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Determinants of Composite Takaful Operators' Financial Performance.


There are numerous studies focused on performance of takaful operators especially in Malaysia. Nevertheless, such performance was demarcated into several components such as financial performance (Ismail, 2013), corporate social performance (Muhamat, Jaafar & Basri, 2017) and agents' performance (Muhamat et al, 2018). Ismail (2013) advised that studies on takaful operator's financial performance is limited due to the lack of data and empirical evidence on this area.

Therefore, this study focused on the recent takaful operator's financial reports specifically for the family takaful operators in order to assess the determinants that influence the financial performance. Previous studies had discussed in-depth on the general takaful operator's financial performance, moreover, family takaful is a lucrative segment for the composite takaful operators (before the requirement of the Central Bank to split the composite takaful business into family and general takaful).

Literature Review

This study has extensively reviewed previous studies on the financial performance of takaful operators.

i. Return on investment, return on equity (ROE) and return on assets (ROA) are amongst the popular proxies being used to asses company's financial performance (Malik, 2011). Ismail (2013) used investment yield is as the proxy since it reflects one of the major activities of the composite takaful businesses. Investment is the main function of takaful and insurance companies in order to mobilise the contribution and premium that received from the participants or policyholders.

ii. Profit rate: Ismail (2013) suggest that profit rate contributes to the performance of the takaful operator's investment which benefited the takaful operator as well as the policyholders. Abduh & Isma (2016) inform that takaful operator's investment instruments consists of bonds, sukuk and fixed deposit which rely on the profit rate determined for the instruments, and influence the stakeholders' decisions either to supply more funds or otherwise; instead of increasing the solvency of the companies (Mwangi & Murigu, 2015).

iii. Equity return: One of the factors that influence the profitability performance of takaful operation. Equity returns result for the dividend income to the company (Ismail, 2013). Based on findings from Abduh & Isma (2016) indicated that equity return is one of the critical factors that influence profitability of the insurance and takaful companies. The lower the equity index will cause the asset liability mismatch.

iv. Size: includes the number of employees, branches and the total asset which pointed by Reshid (2015) to be either positive or negative relationship concerning the profitability. The larger the firm; it will have more resources, better risk diversification, complex information systems and a better expenses management (Burca & Batrinca, 2014).

v. Stability of Underwriting Procedure: Ismail (2013) findings informed that by increasing the premium; it will give better financial performance of the takaful companies. Any unfavourable changes to the chain process of underwriting, it can cause lower profitability due to the financial difficulties. A sound process is needed because takaful operator has the fiduciary duty to ensure the business is managed prudently, even though the takaful operator is only acting as agent. The fiduciary duty of the takaful operator requires the shareholders to top up if there is deficit in the risk fund (Muhamat, Mainal, Alwi & Jaafar, 2018).

vi. Liquidity: Mazviona, Dube & Sakahuhwa (2017) suggest that companies with more liquid assets are less possible to fail because they can liquidate their cash when there is need for it especially in a dire situation. Abduh & Isma (2016) conclude that liquidity is one of the variables that represent takaful operator capability to pay the liability such as claim and expenses to the policyholders.

vii. Retakaful or Reinsurance: Shiu (2004) clarifies that reinsurance or retakaful increases operational stability, greater dependence on reinsurance will reduce the company's preservation level which can decrease the potential profitability for the insurer. Ismail (2013) suggests that coefficient for retakaful dependence is positively related to investment yield.


The data were obtained based on the financial statements and additional notes of the companies of composite takaful operators from 2007-2018 from the Central Bank of Malaysia. Model Specification:

ROI = [beta]0 + [beta]1 PR+ [beta]2 Eq + [beta]3 LOGSi + [beta]4 ReT + [beta]5 Li + [beta]6 Und + [epsilon] it


Descriptive results

Table 2 show the descriptive statistics of the dependent and independent variables for eight composite takaful operators for ten years from 2007-2016. The tables illustrate the results of the mean, standard deviation, skewness, kurtosis and Jarque-Bera. The result shows that the average return from investment of composite takaful operators was 1.43% with a dispersion of 1.53%. This indicates that the variations of composite takaful operators in Malaysia will not increase above 2.96%. Furthermore, the mean value of company size was 8.25. There is significant variation across the sample takaful operators for the reason of the standard deviation is 0.88. Hence, the presence of significant different in term of takaful operators' size produce significant impact on the profitability of takaful operators.

The findings show that R-squared is 0.558 and it means that on average 55.8% of the variation in return on investment (ROI) can be explained by the independent variables under the model above. T-test shows that liquidity is significant with the p-value equal to 0.0495 respectively.

Correlation Test ROI has a positive relationship with equity return, liquidity, company size and underwriting procedure for composite takaful businesses. There were no variables detected to have correlation coefficients more than 0.8 or less than -0.8 which inferred that each variable is independent from one and another. The results show that the correlation coefficients between pairs of independent variables are less than 0.8, means that there are no serious correlations among the variables. The coefficient estimate of correlation is -0.135 for retakaful and the result suggest that retakaful has negative relationship to return on investment (ROI). Thus, the less funds channeled to retakaful; the better profitability it will be. In addition, profit rate signifies negative relationship to ROI. This is contradicted with most of the previous studies. One possible explanation is that during the study period; there was financial crises from 2007-2008.


Takaful operators need to consider factors that influence the financial performance of the companies because it will affect the company's image as well as the growth of the companies in the future. The challenges faced by the composite takaful operators are different from the specialized type of takaful operators. Nevertheless, starting 2018, the composite takaful operators will be separated into specific business according to their line of business either family or general takaful. Limitation of this study is that the data should be separated into the line of businesses either family or general takaful business. Accordingly, the limitation can be future area of research that can be executed in order to understand and perhaps produce a model that will be unique for takaful operators.


