Takaful Malaysia May 2, 2007 Shari’a Quality Rating AA (SQR)

Background

Syarikat Takaful Malaysia Berhad (Takaful Malaysia) was incorporated in November 1984 and commenced operations in July 1985. The establishment of Takaful Malaysia was based on the recommendation of a Task Force on the Study for the Establishment of an Islamic Insurance Company in Malaysia set up by the Government of Malaysia in 1981. Takaful Malaysia started with an authorized capital of RM500 million and a paid-up capital of RM10 million. It was subsequently transformed into a public limited company in July 1996, followed by listing of its shares on the main board of Bursa Malaysia Securities Berhad. The capital was then raised to RM55 million. The capital structure since then has been further enhanced as a result of a restructuring exercise at the end of 2003, resulting in paid-up share capital to rise to RM156.127 million. Takaful Malaysia’s business model is based on the requirements and practices of Shari’a as pronounced in the report of the Task Force. In essence, it upholds the virtues of cooperation, mutuality, solidarity as embodied in the concept of Takaful and the profit sharing principle of Mudharaba. Bank Islam Malaysia Holdings Berhad (BIMB Holdings) is the controlling shareholder with a 69.33% stake in Takaful Malaysia. The BIMB Holdings Group has been the catalyst in actively developing the Islamic financial services industry. The other shareholders are Employee Provident Fund Board (5.17%) and Islamic Development Bank (4.57%) among other small shareholders. Takaful Malaysia’s vision and mission, which are the basis of its operations, are focused on the principles of Shari’a with the primary objective to provide comprehensive Takaful facilities and services to the Muslims and all Malaysians. Takaful Malaysia’s corporate objectives include providing high quality service for both Family Takaful and General Takaful to the participants; attaining profitability sufficient to support the growth of Takaful Malaysia; continuously encouraging a dynamic management; uplifting and developing a motivated work force with responsible work ethics; and striving to protect the interests of the participants and shareholders. Reflecting its principal activities, Takaful Malaysia manages the Family Takaful Fund under the Family Takaful Business, and manages the General Takaful Fund under the General Takaful Business. These Takaful funds are kept separate from the Shareholders’ Fund, which was originally funded wholly by the paid-up capital. Takaful Malaysia employs 1,761 staff consisting of 582 executives, 713 clerks and non-clerks and 466 special executives in its 124 branches. Sources of income are profits from the investment of its Shareholders’ Fund and its share of profits from the management of both the Family Takaful Business and the General Takaful Business in accordance with the profit-sharing agreement of Mudharaba. Takaful Malaysia’s Board of Directors (BoD) comprises of six members, all of them Malaysian citizens having high education and many years of relevant experience in banking and insurance. A detailed profile can be accessed in the Annex to this report.

Analysts:

Fatima AlAlawi fatima.alalawi@iirating.com

+97317211606

Ali Abdulaal ali.abdulaal@iirating.com

+97317211606

The BoD holds monthly scheduled meetings with additional meetings convened as necessary. The BoD delegates certain responsibilities to five Board Committees, namely Audit Committee, Nomination Committee, Remuneration Committee, Risk Management and Compliance Committee; and Employees’ Share Option Scheme (ESOS) Committee. The committees’ memberships are based on Directors’ focus and experience as well as their ability to add value to the committee. Starting in 2006, Takaful Malaysia initiated annual assessment and performance reviews for these committees. The Articles of Association provide for all Directors and the CEO to submit themselves for re-election at least every three years in compliance with Bursa Malaysia Listing Requirements. Takaful Malaysia’s Management Committee comprises of: • Mohamed Hassan Md Kamil, Group Managing Director • Mawardy Edi, Chief Operations Officer • Azian Kassim, Chief Investment Officer • Muhammad Anjar Kuncoro, Chief Information Officer • Ahmad Kassim, Chief Marketing Officer • Nazrul Hisham Abdul Hamid, Chief Internal Auditor • Afidah Mohd Ghazali, Chief Financial Officer • Balilah Hassan, General Manager-Human Resources Shari’a Evaluation Shari’a Committee Underlining the importance of complying with the Religion of Islam, the Memorandum and Articles of Association of Takaful Malaysia preface that all businesses of the company will be transacted in accordance with Islamic principles, rules and practices. For this, Takaful Malaysia has set up a religious supervisory council called the Shari’a Advisory Body (SAB), consisting of Muslim religious scholars from Malaysia, to advise the company on the operations of its Takaful business in order to ensure that they do not involve any element which is not approved by the religion of Islam. The SAB was established at inception in 1984 as required by the Takaful Act of 1984. The SAB is appointed by Takaful Malaysia’s BoD with approval from Bank Negara Malaysia, the Central Bank of Malaysia, as required by its guidelines on the governance of Shari’a Committee for Islamic financial institutions. In its guidelines, Bank Negara Malaysia requires the Shari’a Body to have a minimum of three members. The SAB consists of four members with diverse and advanced experience and background in Shari’a studies and work. The members of this SAB are the following: • Y. Bhg. Ustaz Mohd. Bakir B. Haji Mansor: Aged 69,

