TAKAFUL OPERATORS FORMING ALLIANCE WITH ISLAMIC BANKS

SHABBIR H.KAZMI
Dec 22 - 28, 2008

Takaful is one of the fastest growing segments of Islamic financial system in Pakistan. One of the reasons is that till recently Islamic banks were forced to accept insurance cover issued by the conventional insurance companies due to absence of Takaful operators.

The handsome growth is mainly due to two facts1) growth of Islamic banking and 2) low conventional insurance penetration in the country. The low penetration has been due to interpretation of religious doctrine that has been widely misunderstood in the context of the financial protection. Given that there are more than 160 million Muslims in Pakistan, the potential market for Takaful is yet to be tapped. With the proliferation of Islamic banking, Takaful business is also expected to grow.

In the simplest words Takaful system is based on the principles of fairness and committed to serving one another sincerely and truly so that all participants get benefit. The uniqueness of this concept is that the underwriting profit is shared among all the participants who have a positive contribution during the year.

Takaful is not just another tool for risk mitigation and financial protection. Nor is it just a Shariah compliant business model. It is an ideology which promotes solidarity and joint guarantee, self reliance and self sustainability for community well being, assistance to those who need it by using community pooling system. In a nutshell, it is a system which works as a source of good for those who use it and the community at large.

The word Takaful was first used in Insurance Ordinance 2000 but it took the regulators more than 5 years to frame Takaful Rules. Even when the rules are framed a plethora of changes and amendments were needed to make Takaful Rules all encompassing. Government realising the need for betterment assigned this task to SECP which formed a committee to review the rules. After consultation with all stakeholders, the new Takaful Rules are in final stages and will be open for public comments in a month or two. The upcoming revised rules entail major changes specially in accounting framework and Takaful process. This will bring clarity in a number of areas and will give proper guidance for functioning of Takaful companies.

A new era in the development of Islamic financial system unfolded in 2005 when Takaful operators started emerging in Pakistan. At that time, people had a host of misconceptions about the products and their distinctive features; but after 3 years, the industry is fast gaining grounds. The country offers tremendous growth opportunities for Takaful industry. However, there is a need to systematically proceed for creating awareness among the masses.

The prevailing situation offers challenge as well as opportunities. On one hand people are accustomed to conventional insurance schemes and find it hard to distinguish between Islamic products and its conventional counterparts. But it is also a fact that insurance penetration is low in urban areas and virtually absent in the rural areas.

Despite tremendous potential, Takaful operators have to face the challenges to accelerate the growth process of this budding industry. With current low penetration of just 0.7% of GDP as compared to about 5% in India and Malaysia, there are tremendous opportunities because of the large 165 million population of the country.

Interestingly out of this 100 million are under 30 years of age and 97% Muslims. Therefore, achieving 2.0% penetration over next five years is a realistic and achievable target. Added attraction is increasing affluence in the society looking for a secure future amidst prevailing uncertainties and deteriorating law and order situation.

Awareness is first step towards creating demand for Takaful, and we are fast achieving it through comprehensive market penetration plan. Year 2009 will be marked by unprecedented hike in sales of General Takaful products, which will consolidate the company as well as this fledging industry. Our preference in 2008 was more on raising awareness and building a professional team across the country. Through focused outreach efforts, we have tapped into potential clients and are in process of making alliance with Blue Chips and other financial institutions through Bancatakaful. Our sophisticated computer network is already established, so we are looking forward to utilise it fully and provide state-of-the-art Takaful solutions offered to our clients. With our network spanning over Karachi, Lahore, Islamabad and Peshawar; we will further consolidate our presence through added branches in Hyderabad and Multan.

The year 2009 is expected to usher in unprecedented growth in general Takaful products, which will consolidate the sector outlook. During 2008 all the existing players were busy in creating awareness among the masses and building a professional team across the country. The business is also growing due to growth in Islamic banking. To meet the financial needs, Islamic banks and Takaful operators are collaborating to offer one-stop solutions for customers.

They have also realized the importance of joining hands with Islamic banks for Bancatakaful, an ideal strategy to achieve greater penetration in the market. They have also joined hands with asset management companies, focusing Shariah compliant funds by bringing the investors under Takaful umbrella as well as Ijarah clients. This has certainly improved the outreach of Takaful operators.

In order to provide the best possible service to the participants, Pak Qatar Takaful group has bought a state of the art IT system from Malaysia. With strong technology support, it has emerged stronger in providing Bancatakaful solutions to its banking partners. As part of the agreement Pak Qatar is providing Takaful coverage to the assets of the Car Ijarah and Housing Finance lines to Islamic Banks. With the passage of time it intends to enter into agreement with other business partners which will further increase its network.

Although conventional insurance companies are barred from opening Takaful windows till 2010, sensing the tremendous opportunities conventional insurance companies are also planning to offer Shariah compliant products along with the conventional products.

There are two opinions in this regard. One group believes that if conventional banks are allowed to operate 'designated Islamic banking branches' conventional insurance companies should also be allowed to operate Takaful windows.

The other group believes this will cause undue confusion amongst customers who are already indecisive regarding authenticity of Islamic products. On top of this entry of conventional insurance companies in Takaful business will further intensify the competition.

Some of the critics are of the view that the restriction on conventional insurance companies was imposed mainly to facilitate the Takaful operators, having substantial investment. The breathing time given was sufficient and now conventional insurance companies should also be allowed to offer Shariah compliant products.