Abduh, M., & Isma, S. N. Z. (2016). Dynamic financial model of life insurance and family takaful companies in Malaysia. Middle East Journal of Management, 3(1), 72-93.

Burca, A.-M., & Batrinca, G. (2014). The determinants of financial performance in the Romanian insurance market. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(1), 299-308.

Ismail, M. (2013). Determinants of financial performance: The case of general takaful and insurance companies in Malaysia. International Review of Business Research Papers, 9(6), 111-130.

Malik, H. (2011). Determinants of insurance companies profitability: an analysis of insurance sector of Pakistan. Academic Research International, 1(3), 315.

Mazviona, B. W., Dube, M., & Sakahuhwa, T. (2017). An Analysis of Factors Affecting the Performance of Insurance Companies in Zimbabwe. Journal of Finance and Investment Analysis, 6(1), 1-2.

Muhamat, A. A., Karim, N. A., Mainal, S. A., Alwi, S. F. S., & Jaafar, M. N. (2018). Determinants of Agents Performance: A Case Study of AmMetLife Malaysia Berhad. International Journal of Academic Research in Business and Social Sciences, 8(11).

Muhamat, A.A, Jaafar, M. N., & Basri, M. F. (2017). Corporate Social Performance (CSP) influences on Islamic Bank's financial performance. Journal of International Business, Economics and Entrepreneurship (JIBE), 2(1), 11-16.

Mwangi, M., & Murigu, J. W. (2015). The determinants of financial performance in general insurance companies in Kenya. European Scientific Journal, ESJ, 11(1).

Reshid, S. (2015). Determinants of Insurance Companies Profitability in Ethiopia. Addis Ababa University Addis Ababa, Ethiopia.

Shiu, Y. (2004). Determinants of United Kingdom general insurance company performance. British Actuarial Journal, 10(5), 1079-1110.

Nur Izzati Ibrahim (1)

Faculty of Business & Management, Selangor Campus, Universiti Teknologi MARA

Amirul Afif Muhamat (2) (*)

Faculty of Business & Management, Selangor Campus, Universiti Teknologi MARA


Azreen Roslan (3)

Faculty of Business & Management, Selangor Campus, Universiti Teknologi MARA

Mohamad Nizam Jaafar (3)

AAGBS, Universiti Teknologi MARA

(*) Corresponding Author
Table 1: Proxies for Composite Takaful Operators' Financial Performance
Variables                      Measurement
Return on Investment           Method:
                               Gain of Investment--Cost of Investment
                               Cost of Investment
Profit or interest rate level  Method:
                               5 year Malaysian Government
                               Securities (MGS)
                               5 year Government Investment Issue (GII)
Equity return                  Method:
                               Total equity
                               Total asset
Company size                   Method:
                               Log of total asset
                               (Total contribution earned--Retakaful
Underwriting procedure         Method:
                               Benefits paid
                               Net contribution
Liquidity                      Method:
                               Current Assets
                               Current Liabilities
Retakaful Dependence           Method:
                               Amount of Retakaful
                               Total Assets
Variables                      Notation
Return on Investment           ROI
Profit or interest rate level  PR
Equity return                  Eq
Company size                   Si
Underwriting procedure         Und
Liquidity                      Li
Retakaful Dependence           ReT
Table 2: Descriptive results
Variables    ROI        Profit      Equity      Liquidity
Mean          1.429333    4.196       0.172793     1.271249
Median        1.3         3.43        0.108488     1.141641
Std. Dev.     1.527744    4.940751    0.188769     0.699411
Skewness      1.399157    3.176488    3.83513      6.159659
Kurtosis      6.710182   16.4586     17.16637     40.23818
Jarque-Bera  40.49252   415.3014    486.598     2884.589
Variables     Size       Underwriting  ReTakaful
Mean           8.248357    0.619121     0.054052
Median         8.46737     0.545868     0.031008
Std. Dev.      0.88485     0.60241      0.05531
Skewness      -1.43758     3.905333     1.519235
Kurtosis       4.247877   20.75926      4.400188
Jarque-Bera   18.41951   705.7459      20.98654
Table 3: Random Effect Model
Variable            Coefficient  t-Statistic  Prob.
C                   -20.7449     -1.62283     0.1148
Profit rate           0.006384    0.165069    0.87
Equity                0.343568    0.154646    0.8781
Liquidity             0.581536    2.04441     0.0495
Size                  2.558765    1.692494    0.1006
Underwriting          0.426642    1.036195    0.3081
ReTakaful            -0.387      -0.05475     0.9567
R-squared             0.557912
Adjusted R-squared    0.372521
F-statistic           3.009371
Prob(F-statistic)     0.005865
Table 4. Model of Determinants of composite takaful operators'
financial performance
Independent Variable  Composite Takaful Operators
                      Random Effect Model
C                     -0.982114
PRL                   -0.440308
SI                     1.721838
                       0.0932 (*)
TLLA                   1.040067
                       0.0304 (**)
LOGTA                  1.436621
                       0.0159 (**)
CGCW                   0.064205
RTCTA                 -1.006819
R-squared              0.162316
Adjusted R-squared     0.03005
F-statistic            1.22719
Prob(F-statistic)      0.314111
Durbin-Watson stat     0.537139
(1.) Figure in parentheses are t-statistics.
(2.) (***), (**), (*) denote significant at 1%, 5% and 10% significant
level respectively.
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Author:Ibrahim, Nur Izzati; Muhamat, Amirul Afif; Roslan, Azreen; Jaafar, Mohamad Nizam
Publication:Global Business and Management Research: An International Journal
Geographic Code:9MALA
Date:Oct 1, 2020
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