Malaysian citizen, Chairman of the Shari’a Advisory Body. and a member of the Shari’a Advisory Body since July 2002. He obtained the Shahadah Ulya from Kolej Islam Malaya in 1965. He started as a teacher at Madrasah Mashhoor Islamiyah in 1967 and worked there for three years. He then served as information officer at National Council for Islamic Religious Affairs from 1971 to 1973 and then at Prime Minister’s Department for more than 10 years. He then served at Bank Islam Malaysia as Shari’a Coordinator from

1984 to 2001. He is a Research Fellow at Islamic Banking and Finance Institute Malaysia.

• Y. BHG. Prof. Madya Dr. Ahmad Shahbari @ Sobri B.

Salamon: Aged 63, Malaysian citizen, member of the Shari’a Advisory Body since July 1985. Graduated with Bachelor of Arts in Shari’a from the University of Al-Azhar, Egypt in 1970, a Master of Arts in International Studies from Fairleigh Dickenson University, USA in 1973 and a Doctor of Philosophy in History from New York University, USA in 1979. He started his career as a Shari’a Lecturer at University of Kebangsaan of Malaysia in 1978 and then for two years at Islamic University Malaysia. In 1982, he served as the Acting Head of Shari’a Department. He produced twelve books in educational, economy, Islamic banking and Islamic law.

• Y. Bhg. Datuk Abdul Hamid B. Said: Aged 67, Malaysian

citizen and a member of the Shari’a Advisory Body since August 2005. He obtained a Barrister-At-Law from the Council of Legal Education, England in 1980. After completing Malacaa High School in 1957, he underwent training at Malayan Teachers College in England for one year. In 1961 he started as a Lecturer in Teachers Training College, Brunei. In 1973 he joined Kementerian Kebudayaan as Sports Officer. He then was appointed as the Federal Council of Attorney General Office and then became a Law Practitioner in High Court of Malaya for fourteen years. Then in 1998, he was appointed as Judicial Commissioner in Malacca High Court and he was transferred in 2000 to Kuala Lumpur High Court as a Judge in Malaya High Court. He retired in 2003. He was the Academic Senior Fellow of Civil Procedure in Intentional Islamic University Malaysia from 2003 until July 2006.

• Y. Bhg. Prof. Madya Dr. Ashraf B. Md Hashim: Aged 37,

Malaysian citizen and a member of the Shari’a Advisory Body since August 2005. He graduated with a Bachelor of Arts in Shari’a from Islamic University Madinah, KSA in 1991 and a Master of Arts in Fiqh and Usul Fiqh from University of Jordan in 1995. He then obtained PhD in Shari’a from University of Birmingham, UK in 1999. He started his career at the International Islamic University in 1991 as an Assistant Lecturer and then became a Lecturer of Islamic Revealed Knowledge Department and then Assistant Professor at Fiqh and Usul Department in 1999. In 2003, he was appointed as Associate Professor in Fiqh and Usul Department until today.

