Finance

The growth of Islamic insurance companies or takaful companies have gained academic interest especially as it relates to corporate governance. In light of the scandals and crises that global financial corporations and institutions have faced, there has been renewed pressure on governments to control and regulate actions and behaviour of corporations and their executives to prevent them from committing bribery, fraud, and dishonest conduct. Consequently, this has highlighted the study of non-conventional corporate governance models such as those of takaful companies. Islamic financial institutions operate differently from conventional Western institutions because they are guided by ethical principles embodied in the Shariah law. The guiding principles for doing business in an Islamic way are dissimilar with the conventional model. The goals of conventional financing are also different from Islamic financing. This thesis makes an in-depth examination of the corporate governance models of Islamic insurance companies and seeks to describe their corporate structure, principles, practices and corporate performance. Proposed is a descriptive quantitative research design focusing on four major takaful companies in Saudia Arabia.

The recent global financial crisis highlighted cases of corruption and corporate fraud committed by companies all over the world. Some of the most widely publicised include the Lehman Brothers, Enron, and American International Group (AIG) (Ratnatunga and Ariff 2005). Criticism also mounted as companies gave out exaggerated bonuses CEOs despite their involvement in corporate scandals. Revelations of fraud, bribery, dishonesty, and gross ethical violations indicated the lack of supervisory control within organisations. Governments responded to the public clamor for accountability and good corporate governance by implementing regulatory tools to monitor financial activities of corporations. In the United States, the Sarbanes-Oxley Act was enforced in 2002 to redeem what was perceived as governments inability to hold corporations accountable for fraudulent activity and corporate wrongdoing (Allen and Zhao 2007). These events have not only transformed how corporations would behave but more importantly, it challenged existing corporate governance models and shifted the interest to alternative models of corporate governance.

The Islamic economic system governs banking and financial institutions operating in the Arab world. Islamic financing radically contrasts from conventional Western or neoclassical financing. Moreover, Islamic concepts on corporate governance also differs greatly with conventional types because it incorporates Shariah principles that focus on equity participation, risk and profit-and-loss sharing arrangements from the basis of Islamic financing (Suleiman 2000, n.p.). Literature on corporate governance of Islamic financial institutions such as Islamic insurance companies or takaful are wanting. This thesis aims to contribute to literature by investing the corporate governance models of four Islamic insurance companies in Saudi Arabia.

Background
Islamic insurance or takaful is a fast-growing global industry. As of 2006, Morgan Stanley estimated that it was a USD2billion industry growing at a rate of 2030 per annum (Morgan Stanley 2009). This figure is estimate against a USD3.7trillion global insurance premium. Globally, there exists more than 250 takaful companies, primarily in the Arab region and in Malaysia.

Compared to conventional insurance, takaful represents more than just a financial arrangement but as an ethical system which embodies principles of mutual cooperation and cooperative risk-sharing. The three main differences between conventional insurance and takaful are 1) First, takaful is characterised by an absolute system of ethics patterned after Shariah laws and in conformity with the will of Allah 2) Second, instead of wealth maximisation, the main driver behind takaful are piety, brotherhood or mutual assistance, charity, mutual guarantee, and self-sustainability 3) Lastly, a Sharia Advisory Committee is appointed to audit and monitor takaful operations (Fisher and Taylor 2000).

Moreover, takaful operations follow three business models 1) the non-profit model 2) Al mudharaba model and 3) Al wakala model. Belonging to the nonprofit model are takaful operating at non-profit terms and geared at providing socio-economic programs for the poor and marginalised sectors. An example is Sudans Al Sheikhan Takaful Company which uses tabarru or donations given by participants to underprivileged members of society. Takaful using the Al mudharaba model uses profit sharing among its participants while the takaful operator gets a share in the operating surplus for his efficient underwriting on the participants behalf. The Al wakala model uses a cooperative risk-sharing scheme but instead gives a service fee or performance management to the takaful operator in place of a share in the operating surplus (Fisher and Taylor 2000).

Methods
Proposed is a descriptive quantitative study which aims to investigate the corporate governance models of four Islamic insurance companies in Saudi Arabia. Selected as units of analyses for this study include the following insurance companies
Islamic Arab Insurance Company
Allied Cooperative Insurance Group
BUPA Arabia
Gulf Union Cooperative Insurance Company
Structured interview questionnaires will be distributed to senior executives of the four insurance companies. The interview questionnaire will be developed by the researcher and will focus on the following areas in corporate governance
Board Composition
Executive Compensations
Managerial Structure or Organisation
Business Model Used
Transparency, Monitoring and Regulation
Corporate Principles
Corporate Performance

Measures on corporate performance will include return on assets (ROA), debt ratio (DR), market value of equity (MVE), profit margin (PM), cost of goods sold ratio (CGS), dividend payout ratio (DVP) and audit opinion (AUOP) (Ragothaman and Gollakota 2009). Above-mentioned measures will be obtained by the researcher from company financial records.

Predicted Results
After data will be analyzed and interpreted, a clear description of the corporate governance models that takaful companies in Saudi Arabia will be established. This will include a description of the board composition, compensation of its executives, the business model used, managerial structure, mechanisms for transparency and audit and the companys corporate performance.