of both short term and long term liabilities. Where short term risk contributions are received (typically relating to group risk contracts and general insurance contracts), the liabilities are usually of quite short term in nature. Assets held to match such liabilities also needs to be liquid.

Where contributions received relate to longer term risk contracts with decreasing premiums payable over the term, the risk profile of the liabilities is relatively longer. The average duration of such contracts is determined and an attempt made to match the duration with suitable assets.

Investment Strategy – The Shareholder Fund

As mentioned previously, a portion of Shareholder Fund (representing funds required to provide against the contingency of providing Qard-Hasan to PTFs, providing for cost overruns in the initial years as well as to cover any minimum capital requirement) are invested in risk free liquid assets. A different and higher risk strategy is followed for free capital.

The following shows the various asset classes and their objectives:

Bank call deposits: To cover the guaranteed nature of liabilities and provide liquidity To cover the risk of Qard-Hasan and the expense overruns

Sukuks (matched to liability profile): To match the medium and long term liabilities. The investments will be made to match the projected operating expenses

Equities & Real Estate:The investments in this class will be made to the extent of free cash flows available The free cash flows will be invested to provide higher return

The investments in various asset classes for Investment Fund are made to match the underlying objective of the Fund.