The SAB is appointed for a period of two years. However, there is no restriction on the number of times a member can be nominated to the SAB. The Chairman of the SAB is elected for one year. The main duties and responsibilities of SAB include ensuring operations are Shari’a compliant; advising the board and related parties on Shari’a matters of operations; endorsing Shari’a compliance manuals and documentation; and providing written Shari’a opinion. According the Takaful Malaysia’s Shari’a Compliance Manual, the SAB must have at least six meetings in a year. It spends about three to five hours in each meeting. The agenda of the SAB meetings are detailed, comprehensive and extensive. The agenda papers are circulated to the members of the SAB in

2 Islamic International Rating Agency, May 2007 Shari’a Quality Rating: Takaful Malaysia

advance. All matters requiring Shari’a opinion are presented to the SAB for discussion and decision. Decisions taken by the management in between the meetings of SAB are also presented to the SAB for endorsement of the decisions. The minutes of the meetings are prepared in highly professional manner incorporating a thorough discussion on the issues presented and the logic/judgment and reasons for the decision taken by the SAB. The decisions made by SAB are based on the principle of Shari’a and in accordance with the Shafie School of law. But in certain issue, SAB refers to opinions in other Schools of Islamic Law which is more applicable. These decisions are taken by Syura, consensus or by majority. If the SAB cannot come to an agreement, the issue must be referred to Bank Negara Malaysia. However, there has been no need to refer anything to Bank Negara Malaysia up to now. The decisions of the SAB are considered to be that of the SAB and not of the individual members. No dissenting opinions are recorded. The SAB does not interact directly nor meet formally with the members of the BoD. However, they meet informally. They have not encountered any differences with the BoD so far. The minutes of Shari’a Committee meetings are presented to the BoD. The SAB is not involved in daily operations. It interacts with the management to give advice and Shari’a decisions regarding Shari’a issues. According to Chairman of the SAB, the relationship between management and SAB is very close. All product development is with consultation of the Shari’a Department. A comprehensive presentation is made to SAB of each product for their approval. The SAB’s annual report and review endorses and confirms that the operations of Takaful Malaysia are in accordance with Shari’a requirements and it is included in the Annual Report. Shari’a Internal Control The Shari’a Department issued a “Shari’a Compliance Manual and Shari’a Audit Checklist” in February 2007, incorporating guidelines and procedures for resolving any mistakes and noncompliance discovered in all products/schemes/investments. Before issuance of the manual, resolutions and/or decisions made by the SAB were considered as approved Shari’a control procedures to be followed by Takaful Malaysia. It is important to note that no violations of Shari’a principle have been reported to date. The Shari’a Department together with the Compliance Department acts as Shari’a Control Department. The Shari’a Department also acts as the secretariat for the SAB. There are four employees in the Shari’a Control Department. It is headed by a manager, who reports directly to the Group Managing Director of Takaful Malaysia; in addition it has one deputy manager, an assistant manager and one clerk. All of them are well qualified with relevant Shari’a work experience and educational background. The internal Shari’a control reports are issued on monthly basis. The Shari’a Control Department carries out an assessment on

Shari’a aspects during their audit program or on case-by-case basis as issues are identified. The main recipients of the internal Shari’a control reports are management and audit committee of the BoD. The department also carries out a follow-up on the report with respective departments. The department works closely with the investment department, the underwriting department and Retakaful department to ensure that all activities of the company are Shari’a compliant. The underwriting department refers all proposals to the Shari’a Internal Control Department reporting the principal’s activity, source of income and image of the company. If the activities of the principal consist of both prohibited and non-prohibited income, currently a ratio of 60:40 is applied. The references of the Shari’a Control Department are always made in writing and the response of the Department is always made in writing. The quality of control based on reports of the SAB is excellent. The reports are detailed and descriptive and the SAB’s input and its discussions are profound and complemented with reason and evidence. HR Training and Promotion of Takaful Takaful Malaysia carries sufficient training programs on Takaful within the organization, conducted by the subject matter expert from Takaful Malaysia. The programs include the formation of Takaful companies, Takaful Act 1984, SAB, definition and concept of Takaful, principles of Takaful operations, Takaful business models, differences between Takaful and conventional insurance, and types of Takaful business. The staffs are also sent to training programs on Takaful conducted by the various reputable training institutes/providers locally and internationally. New training approaches and methodologies such as video-based training and e-learning have been introduced. The SAB’s members are also sent to very high level training programs such as the international Shari’a scholar dialogue and 2nd international Shari’a scholar dialogue (Banking and Takaful) organized by the Bank Negara Malaysia, Shari’a expert dialogue (Takaful) organized by Malaysia Takaful Association, international convention on Takaful and Retakaful and the 2nd international convention on Takaful and Retakaful. All Directors have attended the Mandatory Accreditation Program conducted by Bursa Malaysia Training as required by Bursa Malaysia. The Directors continue to attend their training programs and seminars to enhance their skills and knowledge. Newly appointed Directors are also trained internally on corporate governance, leadership, anti-money laundering and assessment of the effectiveness of the BoD. To promote Takaful business, Takaful Malaysia organized training courses in Takaful operations for interested parties, where senior personnel actively participated as trainers.

