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International Journal of Financial Economics
Vol. 3, No. 1, 2014, 41-56
Corporate Governance and Maqasid Shariah: An Empirical Study on
Management Practices of Takaful Operators in Malaysia
Nor Zarina Abu1, DjasrizaJasin
2, Shaikh Hamzah Abdul Razak
3, Kamaruddin Sharif
4
Abstract
The development of the takaful industry in Malaysia has seen tremendous growth since its inception and has
emerged as an important component of the Islamic financial system in Malaysia. Being an Islamic institution,
the takaful business has to adhere Islamic rules and regulations, incorporate maqasid shariah, uphold the
Islamic corporate governance and at the same time achieve its business goals. This study looks into the
current practices of governance of takaful in Malaysia and links it with maqasid Shariah by assessing the
three main stakeholders namely, the takaful operators, the takaful agents and the policy holders. Data were
elicited through interviews from the respective parties. From the study participants and agents accordingly
viewed that takaful operators are handling their activities in accordance to maqasid of Shariah. The
interviews also indicated that each takaful operator has its own processes, policies and procedures and are
conforming their activities to Shariah. The basis of these policies are established in line with the Shariah
Governance Framework and each process is done with the aim to achieve the maqasid of Shariah. It was also
found there was a loose relationship between takaful operators and their agents. Takaful operators normally
places their trust on their agencies to hire and to monitor their agents even though the agents will actually
represent the takaful operators. Conformity to Shariah in every activity and transaction is indeed pertinent to
a takaful operator. Hence in this respect a sound governance or rule must be established to strengthen the
agent, agency and takaful operator relationships. Such action benefits stakeholders in protecting their interest
hence achieving maqasid of Shariah.
Keywords: Corporate Governance, Maqasid Shariah, Takaful
1. Introduction
Takaful industry has seen tremendous growth since its inception and has emerged as an important
component of the Islamic financial system in Malaysia. From a single company in 1984, currently there are
new twelve takaful operators to compete in the market in an attempt to enhance Malaysia’s position as an
international Islamic financial hub. In terms of takaful fund assets, it grew from RM 5,878.4 million in 2005
to RM19,045.90 million in 2012 (www.bnm.gov.my).
The development of takaful industry in Malaysia has been inspired by the prevailing needs of the
Muslim for a Shariah compliant insurance in response to the decree issued by the Malaysian National Fatwa
Committee in 1972 which ruled that life insurance in its present form is a void contract due to the element of
gharar (uncertainty), riba (interest) and maisir (gambling)5. In 1982, the Government established a Special
Task Force to study the viability of the setting-up of an Islamic insurance company and upon the
recommendation of the group, the Takaful Act was enacted in 19846. The establishment of Syarikat Takaful
1 Lecturer at UNITAR International University and PhD candidate at INCEIF
2 Lecturer at UNITAR International University and PhD candidate at INCEIF
3 Assistant Professor of Finance at INCEIF
4 Professor of Risk Management and Takaful at Open University Malaysia
5 20 Years Experience of Malaysia Takaful Industry, Bank Negara Malaysia
6 ibid
N. Z. Abu et al.
42
Malaysia Berhad in the same year has increased the competition in the insurance industry as well as giving
an alternative for Malaysian especially the Muslims to protect themselves and their belongings in line with
the framework of Shariah. Recently, the regulatory and supervisory framework of Malaysia enters a new
stage of its development as Islamic Financial Services Act 2013 (IFSA) come into force on 30 June 2013. It
is crucial for Malaysia to strengthen its regulatory and supervisory system of Islamic financial services in
order to increase market confidence, maintain financial stability, support inclusive growth in the financial
system and the economy, as well as to provide adequate protection for consumers. The laws also provide
Bank Negara Malaysia (BNM) with the necessary regulatory and supervisory oversight powers to fulfil its
broad mandate within a more complex and interconnected environment, given the regional and international
nature of financial developments. This includes an increased focus on preemptive measures to address issues
of concern within financial institutions that may affect the interests of depositors and policyholders, and the
effective and efficient functioning of financial intermediation (BNM, 2013).
Unlike conventional insurance which operates based on profit orientation with the goal to maximize
shareholders fund, the nature of takaful is based on the motive of community welfare and protection of which
the operators only receive a fair compensation as being an agent for the policyholder and through a share in
returns on investment of funds (Lim, Idris, & Yura, 2010) In addition, the concept of takaful embraces the
elements of mutual protection and shared responsibility (Engku Ali & Odierno, 2008). It must be in harmony
with the maqasid (objectives) of shariah with regards to securing benefit for the Muslim of preventing him
harm, not only in this world but the hereafter (Khorshid, 2004).
Besides, takaful sector also need to enhance its quality and credibility through good governance to
protect the rights of policyholders or participants, shareholders and other stakeholders. The corporate
governance is intended to maintain the order of Islamic insurance industry regarding certain regulations and
ethical values that takaful operators should respect and to help identifying and analyzing of risks and
opportunities in this sector.7 This is essential as the contractual relationship between participants and takaful
operator must be clear as there is no insurer-insured relationship as per conventional insurance.
