© 2014 Research Academy of Social Sciences

http://www.rassweb.com 41

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.

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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.

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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

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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:

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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

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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).

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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