Less than 2% of the country's population is covered by any form of insurance.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Mar 12 - 18, 2007

For the past few years the Pakistan government has actively followed the policy of Islamization of the financial system of the country. Another step towards this goal has been the introduction of Islamic banking either as a separate entity or as a separate window offered by the conventional banks. As insurance is also an integral part of the economy the government turned its attention to this sector in 2004.

In its capacity as the regulator of insurance sector, the Securities and Exchange Commission of Pakistan (SECP) formulated a Taskforce in April 2004 under the chairmanship of Chief Justice (Retd) Mian Mahboob Ahmad and members representing insurance industry and the SECP. The Taskforce gave its recommendations and submitted a draft of Takaful (Islamic concept of insurance) to the SECP in September 2004.

Takaful is an Arabic word meaning "joint cooperation and guarantee". The concept of protection is deeply embedded in the Shariah processes through the system of blood money, which was an old Arab custom. This system is based on the principle of compensation and group responsibility where blood money, an amount of compensation known as Diya, is paid to the inured party by a third party termed as Aqila. The Holy Prophet (Peace Be Upon Him) endorsed this system, which became a means of compensation by Muslims of Makkah and Madina at that time. It is this spirit of mutual help (Ta'awun) and joint responsibility through cooperation (Takaful) underlying the system of Diya and Al-Aqila that has become the foundation of mutual protection or insurance, or Takaful.

Since the establishment of the first commercial Takaful Company in Sudan in 1979, a number of successful Takaful companies have emerged in various parts of the world. The companies are mainly based in Islamic states including Bahrain, UAE, Saudi Arabia, Qatar, Malaysia, Brunei and Indonesia. Apart from these Islamic states, Shariah-complaint companies are also operating in Luxembourg, Australia, USA and Singapore. It would be of interest to know that it is not always Muslims who buy Takaful products. Consumers are also attracted to the Takaful system because of its fairness and not just for religious reasons. This has been seen in Malaysia where lots of non-Muslims are Takaful clients.

Pakistan is one of the largest Muslim states in the world with a population of about 160 million, of which more than 98% are Muslims. For a country the size of Pakistan, the insurance sector is underdeveloped. Insurance penetration as percentage of GDP is 0.6% (for life and non-life business). This is far below the levels achieved by many other developing countries such as India (2.85%), Malaysia (5.35%), Iran (1.16%) and UAE (1.12%). According to official estimates, less than 2% of the population is covered by any form of insurance.

It is alleged that the SECP made some arbitrary changes in the draft rules prepared by the taskforce, which hampered the introduction of Takaful in the insurance industry of Pakistan. According to Justice (retd) Mian Mahboob Ahmed, Chairman of the Taskforce, who is now Chairman East West Insurance Company Ltd, the main objectives in their minds while drafting Takaful rules were to draft regulations which are "industry-friendly" without undermining the regulatory and supervisory authority of the SECP. "We developed the regulations with a basic purpose that they should help in establishing and promoting the Takaful business in the country. Any suggestion, which in our view could hamper the growth of Takaful business in the country, was excluded from the final draft."

However, when the final rules were published, it was found that some fundamental changes had been made in the rules. "I would in particular like to mention two changes that were made which I personally feel would do more harm than good to the future Takaful business in the country," the Chairman Taskforce observed in a letter to the SECP.





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The first change is regarding the deletion of the provision to have window Takaful operation by life insurance companies for Family Takaful business. This was a point, which was debated extensively in various meetings of the Taskforce. Initially, there were views both for and against allowing window operations for Family Takaful. However by the time the final draft was being put together, the Taskforce agreed that to "kick start" the process of introducing Family Takaful products, window operations for life companies, with reasonable checks and balances and fulfilling the Shariah aspects, should be allowed. The main reason for allowing window operations was that under the Insurance Ordinance-2000, life insurance companies are required to maintain separate statutory funds for each line of business. These statutory funds serve to segregate the assets, liabilities, income and expenses of each line of business that an insurance company markets.

Using the concept of statutory funds, a life insurance company would create new statutory fund for its Takaful business. The assets, liabilities, income and expenses to Takaful business would be segregated from the conventional insurance business of the company through the statutory funds. Thus there is virtually no chance of "mixing" of Shariah-compliant and non-Shariah complaint funds for insurer. This approach is both pragmatic and logical keeping in view the existing framework of regulations for conventional companies.

The life companies could use this existing system and manpower for Takaful business as well. This also makes economic sense as the cost of the existing resources could always be charged to the Takaful statutory fund. The manpower aspect is very important as well, for everybody knows that there is a dearth of experienced, qualified and professional individuals in the insurance industry.

The consequences of the change in the rules are that now a separate company is required to be formed for marketing of Family Takaful products. "I personally feel this would delay the entry of companies intending to market Takaful products," Justice (retd) Mian Mahboob Ahmad said, adding that "the second change that I would like to point out is that of having some portion of Takaful business emanating from the rural areas". The Taskforce felt that in order to have steady growth of Takaful business throughout the country, the Takaful companies should be required to have 5% of their total business from rural areas in the first year and increase gradually in the following years. This would encourage the companies to focus not only on the urban centers but to some extent also on the rural areas. "Such a provision, in my opinion, would have only done good for the development of Takaful business in Pakistan," he observed.