Background of the Study
With more than 25 years after the incorporation of the first takaful company, the takaful industry in
Malaysia has experienced rapid growth and transformation. Started by Syarikat Takaful Malaysia Berhad, a
wholly owned company under Bank Islam Malaysia Berhad in 1985, now there are many players from
different background competing in the local takaful market. Under the liberalization of the financial sectors
with the objective to attract more players in the market, BNM has permitted takaful operators to own up to
49% of foreign equities. As a result, there are increasing numbers of insurance companies either local or
international teaming up with local companies were awarded licenses to operate and offering takaful
products.
Currently, there are a total of 12 Takaful Operators (TO) operating in Malaysia. Of the 12 operators,
only Syarikat Takaful Malaysia Berhad and Takaful IkhlasSdnBhdare solely focused on the takaful business
whereas the others are either partners or subsidiaries of conventional insurance companies. Most of these
companies are well established conventional insurance organizations and their expansion of the business in
takafulis part of their company’s strategic planning to capture the Muslim’s market.
The underlying features of the takaful business is based on Islamic rules and regulations, the
incorporation of maqasid shariah and the upholding of Islamic corporate governance in their management
policies. In achieving its goals, the question that is often being asked is, whether the TOs really understand
the uniqueness of takaful or are they only conforming to the legal forms of the Shariah contracts. There are
tendencies that Islamic institutions today are modeled after their conventional counterparts. According to
Abozaid & Dusuki, 2007, thorough and rational examination of some basic financing modes as practiced by
some Islamic banks and financial institutions will prove that there are no different from those offered and
7 http://financialislam.com/corporate governance.html, extracted February 2011.
International Journal of Financial Economics
43
practiced in the conventional banks and financial institutions and the only difference is in the technicalities
and legal forms while the substance is the same.
Problem Statement
This paper intends to discuss two main questions:
1. Are takaful providers in Malaysia applying a governance policy framework that fits the guiding
principles on governance of Islamic Insurance?
2. Are takaful providers in Malaysia upholding the maqasid shariah in their governance practices?
Research Questions
From the above problem statements, the following are the corresponding research questions:
1) To investigate the current management policies of TOs in Malaysia
2) To investigate the corporate governance policies of takaful companies
3) To make recommendations based on the current conditions, the governance framework to tackle the
issues and abuses faced by the TOs.
2. Review of Past Studies
The intellectual debates on the issues of governance in the area of Islamic finance have gained the
interest of many researchers in recent years. Since Islamic finance are grounded and developed on a Shariah
foothold it poses a significant difference in terms of its existence from that of conventional finance. However
critics pointed out that there seem to be no different from those offered and practiced by the conventional
banks and financial institutions; the only difference is only in the technicalities and legal forms, the substance
however remain the same (Abozaid&Dusuki, 2007). This section will review the literatures on maqasid
shariah, corporate governance and the operation of takaful, which will help to establish research questions
and thus widening the knowledge on maqasid and its issues in developing sound corporate governance for
takaful institutions specifically.
Maqasid Shariah
It is observed that to date there is a limited discussion on the application of maqasid shariah in relation
to Islamic Financial Institutions (IFIs). Since takaful operation are founded on the platform of Shariah hence,
it must ensure that all its activities are in accordance to Shariah with the objectives of achieving maqasid of
shariah. Thus far, there do not seem to find any study that attempts to explore this relationship. Thus the
present study seeks to examine takaful operator's practices and subsequently try to understand whether it is in
accordance to Shariah. The findings may provide an insight into takaful operator practices and to what
extend the governance play its roles in ensuring that all activities played by takaful operators are in
accordance with Shariah.
Maqasid refers to a purpose or objective, principle, intent or goal (Kamali, 2008). Shariah on the other
hand is defined as follows strictly the injunctions of Allah or the way of Islam (din) (Dusuki & Abdullah,
2007). Dusuki & Bouheraoua, (2011) explains that the maqasid al-shariah represents the objectives and the
rationale of the Shariah. It encompasses all disciplines, laws, regulations, policies, instructions, obligations,
principles, beliefs, devotions and actions designed to protect the interest of human beings in all segments and
aspects of life (Vejzagic&Smolo). For a number of Islamic legal theorists, it is an alternative expression to
‘people’ interests’ (masalih) (JasserAuda, 2008).
Islamic scholars have divided maqasid al-shariah into two main categories: general objectives (maqasid
amah) and specific objectives (maqasid khassah) (Dusuki & Bouheraoua, 2011). Dusuki and Bouheraou
further quoted Ibn Ashur, 2001 in defining the general objective, by stating that they consist of the deeper
meaning and inner aspects of wisdom considered by the Lawgiver in all or most of the areas and
N. Z. Abu et al.
44
circumstances of legislation; they are not confined to a particular type of Shariah command. Thus, they
include the general characteristics of the Shariah, its all-purpose principles, and any aim contemplated by the
legislation.
