Non-Banking Financial

Institutions
EBB 20403
Timur Rustemov
Takaful
Functions:
A type of joint guarantee insurance mechanism where a
large group of people pool their financial resources
together against certain loss of exposures.
Based on principles of co-operation, protection, mutual
responsibility and avoid acts of interest and uncertainty.
Takaful operator conducts all its affairs in a manner that
adheres to Shariah guidelines.
Takaful operators do not have policyholders. They are
contributors or participants, as they are participating jointly
in a takaful fund for their mutual benefits.
Contributors/participants: Owners of the fund.
Takaful
Family Takaful
Has a defined period of maturity.
Insured persons commonly make periodic level premium contributions.
Contributions will be used primarily for meeting their targeted individual
savings and partly for assisting their families financially when the insured
dies.
Contributions amount varies among the insured, depending primarily on
the sum (face amount) that each insured targets to accumulate at the end
of the coverage period and on the age, gender and health condition of the
insured.
The takaful operator may set the minimum face amount for this purpose
and may also set minimum and maximum age limits for participating in
this type of policy.
Takaful life insurance is also used for other purposes, including generating
funds for childrens education, securing a fund in case of mortgagors
premature death and protecting business interest against key employees
death. Several takaful polices now come with hospitalization and disability
benefits.
There is virtually a counterpart takaful life insurance policy for each major
type of conventional life insurance policy, with a difference in how
premiums are allocated.
Takaful
General Takaful
Takaful General Insurance Policy
Takaful operators offer coverage, commonly on an annually
renewal basis, for fire, automobile, liability, marine, workers
compensation, fidelity and even crop insurance.
Principles employed: principle of insurable interest to
minimize the problems of moral hazard, i.e., to separate
insurance from gambling.
Using the principles of uberrima fides, both takaful and
conventional insurers can make a contract void if there is
material misrepresentation concealment or breaches of
warranty made by insured.
Valued policy, actual cash value methods not permitted in
takaful.
Retakaful
Retakaful transfers are commonly classified into proportional and
non-proportional arrangements.
Non-proportional arrangements such as excess of loss or stop-loss
arrangements may not be suitable because of the existence of
uncertainty with respect to the assessment of losses.
Islamic principles demand for clearly defined joint responsibility
throughout the coverage period.
Retakaful likely to be arranged on a pro-rata basis, e.g. quota share
or surplus Retakaful, where the reinsurer becomes a co-insurer of
the original risks. If, however, a non-proportional reinsurance
arrangement is selected, it could be based on a strict profit
commission plan or on a reciprocal basis. In this regard, it matters
little whether the Retakaful transfer is on a facultative or treaty
basis.
Addition:
Takaful operations now available in various countries throughout
the world (around 40 operators), primarily in Islamic countries and
countries with large Muslim population.
Industry growth: 10 -20% per year.
To enhance global takaful infrastructure, ASEAN
Fund Management companies
Definition: Fund management companies manage the funds of
their clients.
Caters for people who either have no time to manage their own
funds or are fearful that they do not know how best to manage
their funds, or believe that fund managers have the expertise to
seek out better yields at lower risk relative to themselves.
Within the Islamic sphere, equity funds have been the most
popular products
The Islamic equity funds market is one of the fastest growing
sectors within the Islamic financial system.
There are approximately 100 Islamic equity funds worldwide.
Growth of total assets managed: 12-15% per annum.
Since the launch of Islamic equity funds in the early 1990s, we
have seen the establishment of credible equity benchmarks by
Dow Jones Islamic market index and the FTSE Global Islamic Index
Series.
Pension Funds
Function
Caters for the time when one is retired.
Pension funds basically accumulate the periodic
contributions of employees and employers and invest the
pool of funds in projects that are deemed secure, but
which nevertheless yield an attractive return.
Investments undertaken by most pension funds /
superannuation schemes are often unacceptable to
Muslims as the returns may come from interest bearing
accounts or from activities considered repugnant to
Muslims.
Pension Funds (Examples)
HSBC Asset Management: Employers make direct deductions from
salaries and wages, which may include the employers own
contribution and pass on the funds to HSBC, which in turn invests
the funds on home loans, as well as Shariah-compliant equities.
Old Mutual Employee Benefits: Launched a product known as the
Pristine Retirement Scheme. Pristine Retirement Scheme is the first
fully Shariah-compliant retirement scheme to be launched in South
Africa. Pristine invests in very selective Shariah-compliant
investments.
Oasis Group Holdings: Manages the Crescent Global Fund,
comprising funds invested in Shariah-compliant products, and the
Oasis Global Fund, which invests in conventional equity products.
Islamic Development Bank (IDB) Infrastructure Fund's Emerging
Markets Partnership (Brunei) Ltd (EMP Brunei): Provides equity and
complementary financing for private sector infrastructure projects
in a wide range of categories, including power, telecommunications,
transport, natural resources development, and infrastructure
related sectors.
In Malaysias case, there is no Islamic pension fund yet.
What are Islamic ETFs?
An Investment Vehicle traded on Stock Exchange much like Stocks
Holds assets like Stocks, Bonds, Commodities or Funds
Trades at same price as NAV of underlying assets over course of
trading day
Most ETFs track Indices like DJIM, FTSE Islamic etc.
Open-ended Funds with unique in-kind creation & redemption
mechanism supported by a system of participating dealers &
liquidity providers
Must have a Prospectus like other Investment Companies
Beta product; Index tracking & Passively-managed
Low cost; Tax-efficient but with Stock-like features
Holistic benefits without the need for trading in underlying stocks

What are the benefits of Islamic ETFs?
Diversification of portfolio with low cost and tax efficiency while
maintaining all features of ordinary stock
Individual shareholder purchase & redemption do not involve
buying or selling of underlying securities because these are not
actively managed, thus lowering marketing, distribution &
operations costs
ETFs can be bought & sold at market price any time during the day,
unlike mutual funds or Unit Investment Trusts which are traded at
the end of the day
Lower tax due to relatively low capital gains because portfolio
turnover is low & redemptions do not require selling shares
Broader market diversification & exposure providing economical
way of balancing portfolio quickly
Complete transparency because the portfolio details are public
knowledge & are priced frequently throughout the day