3 Islamic International Rating Agency, May 2007 Shari’a Quality Rating: Takaful Malaysia

Zakat The distribution of Zakat by Takaful Malaysia is carried out by Zakat Payment Committee according to Shari’a on yearly basis with a clear and intense procedure in approving of Zakat payment for deserving parties as part of a manual of Zakat payment committee. All the allocation and payment of Zakat are done with the supervision and monitored by the Zakat Payment Committee chaired by the SAB chairman and all decisions made are based on Shari’a. The current rate being applied is 2.5775 according to 365 days. As of end of 2006, the amount of Zakat to be paid by Takaful Malaysia is RM2,514,445. Identity and Corporate Image Takaful Malaysia ensures that all activities reflect the Shari’a principles. Among the examples are dress code as prescribed by Shari’a, recitation of “Quran”, “Hadith” and “Doa” every day and providing proper place for praying. The advertising and promotions activities are carried out with the advice and supervision of SAB. All promotional materials such as television, newspaper, outdoor and magazine need to have the SAB approval before going for public. As Takaful Malaysia strives to be the leading Takaful operator, it has committed itself to continuous research and development of its products to become the role model followed by many aspiring Takaful operators as demonstrated in the formation of other Takaful and Retakaful entities. To be in line with the Government’s objectives to promote Islamic Banking and Takaful, thus making the Islamic products and services an integral part of the Malaysian financial system, Takaful Malaysia and Bank Islam Malaysia Berhad lately launched a joint marketing program of Takaful Motor Scheme under the concept of Bancatakaful. The program enables existing and prospective customers of both companies to participate or to renew their Motor Takaful Scheme. Under the Scheme, the customers get to enjoy the same coverage as offered by conventional insurers but at the same time they will also get a cash rebate based on the profit-sharing principle of Mudharaba. The management is strongly committed to upholding the principles of corporate governance and providing the highest quality service, for this, Takaful Malaysia achieved certification of ISO 9001:2000 Quality. In 2004, Takaful Malaysia was awarded “The Best Provider of Takaful Services” by Euromoney, an international financial publication based in London. In 2005, Takaful Malaysia was awarded Superbrand Status 2005 by Superbrands Malaysia. In 2005, Takaful Malaysia also received Best Takaful Provider in 2005 from Islamic Business and Finance Magazine, Dubai. As required under the Listing Requirements of Bursa Malaysia Securities Berhad, the BoD of Takaful Malaysia subscribes and supports the Malaysian Code of Corporate Governance and Best Practices and ensures that they are practiced and observed throughout the group. Takaful Malaysia’s web page is very interactive. Queries regarding business operation are answered by the Customer Service Unit. It includes the quarterly, semi-annual returns and