The second category of maqasid is known as specific objectives of maqasid al-Shariah. It covers a
specific discipline, such as financial transaction or family law or private conduct (Dusuki & Bouheraoua,
2011; JasserAuda, 2008). Dusuki and Bouheraoua describe that both categories as interrelated and served as
the main framework governing human lives and they did propose that the area of Islamic finance falls under
this category. However as the first category and the second are interrelated it is important to view and
analyze both as the objectives of the takaful operations. Takaful is guided by the Shariah which set a standard
and rule of actions to the operator on how they should act and react. It laid down a comprehensive code of
law that govern takaful’s objective. The Quran did explain the objectives of Shariah in the following verse:
“And We sent thee not, but as a mercy for all creatures” (al-Anbiya’ : 107)
The message in this verse transcends all barriers that divide humanity: none must stand in the way of the
mercy and beneficence that Allah had intended for all human beings. Hence takaful operators must oblige
these rules, while managing its business and achieving its goals, it must ensure that they are actually
achieving the maqasid of shariah.
Maqasid of Shariah and Takaful
The birth of the takaful industry is significant in meeting the needs of the Muslim for a shariah
compliant alternative to conventional insurance. However this should not be the basis of its realization as it
may lead to a superficial takaful products and services rather than meeting the shariah law. Takaful operator
hence held greater challenges in its operation than its conventional counterpart. The operations and business
conduct of takaful must be guided by the shariah and maqasid of shariah is the aim. This suggests that the
principles governance for takaful operations is the maqasid of shariah. It implies that the Islamizations of
takaful does not only entails on its product and services, instead it should be viewed from a bigger
perspectives that include the structure of the organizations, the operation, the business conducts and the
ultimate goals should be aligned to meet the maqasid al-shariah. Abdullah and Furqani (2012) articulated
that the takaful industry should aim at life protection and assist in having a smooth circulation of wealth;
instilling social responsibility spirit and facilitating mutual cooperation within society and flourishing ethical
dealings.
Although takaful operation has achieved a remarkable growth over the years, there are growing
concerns that it is matching that of conventional insurance. In any takaful development, maqasid of shariah
should be regarded as the principles existence of takaful operation. The principles allow takaful operators to
have a clear view on their direction and achieving their ultimate objectives, which eventually create a
significant difference from the conventional insurance.
Governance
Poor corporate governance is viewed as threatening the organization's operations and existence. In fact
it is one of the causes for the outbreak of the 1997 Asian Financial crisis (ADBI, 2011). In any business,
governance entails an important aspect to ensure the prudence and the transparency of operations that
promote the interest of relevant parties to the organizations. This extends to takaful operations, hence this
part will explain the governance concepts and its issues in takaful practices. Corporate governance is the set
of processes, policies or laws affecting the way a corporation is directed, administered or controlled
(Odierno, 2009). The objectives of corporate governance are to ensure accountability of individuals in an
organization by trying to reduce or eliminate the risk of one party acting in its own interests against another
party (aligning the interests of all parties)(Odierno, 2009).It is a mechanism used for monitoring the actions,
policies and decisions of corporations. Corporate governance is said to be improving the company’s image,
sustainability ( Lensson, G. et all, 2013).In an effort to spur the development of takaful BNM has decreased
numbers of rules and guidelines that revolved around capital adequacy, financial reporting, anti money
laundering and prudential limits and standards. This however is not an assurance, that takaful business is
International Journal of Financial Economics
45
operating on Shariah foundation. Shariah in any muamalat transaction must be held as an ultimate objective
hence, by all mean a proper process, way and governance is indeed important. In this respect, the governance
policy for takaful and other Islamic institutions must not be the same as other business. Islamic Financial
Institution Act established in 2013 and a more comprehensive Regulatory and Supervisory Framework is
introduced for takaful operators that revolved around governance, prudential and market conduct. Shariah
compliance in all aspects has become the backbone of this regulation. Shariah governance framework,
Shariah parameters and Shariah rulings are used to foster Shariah innovation whilst promoting stability in the
marketplace via harmonization of Shariah interpretation (Nazri W.M, 2012)
This is expected to improve the only enacted law governing takaful that is the Malaysia’s Takaful Act
1984 which is now superceeded by Islamic Financial Services Act 2013.
Corporate governance is the aligning of the interests of all parties, to minimize the risks of moral
hazard. Far from being a cost, proper corporate governance can be a true competitive advantage. The
challenge of corporate governance in takaful is the interaction between technical concepts and shariah
concepts. With this in mind the actuary needs to be heavily involved. The participants should also have their
fair say. In this sense it is best to describe that governance in takaful is a must to ensure ultimate aim of
takaful (maqasid al- shariah ) is fulfilled. In any corporation the shareholder of a corporation is the ultimate
owner, however not all shareholders actively participate in the day-to- day operations of the firm. Hence
conflict may arise as in practice the majority owners control the businesses and make decisions on behalf of
others. Takaful operations are unique as the participants own the fund and the operators are the managers
operating the fund on behalf of the participants. This unique relationship required a proper governance as
participant in reality do not actively participate in the day-to-day operation and making decisions in the firm.
