The Malaysian Takaful (Islamic insurance) industry is currently experiencing positive growth, albeit in a challenging economic situation due to COVID-19. According to the Malaysian Takaful Association (MTA), among the initiatives that the industry has implemented since 2020 until recently are the injection of RM8 Millions of COVID-19 Test Fund by the MTA, the Life Insurance Association of Malaysia (LIAM) and the Persatuan Insurans Am Malaysia. The MTA and Islamic Banking and Finance Institute Malaysia have also conducted a virtual Takaful Basic Examination for Takaful agents and a 90-day moratorium of premium/contribution payment, which was initiated by the MTA and LIAM.
As the industry regulator, Bank Negara Malaysia (BNM) is one of the important harbingers of change in the industry. One of the significant legislation under the purview of BNM that came into force in 2013 was the Islamic Financial Services Act (IFSA) 2013. In 2015, the Malaysian government replaced Sales and Service Tax regimes with the goods and services tax (GST). Hence, there are significant findings to be shared with other researchers with regards to the GST, even though it took only two years of its implementation in Malaysia. Several possible reasons why the government imposed the GST, which including to reduce the fiscal deficit, government debts, administrative and compliance costs, price distortions, operating costs and most importantly, sustaining transparency and reducing uncertainty in the tax system. However, among the negative side of GST was most companies have to bear the increase in their internal cost for tax computation and planning. In the context of takaful, because of the unclear direction of GST and how it would affect the customers, the public at that time was worried that takaful operators would increase the product price (contribution), which have a similar effect on the consumers’ product due to the GST.
As a result, it has slightly slowed down the takaful business for the short term due to the market interpretation. To ensure the industry would remain its momentum to growth in the GST era, MTA has released an announcement on the effect of GST on the takaful products and the customers. Assumedly, the GST might not affect the price of the Takaful products as well as the contribution because the amount of GST will be captivated by the operators. The fees and charges imposed on any takaful schemes are subjected to GST, such as fees for certification, fund management, transferring funds and contribution payment. On the operators’ side, GST has affected their operation costs to adjust to a new system and train or employ new staff for GST purposes. This paper, therefore, is conducted to observe the effect of GST on the performance of takaful operators by measuring and comparing the efficiency of individual takaful operators for a period before and after the GST is implemented.
The main purpose of this study is to evaluate the performance of takaful operators in Malaysia. The study applied the data envelopment analysis (DEA) technique and the ratio analysis, using secondary data available on Malaysian Takaful operators’ annual reports.
Charnes and Cooper, proposed CRS (Constant Rate to Scale) model. The CRS model mainly measures the constant returns to scale, which presents overall technical efficiency. This study has aimed to evaluate the performance of takaful operators over the study period. Therefore, the CRS model is chosen to achieve the objective of this study. More so, paired t-test was applied to identify the significant differences in efficiency and performances of takaful operators. By categorising before and after GST implementation, this study conducted mean differences analysis to find the statistical effect on the differences in performance before and after the GST is implemented by the Malaysian government.
The appropriate selection of inputs and outputs of financial institutions, especially the insurance industry, is challenging and critical. Past studies have used different inputs and outputs to measure the efficiency and productivity of insurance companies. They were mainly provided two services: risk management and financial intermediaries. Thus, an intermediate approach is applied to select inputs and outputs for this study. Labor (salaries and wages), capital and business services are generally referred to as inputs to measure efficiency and equity capital is being used as input. GST implementation costs the operators additional staff and software to maintain it; thus, the salaries and wages have increased simultaneously. Insurers must maintain equity capital to settle the claims payment for policyholders if there is any loss incurred. This study includes three inputs labour (X1), equity capital (X2) and business services (X3).
This study aims to evaluate the changes in performance of the takaful industry before and after the GST implementation in Malaysia. The ratio analysis and DEA method were used to achieve the objective of this study, while paired t-test was applied to find the significant mean difference before and after. Both analyses found the performance of the takaful industry is less efficient in the years 2015 and 2016 in the DEA analysis by observing the efficient scale of weights. The study found that the GST implementation insignificantly impacted the takaful industry’s efficiency. However, the DEA analysis showed a reduction in 2014 compared with 2013 in the absence of GST. But compared with 2015 and 2016, the percentage of difference in 2014 from 2013 was significantly less. The changes in the efficiency scale of the takaful industry were significant during the 2015–2016-year end, which showed the remarkable worse efficiency of the takaful industry.
Findings can be useful for policymakers to identify the shortcomings of GST or new tax implementation on new and emerging industries. So, the policymakers and central banks may implement necessary initiatives to support the emerging industry. Because the Malaysian government promotes the takaful industry and Islamic banking and finance in the competitive market, takaful operators may be exempted from the current SST. Takaful operators may find these findings to enhance their operational activities efficiently to improve performance. By improvising current strategies, they may improve their business performances by complying with and adjusting existing or future government-imposed taxes. Even though GST seems not relevant anymore as the government has replaced it with SST, the trick is still the same as it is a kind of tax or costs incurred by the takaful operators in operating their business. To this extent, takaful managers may identify their efficient level in managerial aspects and optimal scale of resources. Finally, the findings of this study will contribute to knowledge and pin the basis for future studies in other countries implementing the tax policy in sharia financial industry.
Author: Eko Fajar Cahyono,SE,ME
Details of our research can be accessed here:
https://www.emerald.com/insight/content/doi/10.1108/JIABR-06-2020-0193/full/html