Ownership structure and financial stability: Evidence from Takaful and conventional insurance firms

This paper provides cross-country evidence on financial stability in seven markets with a dual system of Takaful companies and conventional insurers over the period 2009–2016. It tests if differences in soundness between Takaful firms and conventional insurers exist as well as if ownership concentration influences firms' risk-taking. The Z-score is used as a measure of soundness and the analysis is conducted by applying the two-step system-GMM. We find that there are not significant differences in stability between Takaful firms and conventional insurers when they are compared according to the segment they operate in and the diversification strategy. However, mid-size Takaful companies are more stable than conventional insurers, suggesting that a policy encouraging mergers and acquisitions of small Takaful companies to get mid-size Takaful firms should be emphasized. Results also indicate that companies with a more concentrated ownership structure tend to show lower levels of financial stability, consistent with the view that in closely held firms the owner and manager incentives are more aligned.