Conflict may arise as each party may have its own need and interest. The manager who is running the takaful
business is dealing with the capital requirement set by the regulator, management cost and operational risk.
The participant on the other hand are placing concerns on the fund and how it is managed. Ultimately both
are placing concerns on profit. As takaful operators must conform its operations to the Shariah, their
requirements are even more rigid than the conventional. To date limited studies can be found on takaful and
its governance. Hence this paper will investigate the application of maqasid al- shariah in its operations and
business conduct.
The Islamic Financial Services Board (IFSB) has developed three Guiding Principles to help strengthen
governance structures and processes in various segments of the Islamic financial services industry (IFSI) that
include takaful operator8. This is inline with its mandate to promote soundness and stability of the Islamic
financial system. However this guiding principle is not compulsory it only provide current practices of IFIs
that can be regarded as best practices. However, as the IFIs continues to grow, best practices would and
should also change. As markets change and develop, and as technology, financial engineering, and an
improved coordination between supervisory authorities and market players, then other strategies will be
available (IFSB, 2009). The IFSB focus on Shariah governance systems, as it is crucial to ensure considering
that compliance with Shariah rules and principles is the reason for the existence of an IFI.
Theoretical Framework
This study was conducted in two phases. In the first phase, two sets of questionnaires were distributed to
the takaful participants and agents with the main objectives are to study their perceptions on the level of
governance practices of takaful providers towards maqasid shariah. Based on the feedback from the takaful
participants and agents, interviews were conducted with takaful providers to study their current practices of
governance and management policies towards achieving maqasidshariah. According to AsyrafWajdi, the
conventional approach of corporate governance mainly focuses on the principal / agent relationship between
managers and shareholders. Unfortunately, this is not always being the case due to the presence of agency
8These include (i) Guiding Principles for Governance for Institutes offering only Islamic Financial Services (IIFS –
excluding Islamic Insurance/Takaful, institutions and Islamic Mutual Funds) also known as IFSB-3 (2006); Guiding
Principles on Governance for Islamic Collective Investment Schemes, also known as IFSB-6 (2008) and Guiding
Principles on Governance for Takaful Operations also known as IFSB-?(2009)
N. Z. Abu et al.
46
problem that arises from adverse selection and moral hazard of managers that have information advantages
over shareholders. A broader perspective of corporate governance approach is used in this study whereby it
adopted a stakeholders’ value of corporate governance. Tirole (1999) asserts that the need to consider other
stakeholders beside shareholders is imperative, especially when managerial decisions do not only impact the
investors but also exert externalities on a number of natural stakeholders who have an innate relationship
with the firm. By adopting Stakeholders theory, this study focuses on the three main stakeholders of takaful
industry, the participants, the agents and the takaful providers.
Theoretical Framework
Generally, this study was done with an attempt to fill the gap in current Islamic finance practices by
providing insights on the three main stakeholders’ perspective on the current practices of corporate
governance in achieving maqasid shariah.In the first phase of this study, an exploratory study was conducted
on takaful participants and agents to investigate their perception on the current corporate governance
practices of takaful in achieving maqasid shariah. Figure 1 shows the study theoretical framework with
corporate governance practices as the dependent variable and religiosity as the moderating factor. The
independent variables of the study are dimensions of maqasid shariah which are educating individual,
establishing justice and promotion of public interest.
Figure 1: Theoretical Framework
Hypotheses Development
In order to study the perception of takaful participants and agents, the following hypotheses were
developed. Based on the guiding principles on governance for takaful undertakings issued by Islamic
Financial Services Board (IFSB), five attributes of corporate governance which are Governance Framework,
Ethics, Rights and Obligations of Policyholders, Transparency and Disclosure and Sustainability were used
to represent the dependent variables. Takaful operators acts in a fiduciary capacity on behalf of the
participants in performing underwriting and managing the takaful funds. The takaful funds are funded by the
takaful participants under the concept of mutuality. If a takaful scheme is strictly implemented under the
principle of Ta’awun, the agency problems are mitigated so that the scheme operates in the interest of
participants. A specific code of governance framework, appropriate code of ethics, structures that represent
the rights and obligations of policyholders, appropriate disclosures of information and appropriate
mechanism to sustain the solvency of takaful undertakings are needed to ensure that the operators are
adhering to the maqasid shariah. Thus, hypothesis 1 to 5 can be stated as follows:
International Journal of Financial Economics
47
H1: There is a significant relationship between governance framework and maqasid
shariah.
H2: There is a significant relationship between ethics and maqasid Shariah.
H3: There is a significant relationship between rights and obligations of policyholders
and maqasid shariah.
H4: There is a significant relationship between the disclosures of information and
maqasid shariah.
H5: There is a significant relationship between sustainability and maqasid shariah.
For each of the above five hypothesis, it could be further broken down to include the elements of
‘educating individual’, ‘establishing justice’ and ‘promotion of public interest’.
