ACII, MCIT, Master Mariner
Chief Executive Officer

Feb 19 - 25, 2007

Pakistan is among those few countries where the per capita spending on insurance is extremely low. This penetration of insurance is around 0.3% of our GDP compared to that of around 4% for India, 8% for Malaysia and upward of 14% in case of the developed economies of Japan, U.S. and Europe.

Apart from the affordability issue, a significant reason for such low penetration is lack of awareness of the availability of insurance as a viable support arm for all commercial activities and its important role in bringing economic stability and benefiting society at large.

Another reason is the general perception (and rightly so!) that insurance, as is being practiced by blindly following the West, is un-Islamic and hence 'Haraam'. This factor is even more pronounced in the case of 'Life' Assurance.

Due to the above factors, people generally tend to opt for insurance coverage only where it is either mandatory by law, as in the case of Motor Third Party Insurance, or when it is one of the requirements of the lending institutions like banks and DFIs. Even in those cases, it tends to be regarded as a necessary evil and the ensuing "additional" cost involved is invariably resented.

Thus, a considerable vacuum exists in the country that can only be filled once the generally negative perception about insurance is removed and people are made aware of the benefits of insurance to the national economy in general and to their own personal wellbeing in particular. Unfortunately, not much work has been done by the contemporary "conventional" insurance professionals in this direction where probably short-term vested interests take precedence. On the other hand, several 'malpractices' have been introduced and encouraged over time that have resulted in virtually obliterating the distinction between what is ethical and what is not. Inevitably, it is not the common man but large corporate 'influentials' who benefit from inflated claims, kick-backs for placement of their insurances, etc. ? all at the cost of the common man who bears the brunt by a subsequent increase in insurance rates at renewals.

The above dismal scenario can be rectified by the introduction in the country of the pristine concept of 'Takaful' as a viable Shariah-compliant alternative to the conventional insurance. If properly introduced by professionals who are not only competent but also fully committed to the cause, there is no reason why this relatively new concept will not achieve wide spread acceptability. In fact, Takaful insurance would be ideally positioned to infiltrate far and wide and create awareness and demand for insurance products that not only are tailored to the specific needs of the businesses and personal lines' segments but are also in full compliance with the Shariah. Even now, there are currently a significant number of insurance consumers who are obtaining insurance coverage from the conventional insurance companies simply because they have no choice of an Islamic alternative. Once such option is there, and provided it is competitive and equally comprehensive, they will willingly switch over. A parallel in this matter can be drawn from the phenomenal success achieved by the recently established Islamic banks in the country. Once people's confidence was built up looking at their respective Shariah Boards, innovative riba-free Islamic products based on Ijarah, Musharikah, Murabaha and the like, they lost no time in switching over their deposits and their financial transactions through these banks.

Takaful likewise, can build up public's confidence and once that is achieved, people will voluntarily opt for the various Takaful options in their individual as well as collective interests. Society as a whole will benefit as huge funds currently blocked up to hedge against fortuitous losses, will be willingly released and utilised in the growth of various businesses. Needless to mention, Takaful concept discourages spread of malpractices and does have a viable and unique alternative in the form of 'Surplus sharing' which, in Malaysia and Sri Lanka, has even attracted the non-Muslims towards Takaful products from the conventional insurances.

One important, and a very sensitive, aspect that needs to be carefully understood here is that there can be no provision for the so-called "Takaful windows" for the conventional insurance operators. For one, it will confuse the minds of the general public who would like to have a clear, defined distinction and freedom to choose between the products offered by a dedicated Shariah-supervised Takaful operator and such equivalent products that are offered by the conventional insurance companies that have been unequivocally rendered by all the Shariah scholars as non-Shariah compliant. Certain vested interests are currently lobbying for being allowed such "windows" so that they can hood-wink their existing clientele as well as the public at large that they too can cater to their choice. There is a clear provision in law ? "Takaful Rules 2005" that allows any existing conventional insurance company to completely switch over its existing business into Takaful mode in a non-reversible way. Furthermore, any institution or even a conventional insurance company can set up an entirely separate Takaful company under the law with the requisite Capital. Hence there can be no justification of allowing for "window" operations within the existing conventional set-up. Such an ill-advised move will kill the very purpose of presenting Takaful as a Shariah-compliant alternative to the conventional insurance and will also be a violation of the clear Quranic injunction:

"And mix not the Right with the Wrong; and hide not the Truth when you know it!" < Al- Bakra>

Secondly, there is a fundamental, irreconcilable difference in concept between the two since conventional insurance, by its very definition, is a risk-transfer mechanism. This mechanism, again, is unacceptable in Islam since:

"Every bearer of burden shall bear his own burden".

Takaful, on the other hand, is a risk-sharing mechanism that allows for a transparent arrangement of cooperative sharing of risks by pooling individual 'contributions' for the benefit of all and hence eliminates the basic ingredients that are prevalent in the conventional insurance rendering that un-Islamic. These are "Gharrar" ? meaning "uncertainty", "Maiser" ? meaning "gambling" and "Riba" ? meaning "usury". Such basic conceptual difference is not there in case of banks, except only "Riba" which is specifically avoided in the Islamic banking operations.

