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INVESTMENT STRATEGIES AND PLACEMENT OF CONTRIBUTIONS

INVESTMENT STRATEGIES AND PLACEMENT OF CONTRIBUTIONS. 1 st Saudi International Takaful Forum Intercontinental Hotel Jeddah 21- 22 September 2004. SHAHZAD HAFEEZ Asst. General Manager Islamic Arab Insurance Co. (IAIC). SUMMARY OF CONTENTS. Introduction, Contributions & Takaful

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INVESTMENT STRATEGIES AND PLACEMENT OF CONTRIBUTIONS

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  1. INVESTMENT STRATEGIES AND PLACEMENT OF CONTRIBUTIONS 1st Saudi International Takaful Forum Intercontinental Hotel Jeddah 21- 22 September 2004 SHAHZAD HAFEEZ Asst. General Manager Islamic Arab Insurance Co. (IAIC)

  2. SUMMARY OF CONTENTS • Introduction, Contributions & Takaful • Conventional vs. Islamic Investment Strategy • Shariah’s impact on Investment Strategy • Market Share & Deployment of Takaful Funds • Way Forward & Challenges

  3. INTRODUCTION The growth in the Takaful contributions translating into sizeable funds, highlights the need for Management of these Funds according to Islamic Principles.

  4. CONTRIBUTIONS & TAKAFUL CONTRIBUTIONS: Subscriptions paid by Policy Holders to assist and indemnify each others. TAKAFUL: Islamic substitute to conventional insurance, based on: • Social Solidarity • Cooperation • Mutual Indemnification • Sharia’h compliant management of Funds

  5. GENERAL TAKAFUL OPERATING MODEL Policyholders Contributions Takaful Fund Net Investment Income Benefits Payments, Expenses & Reserves Surplus Management Fee % (C) % (A) % (B) * May take a %age of the Surplus or Management Fee or Both Shareholders Takaful Operator *

  6. GENERAL TAKAFUL CONTRIBUTION GROWTH MALAYSIAN INSURANCE INDUSTRY DATA Source: Bank Negara Malaysia

  7. FAMILY TAKAFUL CONTRIBUTION GROWTH MALAYSIAN INSURANCE INDUSTRY DATA Source: Bank Negara Malaysia

  8. CONVENTIONAL INVESTMENT STRATEGY • GOOD PRUDENCE • REGULATORY COMPLIANCE

  9. GOOD PRUDENCE • RATE OF RETURN • RISK MANAGEMENT • Diversification • Security • Liquidity • Track Record • Timing • HISTORICAL PERFORMANCE OF FUNDS

  10. REGULATORY COMPLIANCE Complying to Government Regulating Authorities KSA • No Regulatory body for insurance in KSA till now • SAMA’s Forthcoming Role will provide the industry • Recognition • Credibility • Legality • Transparency

  11. ISLAMIC INVESTMENT STRATEGY • SHARIA’H COMPLIANCE • GOOD PRUDENCE • REGULATORY COMPLIANCE

  12. SHARIA’H COMPLIANCE Controlling and limiting exposure to certain activities i.e. “Haraam” Activities. Derivation of (Halaal) activities: All activities not falling under “Haraam” Activities.

  13. SHARIA’H COMPLIANCE Prohibited Business Lines (“Haraam” Activities) Service Industries • Interest Based Financial Institutions • Conventional Insurance Companies • Entertainment Industry involved in Pornography, Gambling etc. Manufacturing, Processing & Trading: • Alcoholic Beverages, Tobacco Products • Pork or using Pork based ingredient/s • Arms & Ammunitions

  14. SHARIA’H COMPLIANCE FINANCIAL CRITERIA • Avoid/Minimize association with interest • Control Leverage i.e. Debt / Equity Ratio • Minimize Interest Income • Minimize Cash & Receivables to Total Assets Ratio

  15. IMPACT OF SHARIA’H PARAMETERS ADVANTAGES • Islamic Social Values • Enhanced duty of care on Fund Manager • Additional Discipline in investment selection • Emphasis on equity-based investments

  16. IMPACT OF SHARIA’H PARAMETERS LIMITATIONS • Limited Investment Universe • Less Opportunity for Diversification • No hedging • Benchmarking Problem (Lack of available Index)

  17. GENERAL TAKAFUL ASSETS COMPARED TO INDUSTRY MALAYSIAN INSURANCE INDUSTRY DATA Source: Bank Negara Malaysia

  18. FAMILY TAKAFUL ASSETS COMPARED TO INDUSTRY MALAYSIAN INSURANCE INDUSTRY DATA Source: Bank Negara Malaysia

  19. DISTRIBUTION OF GENERAL TAKAFUL ASSETS MALAYSIAN INSURANCE INDUSTRY DATA Source: Bank Negara Malaysia

  20. DISTRIBUTION OF FAMILY TAKAFUL ASSETS MALAYSIAN INSURANCE INDUSTRY DATA Source: Bank Negara Malaysia

  21. INVESTMENT TRENDMALAYSIAN TAKAFUL FUNDS • Tendency towards Higher Return Instruments – Islamic Private Debt Securities & Equities • Financings (mainly secured) decreased

  22. CURRENT DEPLOYMENT OF TAKAFUL FUNDS • Short to Medium Term Trade Finance • Leasing • Asset backed debt financing “Sukuk” • Real Estate Development & Management • Industrial / Manufacturing Finance

  23. THE WAY FORWARD • Refine Investment Guidelines • Framework • Continuity • Consistency • Become more innovative • Diversify i.e. Private Equity etc.

  24. CHALLENGES • To Increase Market Share • Benchmarking (Indexing) • Creating Further Awareness • Educating the Regulators • Exploring New Markets • Universally accepted Sharia'h Advisory Body for Economic & Financial Matters

  25. MANY THANKS

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