The nature of risk and accountability in Islamic Financial Institutions is more complex than
conventional counterparts. Thus it is relevant to incorporate religiosity as a moderating factor to study
whether religiosity level will have an impact on the relationship between corporate governance practices and
maqasid shariah. Therefore, hypothesis 6 to 10 can be stated as follows:
H6: Religiosity moderates the relationship between governance framework and
maqasid shariah.
H7: Religiosity moderates the relationship between ethics and maqasid shariah.
H8: Religiosity moderates the relationship between rights and obligations of
policyholders and maqasid shariah.
H9: Religiosity moderates the relationship between transparency and disclosures of
information and maqasid shariah.
H10: Religiosity moderates the relationship between sustainability and maqasid shariah.
3. Research Methodology
Basically this study was conducted using a mixed method approach that focus on three different groups
of respondents. In the first phase, two sets of questionnaires were developed. The first set was focussed on
takaful participants and the other set is prepared for takaful agents. Distributions of 600 questionnaires were
done simultaneously through Takaful agencies. The data were collected In the second phase, interviews were
conducted with takaful operators to collect the information needed for this study. The following sections
describe the methodology used in detail.
First Phase
This phase is basically a preliminary study to help researcher with the data collection for the second
phase. Opinions from the agents and participants are important to construct questions for the interviews with
the operators. In the first phase, the data were collected through self-administered surveys whereby
questionnaires were distributed through takaful agencies and e-mail. Six hundred questionnaires were
distributed through takaful agency managers of which three hundred are for takaful participants and another
three hundred are for takafal agents. The questionnaires were written both in English and Bahasa Malaysia.
It was written in Bahasa Malaysia because it is Malaysia’s official language. The questionnaires were
divided into five sections on a six-page paper. The respondents were assured that their responses would be
confidential and the results would be reported in an aggregate form. The first set of the questionnaires was
prepared for takaful participants. Respondents were asked about their age, gender, educational background,
their takaful policies and their understanding on takaful management and funds as well as their opinion on
governance practices of takaful operators. The second set of the questionnaires was prepared to elicit takaful
agents’, opinion on governance practices of takaful operators in achieving maqasid shariah. Questionnaires
N. Z. Abu et al.
48
were distributed through agency managers. Besides demographic information, respondents were asked on
their knowledge on maqasid shariah as well as their opinion on the current practices of selling takaful
products.
Research Instrument
Several factors were used to measure the opinion of takaful participants and agents towards the issue of
governance of takaful operators in achieving maqasid shariah. Based on the literature review two set of
questionnaires were developed. Both questionnaires were designed to obtain data from takaful participants
and takaful agents pertaining to the following:
Section 1 For the demographics the various variables such as: age, gender, education
level, types of employment, types of policy, reasons to participate in takaful and
their experience on the service of takaful providers, were asked and they need to
tick the respective boxes.
Section 2 For perception of corporate governance, based on the guiding principles on
governance for takaful undertakings issued by Islamic Financial Services Board
(IFSB), five attributes of corporate governance were used in the questionnaires
which are Governance Framework, Ethics, Rights and Obligations of
Policyholders, Transparency and Disclosure and Sustainability. Respondents
were asked to indicate the extent to which these statements are important to
them on a scale from 1 being strongly disagree to 5 being strongly agree on the
5 point Likert Scale.
Section 3 For religiosity commitment towards Shariah, a 5 point Likert Scale from 1
being strongly disagreed to 5 being strongly agreed were used. Five dimensions;
ideology, ritualistic, intellectual, consequential and experimental was developed
based on an Islamic Religiosity index (Ateeq-ur-Rehman and Shabbir, M.S.
(2010)).
Section 4 For MaqasidShariah, three shariah objectives; Educating Individual,
Establishing Justice and Promotion of Public Interest (Maslahah) were used
(Mustafa and Taib, 2009). Respondents were asked to indicate the extent to
which these statements are important to them on a scale from 1 being strongly
disagree to 5 being strongly agree on the 5 point Likert Scale.
Section 5 For Shariah Compliance, a 5 point Likert Scale from 1 being strongly disagree
to 5 being strongly agree were used to understand respondents' perception on
the practices of Takaful Operators in upholding the Shariah rules and
regulations.
Method of Data Analysis
Various statistical techniques were used to analyze the data collected. The data were processed using
the Statistical Package for the Social Science (SPSS Version 18.0) software and SmartPLS, a software
application for modeling of structural equation models (SEM). The statistical techniques that were used in
the study are as follows.
Factor Analysis
Factor Analysis was performed on the responses to reduce a vast number of variables to a meaningful,
interpretable and manageable set of factors (Sekaran, 2003). By one rule of thumb in confirmatory factor
analysis, loadings should be .7 or higher to confirm that independent variables identified a priori are
represented by a particular factor, on the rationale that the .7 level corresponds to about half of the variance
in the indicator being explained by the factor (http://en.wikipedia.org/wiki/Factor_analysis).
