Like their conventional insurance counterparts, Takaful operators also generate revenues from their investment activities. However, due to Shariah constraints, Takaful operators have hitherto had relatively limited alternative investment asset classes as compared to conventional insurers.
The lack of Shariah compliant investment alternatives was recently pointed as the biggest challenge which Takaful operators face in their operations. Generally, a Takaful operator channels its funds into Sukuk, equity, real estate and deposits asset classes.
According to Ernst & Young World Takaful Report 2012, so far the biggest portion of Takaful operators’ investment in the GCC is in equity. In 2007, 68% of Takaful operators’ investment was in equity. However, the equity portion of the portfolio declined significantly to 38% in 2011, indicating Takaful operators are exploring other alternative asset classes – most notably Sukuk.
In contract, over the last five years Sukuk has become the favorite asset class for Takaful operators in Malaysia. In 2007, Sukuk represented 44% of Takaful investment portfolio. The portion of Sukuk in the portfolio increased to 57% in 2011. The dominance of Sukuk in Malaysia is due to a relatively more developed Sukuk market in the country as compared to the GCC.
In addition, the increase in the Sukuk portion over the total Takaful investment portfolio both in the GCC and Malaysia is mainly due to the good performance of most Sukuk for the last two years, along with a remarkable improvement in Sukuk liquidity.
Despite the above trend, many Takaful stakeholders still believe that Takaful operators must explore other alternative asset classes for diversification purposes. Allocating more funds into real estate (property) and private equity has been suggested by some experts in the industry. However, the decision has to be made carefully since it contains a risk-return trade off.
Sutan Emir Hidayat is a senior lecturer at University College of Bahrain. He can be contacted at
[email protected]
.