Having reinvented itself in the world in 1979, Takaful found its way into Pakistan in 2006 when in the last quarter of that year the country’s first Takaful operator was issued a license to start its business. Although Pakistan is a late entrant on the global Takaful scene, Takaful started taking shape in the country as early as 1982 when the Council of Islamic Ideology was entrusted with the task of reviewing the country’s entire financial system and to suggest Shariah compliant alternatives.
The Council took almost a decade to complete this comprehensive review, and issued its report in 1992 suggesting Takaful as a viable alternative to the prevailing system of insurance. No practical steps followed the report however, and even the Insurance Ordinance 2000, which replaced the Insurance Act of 1938, mentioned Takaful merely as a definition. Real efforts in this direction began in 2004 with the formulation of a task force by the regulator, the Securities and Exchange Commission of Pakistan (SECP), to formulate a regulatory framework for Takaful in the country. The task force came up with the draft early in 2005 and the Takaful Rules 2005 were finally promulgated on the 3rd September 2005.
Current situation
At present five Takaful operators – three General and two Family – are in operation in the country, all following a ‘Wakalah with Waqf’ model. All the operators are sponsored by reputed local and/or foreign institutions, giving a sense of confidence to the aspiring customers who have either never had any insurance in the past or who were previously dealing with established local or foreign insurance companies.
It has been a challenging start for the Takaful industry, as right after its inception the country plunged into a severe economic crisis; resulting in the fall of GDP growth rate from 7% in 2006 to a low of 2% in 2009. Despite all these challenges the Takaful sector has managed to gain some ground: securing approximately 2.4% of the entire insurance market (General and Life combined) in 2010. Overall Takaful contributions stood at PKR0.98 billion (US$11 million) in General Takaful and PKR1.24 billion (US$14 million) in Family Takaful as at the end of 2010.
General Takaful
The General Takaful companies are largely dependent on business emanating from Islamic banks. Therefore, the share of the volatile motor business in their overall business mix was around 60% as at the end of 2010. Although this has contributed to the top-line growth, the unfavorable loss experience has taken a toll on the overall profitability of the operators – which was already under great stress due to declining contribution rates, rising business acquisition, management and claims costs.
None of the General Takaful operators were able to post profit (on a consolidated basis) as at the end of last year. The performance of the two funds, the shareholders’ fund (SHF) and the participants’ Takaful fund (PTF), has been quite varied with one operator posting a profit in SHF but a huge deficit in the PTF and another posting exactly opposite results. In aggregate almost half of the capital of all three operators has been eroded so far. This year one of the operators has registered a turn-around so far but a great effort will be required to sustain it.
Family Takaful
The performance of Family Takaful operators has been relatively better than their General counterparts, with both operators declaring some surplus to their individual participants.
Challenges
The future still holds tremendous growth potential for Takaful in Pakistan but the challenges are also huge. The five-year moratorium on Takaful windows of conventional insurance companies expired in September last year.
Arguments both in favor and against the opening of Islamic Takaful windows by conventional institutions have been voiced by concerned quarters. Theoretically the move will enhance the outreach of Takaful due to the numerous and well entrenched sales outlets of the established conventional insurance companies. However, it would also deprive the embryonic dedicated Takaful operators of a level playing field since the latter, by the very essence of their existence, cannot similarly open a conventional insurance window within their Takaful operations.
This would also put substantial foreign investment under further stress. This act is also likely to confuse and disillusion the general public who are seeking pure and refined Islamic alternatives to insurance, undiluted by any Islamic/conventional combination. There is already a lot of criticism over the way Islamic financial services and Islamic banking, as well as Takaful, are being offered. Many people including the current customers are not able to appreciate the difference between conventional and Islamic finance offerings and consider Islamic banking as well Takaful to be a mere change of label.
A lot still needs to be done to enhance customer awareness as to the basic governing principles of Islamic financial transactions, including Takaful. Takaful operators need to invest more on the training and development of their staff, particularly marketing and sales staff, who are their first contact point with a potential customer. Unless the person representing Takaful fully understands the basic concepts of Takaful he or she cannot convince a customer who has been in a conflicting system for years why the Takaful offering is an improvement.
The absence of a Central Shariah Board at SECP level has also added to the challenge, since the varied Shariah opinions of the Shariah board members of the respective operators have resulted in non-standardized practices, which only augments the confusion of the customers.
The sponsors will have to demonstrate extraordinary commitment to the cause of Takaful or we may see mergers in order to meet the revised solvency requirements. The management will also have to make some bold decisions as to management expenses so as to demonstrate their level of commitment.
Conclusion
Commitment to the customer is the main driving force that could lead Takaful forward in the future, and this can only be attained through efficient service at competitive contribution rates.
Ashraf Ali Siddiqui is the deputy general manager of operations at Takaful Pakistan. He can be contacted at
[email protected]
.