International Journal of Financial Economics
49
Reliability and Validity Analyses
Reliability is concerned with estimates of the degree to which a measurement is free of random or
unstable error (Cooper and Schindler, 2011). A measure is reliable to the degree that it supplies consistent
results. To determine reliability based on internal consistency, Cronbach’s coefficient alpha is used because
it provides a good estimate of reliability in most situations. Measures in this study were judged to be
reliable if Cronbach’s coefficient alpha was 0.70 or greater (Nunnally, 1978).
Validity refers to the extent to which a test measures what we actually wish to measure. There are
several types of validity and various methods used to assess it. For instance, content validity of a measuring
instrument is the extent to which it provides adequate coverage of the topic under study (Cooper and
Schindler, 2011). To address content validity in this study, a thorough review of available literature on
corporate governance for both takaful and insurance was conducted in an attempt to discover the dimensions
of the construct.
T-Test
T-test was used to compare the degree of importance of each criterion. A two-tailed t-test was used to
compare the means of each criterion in order to rank the degree of importance of each criterion. A level of
significance (p>0.05) was used in the t-test.
4. Results
Takaful Agents
Although 300 questionnaires were distributed , only one hundred and sixty-one respondents returned the
questionnaires, giving a response rate of 54 percent. As shown in Table 7, out of one hundred and sixty-one
respondents, eighty-two were males and the balance seventy-nine respondents were females. Most of the
respondents were between the age oftwenty to twenty-nine years old (44.7 percent). In terms of the types of
policies they are selling, majority (65.8 percent) is selling more than one takaful products, follows by family
takaful 38 percent and medical takaful (9 percent). On the level of education, most of the agents (74.5
percent) have at least a diploma. Table 8 shows the frequency and percentage of respondent’s profile. Most
of the respondents (54.7 percent) are Prudential BSN agents, followed by Takaful Ikhlas (28 percent) and
Etiqa Takaful (16.1 percent). As shown in Appendix 2, around 75 percent of the respondents are selling
takaful products only, whereas the balance are selling both takaful and insurance products. In term of their
knowledge on who owns the takaful funds, almost 50 percent of the agents believe that both policyholders
and operators are the fund owner, whereas 37 percent think that it belongs to the policyholders. Just like the
participants, most of the agents (77 percents) believe that takaful operators should manage the fund.
Factor Analysis and Reliability Test
Factor analysis was also performed on all dimensions for takaful agents. By using Smart Pls Software,
all dimensions for each variable was analyzed and the lowest factor will be deleted. The process of deleting
the dimension will continue until all factor loading are more than 0.7 for each variable. For governance
framework, initially there are twelve items named as GF1 to GF12. However, after the analysis seven items
that have a factor loading of more than 0.7, are retained as shown in Figure 4. For ethics, out of seven items,
four items remained as their factor loadings is more than 0.7. For rights and obligations, three items were
deleted due to low factor loading. For transparency and disclosure, only one item was deleted out of six items
and for sustainability all items were remained due to their high factor loadings. Besides the dependent
variables, as shown in Figure 4, factor analysis was also conducted on the moderating factors and
independent variables. For religiosity, all 15 items were retained since their factor loadings are above 0.7. All
items under educating individual and promotion of public interest were accepted but for establishing justice,
only three out of four items were accepted.
Assessment of Goodness of Measures
N. Z. Abu et al.
50
The same process has been conducted as the respondents for takaful participants. Before testing the
hypotheses, convergent validity, discriminant validity and reliability measures, the goodness of the items
needs to be assessed. Table 9 shows the loading of all items that exceeded the recommended value of 0.5
(Hair et al. 2010).The AVE measures the variance captured by the indicators relative to measurement error,
and it should be greater than 0.5 to justify using a construct (Barclay et al. 1995). From Table 9, AVE is in
the range of 0.6325 and 0.8699. In addition, the Composite Reliability values for all constructs are above 0.7
as suggested by Fornell and Larcker (1981), thus indicating an adequate level of convergent validity.
Discriminant validity refers to the degree to which items measure different concepts. It can be assessed by
examining whether items were loaded strongly on their own constructs in the model (Maria and Yusniza,
2012). According to Ramayah et al. 2011, the AVE shared between each construct and it measures should be
greater than the variance shared between the construct and other constructs. Table 9 shows the correlations
for each construct are less than the square root of the AVE of the constructs, thus indicating adequate
discriminant validity. Cronbach’s alpha coefficient and Composite Reliability (CR) are used to assess the
inter-item consistency of the measurement model. From Table 9 all alpha values are above 0.6 as suggested
by Nunnally and Bernstein (1994) and CR value are also more than 0.7, acceptable by Fornell and Larcker
(1981). Thus, it can be concluded that the measurement model is valid and reliable.
Hypotheses Tests
This section reports the results of the hypothesis testing procedures and the findings of the study.
Basically, the hypotheses were tested to identify whether there are relationship between corporate
governance practices and maqasid shariah for agents.T-test was carried to test the hypotheses.
