Economies of scope, organizational form, and insolvency risk: Evidence from the takaful industry

Khalid Al-Amri*, J. David Cummins, Mary A. Weiss

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

1 Citation (Scopus)

Abstract

This study investigates scope economies, organizational form, and insolvency risk for a sample of takaful firms in 19 countries. Firm efficiency is estimated using data envelopment analysis, performance is also gauged using return on equity and return on assets, and insolvency risk is measured using distance to default. We test the strategic focus and conglomeration hypotheses for takaful operators. We also test for differences in performance between the two major takaful organizational forms – the mudharaba (profit-sharing) and the wakala (fee-based) models for compensating managers. The profit-sharing design is hypothesized to be more effective in aligning the incentives of managers and policyholders. The findings suggest that strategic focus is superior to conglomeration for takafuls in terms of performance, efficiency, and insolvency risk. The results also show that the profit-sharing model performs better than the fee-based model. This research is important because takafuls are growing rapidly in Muslim-dominated countries where insurance density and insurance penetration are low.

Original languageEnglish
Article number101259
JournalJournal of International Financial Markets, Institutions and Money
Volume70
DOIs
Publication statusPublished - Jan 2021
Externally publishedYes

Keywords

  • Data envelopment analysis
  • Distance to default
  • Economies of scope
  • Efficiency
  • Insolvency
  • Organizational form
  • Strategic focus
  • Takaful

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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