The 2012 draft Takaful Rules suggest the establishment of a Central Shariah Board at the SECP, allowing conventional insurers to establish Takaful windows; the formulation of risk management and rating procedures by Takaful operators; and the proposal of separate solvency requirements for each participant Takaful fund. The document also contains rules for Shariah compliance audit, accounting and reporting; the responsibilities of a Shariah advisor; and the detailed conduct of Takaful business.
Over the years, a number of practical issues were highlighted in the existing rules (issued in 2005) by the stakeholders regarding their implementation. These concerns are addressed and an SECP-constituted committee has reviewed the existing rules and recommended possible enhancements.
The draft rules are based on the committee’s recommendations and succeeding detailed discussions. The SECP reviewed the draft rules and after seeking the expert opinion of Shariah scholars and legal experts they are being disseminated for public comment.
Ramifications of the Takaful Rules
Subsequent to the new rules, the number of insurance service providers in Pakistan will increase substantially as all life and non-life insurance companies will also be allowed to offer Takaful products. The local and multinational insurance companies have a wide distribution network in the country.
This will enable them to tap into the large market which refrains from conventional insurance products, considering them un-Islamic. Consequently, this will increase the span of industry and allow easy penetration in Pakistan; and will provide robust support by backing assets of Islamic banks in Pakistan. At present, three General Takaful (non-life insurance) companies and two Family Takaful (life insurance) companies are operating in Pakistan. The notification will also allow arresting foreign investments in Pakistan if they are adequately administered.
Shariah perspective of insurance
Some religious scholars, such as Maulana Abul Kalam Azad, have highlighted the significance of insurance for Muslims. The majority of the scholars, who declare insurance as haram, provide the following reasons for its non-permissibility.
Therefore, the Islamic alternative to traditional insurance, Takaful, has been developed. This is based on the principles of joint assistance in compliance with the provisions of the Shariah, and provides for joint financial aid to the participants in case of occurrence of certain contingencies and whereby the participants mutually agree to contribute to the common fund for that purpose. This provides a risk sharing mechanism, where no transfer of risk is involved. On the other side, conventional insurance is based on a risk transfer mechanism where the insured substitutes certainty for uncertainty.
I believe that there is an enormous need for heavy investment in the Takaful sector globally. Such initiatives as these enacted by the Pakistani body have opened a new avenue for the rest of the world. Moreover, the level of such commitment highlights the acceptability, potential and growth of Islamic finance in Pakistan, which will positively add value to global assets of the industry: which is currently estimated at nearly US$1 trillion. Globally, there are now more than 120 Takaful operators with an annual growth rate of 15-20%, in comparison with the growth rate of the conventional insurance business.
Asim Hameed Khan is an Islamic banking and finance professional. He can be contacted at