Table 11: The Result of the structural model
Hypothesis Beta Sample Standard Standard T-value Decision
Mean Deviation Error
H1a GF -> EI -0.0711 -0.0709 0.1255 0.1255 0.5665 Not Supported
H1b GF -> EJ 0.014 0.0203 0.1406 0.1406 0.0995 Not Supported
H1c GF -> PROMO 0.063 0.0671 0.1155 0.1155 0.5455 Not Supported
H2a E -> EI 0.2468 0.2527 0.1287 0.1287 1.9174 Supported
H2b E -> EJ 0.2348 0.2419 0.1579 0.1579 1.4866 Not Supported
H2c E -> PROMO 0.0549 0.0607 0.1265 0.1265 0.4345 Not Supported
H3a TRANSP -> EI 0.0703 0.0645 0.1469 0.1469 0.4789 Not Supported
H3b TRANSP -> EJ 0.0106 0.0044 0.1762 0.1762 0.0601 Not Supported
H3c TRANSP -> PROMO 0.2182 0.2318 0.1441 0.1441 1.5145 Not Supported
H4a RO -> EI 0.0699 0.0713 0.1168 0.1168 0.5986 Not Supported
H4b RO -> EJ 0.0153 0.0129 0.1108 0.1108 0.1383 Not Supported
H4c RO -> PROMO 0.1388 0.1357 0.1324 0.1324 1.0484 Not Supported
H5a SUSTAIN -> EI -0.0215 -0.0136 0.1098 0.1098 0.1957 Not Supported
H5b SUSTAIN -> EJ -0.0309 -0.0269 0.1261 0.1261 0.2448 Not Supported
H5c SUSTAIN -> PROMO -0.0938 -0.1048 0.0893 0.0893 1.0502 Not Supported
H6 GF -> RELIGIOSITY 0.1245 0.1361 0.1053 0.1053 1.1831 Not Supported
H7 E -> RELIGIOSITY 0.0755 0.0797 0.1033 0.1033 0.7311 Not Supported
H8 TRANSP -> RELIGIOSITY 0.2302 0.2319 0.1088 0.1088 2.1156 Supported
H9 RO -> RELIGIOSITY 0.2328 0.2289 0.0944 0.0944 2.4672 Supported
H10 SUSTAIN -> RELIGIOSITY 0.0639 0.0526 0.1016 0.1016 0.6289 Not Supported
RELIGIOSITY -> EI 0.441 0.435 0.0913 0.0913 4.832 Supported
RELIGIOSITY -> EJ 0.4905 0.4881 0.1 0.1 4.9059 Supported
RELIGIOSITY -> PROMO 0.4263 0.4184 0.0856 0.0856 4.9779 Supported
International Journal of Financial Economics
51
Ten hypotheses were developed to test whether there are significant relationship between corporate
governance practices and maqasid Shariah for agents. The factors that were used in this study are
governance framework, ethics, rights and obligations, transparency and disclosure and sustainability. Table
9 and Figure 5 provides results of the test and the level of significance for the analysis of the five hypotheses.
The null hypotheses will be rejected if the level of significance is less than or equal to 1.96.
From the hypotheses that have been developed, we will reject the null hypotheses if the level of
significance is more than or equal to 1.96 or p<0.05. The result in Table 11 gives a t-value of 2.5851 from
relationship sustain to educating individual, t-value of 2.7882 from relationship sustainability of establishing
justice and t-value of 2.8005 from relationship sustainability to promotion of public interest. Only the
moderating factor religiosity gives t-value that exceeds 1.96 which support the hypothesis. In addition, all the
relationship between religiosity and maqasid shariah variables, which are educating individuals, establishing
justice and promotion of public interest give t-value of more than 1.96, thus supporting the hypothesis. It
shows that religiosity has an impact on the relationship between governance practices and maqasid shariah.
Second Phase: Interview
The interviews were conducted with the officers of the respective takaful companies. Although there are
twelve takaful operators in Malaysia, we only manage to conduct an interview with four operators as the
others did not provide us any feedback. Based on some of the feedback given by the agents and participants,
guided questions were developed for the interviews that focus on the operator’s current practices and issues
on shariah and governance. The interviews were recorded and later transcribe in order to process the
information. The operators that have been participating in the research are listed as per Table 2.
Table 2: List of Operators
No Takaful Operator Department/ Area
1 HSBC Takaful Shariah
2 Etiqa Takaful Shariah
3 Great Eastern Takaful Shariah
4 AIA Takaful Marketing
Shariah is an over reaching principle in Islamic Finance hence a proper governance is needed to provide
assurance on Shariah compliance and confidence in takaful operation. Three participating takaful officers
from the Shariah department ( HSBC Takaful, Etiqa Takaful and Great Eastern) were interviewed.The
interview questions were focused on Shariah issues and practices thus answering questions on :
1. Duties & responsibilities of board of directors and senior management
2. Takaful operator's activities, practices, process and functions.
3. Duties & responsibilities of the Shariah Advisory Council & Shariah Committee.
4. Fiduciary duties of Takaful operator.
It was found that each company has its own processes in product development, however each process is
scrutinized and governed by a set of policies and rules. The policies and rules are established to govern each
activity and decision making made during the product development process with an objective of developing a
product that meets the shariah requirements.