annual results and information about products and operations. It also has prayer times, being updated on daily basis. Through its commitment to sustain and improve its competitive advantage in the Takaful market, Takaful Malaysia is always upholds and promotes the values such as integrity, customer focus, accountability, respect and entrepreneurship throughout day-to-day practices, behaviors, communication and relationships to translate to a good corporate image and operational excellence. Non-Shari’a Compliant Income Takaful Malaysia is following clear guidelines and procedures related to non-Shari’a gains/income. In principle, whenever any non-Shari’a compliant income arises, it is immediately set aside and not mixed with income from Shari’a compliant investment. There was a case with respect to shares in Highlands and Lowlands Berhad, listed on the main board of Kuala Lumpur Stock Exchange The counter of it was originally Shari’a-approved as classified by Shari’a Advisory Council of Security Commission, but was later reclassified as non-Shari’a approved counter. Under this circumstance, as guided by the guidelines issued by Shari’a Advisory Council of Security Commission the fund manager immediately disposed off the counter and the gain from disposal was seat aside and placed in Qardul Hasan accounts to be channeled to charitable bodies. As mentioned in portfolio management agreement between Takaful Malaysia and the fund managers, if the securities which have been approved by the Securities Commission’s Shari’a Advisory Council (SAC) and bought by the manager for the portfolio are later classified as non-approved securities, the manager shall dispose of the securities in the manner as advised by the SAC. The manager shall also ensure that any profit obtained from the disposal of the non-approved securities, including capital gain, is immediately set aside and not mixed with profit from approved securities. Investments The insurance base funds are invested through modes approved by SAB. For investment products, which are available in the market, Takaful Malaysia relies on the approval granted by the financial institutions’ Shari’a Committees and/or Securities Commission’s Shari’a Committee. Takaful Malaysia follows identical procedures for investment of shareholder’s fund, Family Takaful Fund and General Takaful Fund, such as: • Quoted listed shares and unit trust – only in shares approved

by SAC of Securities Commission, Malaysia; • Fixed income securities – Investment is made (in Islamic

private debt securities) after making a reference to the Shari’a advisor of the originating bank, which have been endorsed by SAC of Securities Commission;

• For investments in high rise commercial buildings, tenants are screened to see if they are Shari’a Compliant. Tenants’ activities, sources of income and their image are obtained and if non-Shari’a compliant portion does not exceed 25%, the proposal may be accepted. The guidelines on Islamic investment in buildings have been obtained;

• Deposits are made only in Islamic banks, licensed Islamic finance companies and Islamic Financial Institutions; and

4 Islamic International Rating Agency, May 2007 Shari’a Quality Rating: Takaful Malaysia

• Takaful Malaysia also participates in syndicate financing such as project finance, car finance and housing finance in proposals initiated by Bank Islam Malaysia. The mode of financing is BBA (Bai Bithman Ajil).

Islamic International Rating Agency, May 2007 Shari’a Quality Rating: Takaful Malaysia

Retakaful is a cost to the Takaful Fund of each General and Family Takaful. This means that the fund will bear part of the risk called “net retention” and re-insurers under Treaty Retakaful Program will bear the other part of the risk. Under-Writing Department (UWD) refers all proposals to Shari’a Control Department. The UWD reports on the principal’s activity, sources of income, image of the company. If the activities of the principal consist of both prohibited and non-prohibited, a ratio of 60:40 is applied. The Takaful company may accept the business of non-prohibited activity and give the other part to another insurance company. Dealing With Surplus and Deficits The company carries out its business under the Mudharaba mode. For General Takaful Fund, Group Takaful Fund and Family Individual Takaful Fund, surpluses from underwritings are shared and distributed to the shareholders and participants. Currently, the ratio of distribution is 60% for shareholders and 40% for participants and is endorsed by the SAB. If the ratio is changed, it is applied to new policy holders only. These ratios are disclosed to the participants in the proposal form.

Mudharaba is calculated every month for general Takaful and paid every month to the eligible Takaful participants by the Mudharaba Unit under the Claim Division and it is counter checked by another person to ensure accuracy.

In case of deficits, shareholder’s fund will give a loan based on the principle of Quard Hasan as imposed by Bank Negara Malaysia. So far Takaful Malaysia has not experienced any deficit in any year of its operations; therefore, we were not provided examples. Reinsurance Retakaful is under a dedicated department at Takaful Malaysia. This Retakaful Department is responsible to arrange all types of Retakaful placements for the General and Family Takaful businesses. All Retakaful placements are subject to Bank Negara Malaysia guidelines and procedures. Priority is given to Retakaful companies, depending on capacity and technical support offered by the company. However, as there are very few Retakaful companies, some business is necessarily given to conventional reinsurance companies. Priority is given to local/offshore companies registered in Malaysia.