Furthermore, whereas a very high Capital, i.e. Rs. 6 Billion, is required to set up a new bank, a separate Takaful company can be set up with only Rs. 80 million in case of General Takaful business and Rs. 150 million in case of Life/Family Takaful. Though the government is considering reviewing and progressively enhancing these figures to around Rs. 300 million by the year 2011, still these will be no comparison to the Capital required to set up a new bank. Thus Capital is not a constraint for the cash-rich conventional insurance companies in setting up separate Takaful companies as their subsidiaries instead of seeking permission for "Takaful window" operations within their existing setup.

Similarly, there is no dearth of professional manpower in the insurance industry as is being given out. It is only due to relatively slow career progression opportunities in the contemporary insurance circles that forced several of their young, energetic employees to seek better opportunities in the Middle-East and elsewhere. Had these companies provided conducive growth environment by way of streamlined succession planning, such young insurance professionals would not have left. A similar situation existed for aspiring banking professionals some ten years back. Eventually, when more opportunities started becoming available by opening of new banks in the country, several such professionals returned from the Middle-East and joined them bringing with them enriched experience of a rapidly developing economy. Likewise, there are currently a number of our insurance and Takaful professionals working in the Gulf who will willingly return and avail the new opportunities created. Even otherwise, there are enough middle-management insurance professionals in the country many of whom have joined the recently established insurance companies. A large number of such professionals are just waiting for an opportunity to work and earn their income through an Islamic insurance company. Probably this prospect of loosing such employees scares those companies further and they are therefore looking for "short-cuts" in order to keep their employees ? and their clientele too!

Another aspect that needs to be taken into account is the possible adverse impact on the potential foreign investors in case the so-called "windows" are allowed to the conventional insurance companies. These foreign investors are keen to invest in new Takaful ventures since they were assured that no "windows" would be allowed and the same has been specifically stated in the "Takaful Rules 2005" enforced in September 2005. Now, if the government reverses that decision under influence of those vested quarters, this will send negative signal to those interested foreign investors about the inconsistencies of the government's policies.

It is hoped that the government, and the regulators whose prime motive no doubt is to safeguard the interests of the general public rather than that of the conventional insurance industry, will defy all moves in the direction of such "window" operations and instead, will encourage emergence of dedicated Takaful companies in the country. It is my ardent desire to contribute my humble bit towards ensuring that one day, the ONLY form of insurance allowed in the Islamic Republic of Pakistan shall be Takaful ? the equitable and the right form of insurance!




*Takaful' comes from the Arabic root-word 'kafala', meaning guarantee.

*Takaful means mutual protection and joint guarantee.

*Operationally, Takaful refers to participation in a common pool whereby the participants contribute to the Takaful Fund with the purpose of arranging mutual indemnity in the case of peril or harm.

*As far as the type and scope of insurance coverage is concerned, there is no difference since Takaful also provides comprehensive insurance coverage to Life and Properties, viz. Fire, Engineering, Marine, Motor, Liabilities, etc. in the same way and subject to virtually the same terms and conditions as does the conventional insurance, but in an Islamic way!

Difference Between Takaful and Conventional Insurance



•It is a Risk Transfer mechanism whereby risk is transferred from the policy holder (the Insured) to the Insurance Company (the Insurer) in consideration of 'insurance premium' paid by the Insured.

It is based on mutuality; hence the risk is not transferred but shared by the participants who form a common pool. The Company acts only as the manager of the pool (Takaful Operator).

•It contains the element of uncertainty i.e. "gharrar" which is forbidden in Islam. There is an uncertainty as to when any loss would occur and how much compensation would be payable.

The element of 'uncertainty' i.e. 'gharrar' is brought down to acceptable levels under Shariah by making contributions as "Conditional Donations" (tabarru) for a good cause i.e. to mitigate the loss suffered by any one of the participants.

•It contains an element of gambling i.e. "maisir" in that the insured pays an amount (premium) in the expectation of gain (compensation/payment against claim). If the anticipated loss (claim) does not occur, the insured loses the amount paid as premium. If the loss does occur, the insurer loses a far larger amount than collected as premium and the insured gains by the same.

The participant pays the contribution (tabarru) in the spirit of Ne'ea (purity) and brotherhood; hence it obviates the element of 'maisir' while at the same time without losing the benefit of Takaful in the same way as conventional insurance.

•Funds are mostly invested in fixed interest bearing instruments like bonds, TFCs, securities, etc. Hence these contain the element of "riba" (usury) which is forbidden in Islam.

Funds are only invested in non-interest bearing, i.e. riba-free instruments.

•Surplus or profit belongs to the Shareholders. The insured is covered during the policy period but is not entitled to any return at the end of such period.

Surplus belongs to the participants and is accordingly returned to them (in proportion to their respective shares of contributions) at the end of the accounting period.