5. Conclusion
The purpose of this study is to investigate whether takaful providers in Malaysia are applying the
governance policy framework, and secondly to investigate whether they are upholding the maqasid of shariah
in their transactions and operations. Views from participants and agents were obtained through
questionnaires and it was found that both viewed takaful operators as handling their activities in accordance
to maqasid of shariah.
N. Z. Abu et al.
52
In support of this, religiosity has been used as moderator to test the relationship. It shows that religiosity
has an impact on the relationship between governance practices and maqasid shariah. It provides empirical
evidence that takaful operators are following the Corporate Governance Guideline as introduced by IFIs in its
activities. This Guideline was established to ensure that takaful operators are conducting their business in
accordance to maqasid of shariah.
An investigation was done through interviews to understand takaful operators practices and activities.
The interview is aimed to understand whether takaful operator’s practices are in accordance with Shariah.
SGF was used as a guideline to understand this. Even though SGF is not compulsory and act as a guiding
principle, it did provide a good basis that can be used by takaful operators in ensuring that their operations is
shariah compliant. SGF aims at providing IFIS with organizational arrangements through which IFIS can
ensure that there is an effective independent overseeing of Shariah compliance over takaful structures and
processes. The interview shows that each takaful operator has its own processes, policies and procedures, to
ensure that their activities are conforming to Shariah. The basis of these policies are established against the
SGF and each process is done with the aim to achieve the maqasid of shariah.
One of the major findings in this research is that, it was found that there is a loose relationship between
takaful operators and their agent. In practice, takaful operators places their trust on their agencies to hire and
to monitor their agents. However these agents will actually represent the takaful operators and not the
agencies. Agencies being profit oriented companies will focus mainly on profit, hence monitoring done by
the agency managers are only on number of sales. As a consequence, takaful operators will be burdened with
issues such as misselling by agents. Except for Great Eastern Takaful, they have governance committees that
take care of the customer’s interest. These committees basically looks at agents’ activities and actions to
avoid misselling and other misconduct. Takaful agents are required to comply with the specific minimum
standard of service set by the Regulator and the Takaful Association. The minimum standard of service
ensures that takaful agents conduct their business with a high degree of responsibility and professionalism. In
this respect Takaful Basic Examination (TBE) is designed as a compulsory entry requirement for all those
who intend to be registered as a takaful agent with Malaysian Takaful Association (MTA). However the
examination is only a one time test; it is not an assurance that knowledge has been fully comprehended. It
was also found that most takaful operators only provide training to agents and agencies when they have a
new product. Other than that takaful operators trusted the agencies to observe the high degree responsibilities
and professionalism in representing them and their products. Conformity with Shariah in every activity and
transaction is indeed pertinent to a takaful operator. Hence in this respect a sound governance or rule must be
established that strengthen the agent, agency and takaful operator relationships. Such action benefits
stakeholders in protecting their interest hence achieving maqasid of shariah.
This study however has its limitation. The lack of participation from takaful operators in sharing their
information has given a number of challenges. The non availability of agents’ names and mailing addresses
have forced the questionnaires to be sent to the insurance company’s regional center and agency manager
throughout Peninsular Malaysia.
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Appendix 1: Takaful Participants
Reason for Choosing Takaful
Frequency Percent
Religious 87 58.8
Good Service 49 33.1
Others 5 3.4
More tha one 7 4.7
Total 148 100.0
Experience
Frequency Percent Valid Percent Cumulative
Percent
Good 94 63.5 63.5 63.5
Fair 50 33.8 33.8 97.3
Poor 4 2.7 2.7 100.0
Total 148 100.0 100.0
FundOwner
Frequency Percent Valid Percent Cumulative
Percent
Operators 30 20.3 20.3 20.3
Policyholdes 47 31.8 31.8 52.0
Both 71 48.0 48.0 100.0
Total 148 100.0 100.0
Management of Takaful
Frequency Percent
Operators 66 44.6
Policyholders 20 13.5
Both 62 41.9
Total 148 100.0
N. Z. Abu et al.
56
Appendix 2: Takaful Agents
Promote
Frequency Percent Valid
Percent
Cumulative
Percent
Valid
Takaful only 120 74.5 74.5 74.5
Both 41 25.5 25.5 100.0
Total 161 100.0 100.0
Fund Owner
Frequency Percent Valid Percent Cumulative
Percent
Valid
Operators 21 13.0 13.0 13.0
Policyholders 60 37.3 37.3 50.3
Both 80 49.7 49.7 100.0
Total 161 100.0 100.0
Management
Frequency Percent Valid Percent Cumulative
Percent
Valid
Operators 124 77.0 77.0 77.0
Both 37 23.0 23.0 100.0
Total 161 100.0 100.0