For a thorough Shari’a Quality analysis, you can rely on Islamic International Rating Agency’s (IIRA) Shari’a Quality Rating Service. For more information call: +973 17 211 606 or visit our website: www.iirating.com

© Copyright 2007 All of the information contained herein is obtained by IIRA from sources believed to be accurate and reliable. IIRA does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided “as is” without any representation or warranty of any kind. IIRA’s rating is an opinion and not a warranty of a rated entity’s current or future ability to meet contractual obligations, nor it is a recommendation to buy, sell or hold any security. Reproduction or distribution of Shari’a Quality Service without the explicit consent of IIRA is strictly prohibited. To reprint, translate, or quote IIRA’s publications, contact: IIRA, Al-Zamil Tower, 7th Floor, Govt. Avenue, Manama, Kingdom of Bahrain; Tel: +973 17 211 606 Fax: +973 17 211 605

5

Annex 1 – Board of Directors

• Y. Bhg. Tan Sri Dr. Hadenan A. Jalil: Dr. Jalil graduated with a Bachelor of Economics (Honors) from the University of Malaysia in 1970 and continued his education until he completed his Doctor of Philosophy from The Management College at Henley in the United Kingdom. He held several secretarial and managerial positions at government and non-government departments throughout his career. He is presently the President Commisioner/Chairman of Bank Bumiputera Indonesia; Board member and Chairman of Audit Committee of Islamd and Peninsular Berhad; Advisor of Maunsell Malaysia Sdn Bhd; and Group Business Advisor at Sinar Jernih Sdn Bhd.

• Y. Bhg. Dato’ Noorazman A. Aziz: Mr. Aziz graduated with a Bachelor of Science (Honors)

from Louisiana University in 1982 and is an associate of the Institute of Bankers in the United Kingdom. He started his career in 1982 as a senior executive at Pernas International Berhad and held several executive positions in Malaysia ever since. In 2005, he joined Bank Islam Malaysia Berhad as Managing Director and was subsequently appointed as Group Managing Director, BIMB Holdings Berhad in June 2006. He is a member in Takaful Board of Directors since December 2005.

• Y. DH. Dato’ Sri Wan Abdul Wahid Wan Hassan: Mr. Hassan graduated with a Bachelor of Arts (Honors) degree of the University of Malaya in 1971 and has obtained several educational certificates during the following years from international universities, including Cambridge, in Public Administration, Management and Land Resource Management. He was appointed to the Board of Directors of Takaful Malaysia on 1 March 2003. He is also the Chairman of Risk Management and Compliance Committee, a member of the Audit and Nomination Committees of the company. He is also the Deputy President of Majlis Uama Islam dan Adat Resam Melayu Pahang and has held the position since December 2000.

• Y. Bhg. Dato’ Alwi Muhamad: Mr. Muhamad started his career in 1973 as an Assistant

District Officer at Besut and later moved to different government state positions in Terengganu in agriculture, R&D and other areas. He also served as Director of Water Supply Department of Terengganu until 2001. He is currently the Chief Executive Officer of Majlis Agama Islam Dan Adat Melayu Terengganu since 11 January 2004 and a Board of Dierctors Member at Takaful since December 2005.

• Encik Mohamed Hassan Md Kamil: Mr. Kamil graduated with a Bachelor of Science degree

in Actuarial Science and later a Master in Business Administration from The University of Iowa, USA. He is a Fellow of the Society of Actuaries, USA, a member of the American Academy of Actuaries and a Chartered Life Underwriter. He worked in the United States as an Actuary from 1987 to 1994 prior to returning to Malaysia as Deputy General Manager at Malaysia National Insurance. In 1996, he joined ING Insurance Berhad (previously known as Aetna Universal Insurance) as Senior Vice President and Chief Actuary. In 2004, he became the Deputy General Manager for P.T. AIA Indonesia and subsequently transferred to AIA Regional Office in Hong Kong as Vice President of Actuarial/ Finance in December 2005. He is currently the Executive Director of BIMB Holdings Berhad since April 2006 and Group Manager of Takaful Malaysia.

• Y.A.M. Tengku Azman Ibni Almarhum Sultan Abu Bakar: Mr. Sultan was appointed Chief

Executive Officer of Takaful Malaysia in September 2005. He obtained his Master of Science from the University of Iowa in 1988 and soon joined Takaful Malaysia in 1989, before climbing through the ranks until he reached this level. He started as an Executive Assistant in the Family Takaful Department in 1989, and then moved to the Marketing Department as an Executive in 1990.

6 Shari’a Quality Rating: Takaful Malaysia Islamic International Rating Agency, May 2007