SHAMSUL GHANI (shams_ghani@hotmail.com)
June 23 - 29, 2008

The concept of Takaful can be traced back to the ancient Arab tribal practice of joining together of clan members for some gainful commercial occupation and joint loss bearing in case the undertaking suffered losses. The two relevant roots to the term Takaful are Kafala meaning assurance or guarantee and Takafi meaning equality or equity. Under Takaful, a fund is created through equity participation. The Takaful company is the Takaful operator. All business profits and losses are attributable to the fund. Takaful is recognized by the entire Islamic world as Riba free and Shariah compliant risk transfer option. Owing to the lack of appropriate legislation, Takaful made a late entry into Pakistan after introduction of Takaful rules by the SECP in 2005. Having already made its debut in Sudan and Bahrain in late seventies, the idea has found recognition in more than 35 countries of the world with as many as 133 Takaful companies in operation worldwide. The business appeal of the idea has attracted a number of non-Muslim nations and multi national companies as well. International insurance giants such as AIG, Allianz, Axa Insurance, Aviva, Lloyd, Swiss Re, Munich-Re etc. have entered the emergent potential market. Takaful companies are also operational in Russia and South Africa. The positioning of the product in the large Islamic market holds great promise for the global success of the concept.

During the last decade no new life insurer entered the Pakistani market. A few new general insurance companies appeared on scene during this period. On the contrary, four Takaful companies have started business in Pakistan during the last three years. Pakistan market can give the required boost to the new born Islamic insurance sector. Attractive pricing, serious promotional efforts and easy access to distributional network can change the mindset of a nation not so insurance-friendly.


Pakistan, despite housing a predominantly Muslim population has been found struggling in the field of insurance. The insurance industry of Pakistan makes a nominal contribution of 0.8% to GDP as against 4.8% in case of India and 8% in case of Malaysia. The developed economies of Europe, Japan and US contribute around 14%. Out of 0.8%, only 0.3% comes from life insurance, while the rest 0.5% is contributed by non-life segment. With such a low penetration, the industry is still in the nascent stage. The situation has resulted from the failure to generate demand. The insurance density (premium per capita) in case of Pakistan is only $5.9 as against $38.4 in case of India.

The potential of this sector has not been tapped as it should have been. The user base has not been broadened with the result that the sector is living in a state of dormancy. On the contrary, the counter-part banking sector, has flourished during the same period. With the dramatic economic expansion and boom in the service sector, the slow paced growth of insurance sector is a paradox.

The under-performance of insurance sector in our country, particularly the life segment, can be attributed mainly to a narrow user base which in turn is the outcome of a number of factors for example lack of awareness, high tariffs, insufficient disposable income, religious misgivings etc.

Life insurance business in Pakistan has remained under stress despite having immense growth potential. It has been assigned the role of a noted under-performer by our failure to create mass awareness on the importance of insurance in human life. A new range of products based on Takaful needs to be designed and introduced. The Riba-free feature of Takaful products can prove to be a strong selling point. The products presently being offered include Takaful travel policy providing cover against death, injury and disability. The success of such products will set ground for the success of Islamic life insurance.


As repeatedly stressed, banks are in an envious position to develop synergy with the insurance sector, both Islamic and conventional. The banks have a huge network of clients (depositors and borrowers) in whose name a mandatory Takaful or insurance policy may be taken out. The insurance and Takaful companies should offer a very competitive premium rate to the banks. The premium expense should be borne by the bank. In case a depositor expires, an amount equal to the amount of deposit in his account at the time of his death should be paid by the insurance company to the legal heirs of the deceased depositor. This will not only encourage the depositor to maintain a decent balance in his bank account but will also result in increased business to the banks and insurance companies. The idea can be used in the case of borrowers as well.


The insurance sector is estimated to be Rs.60 billion premium market with the conventional insurance premium generating capacity hovering around Rs.20 billion leaving a huge gap of Rs.40 billion. The Islamic insurance has the advantage of such an ideal situation. In the wake of a high dependency ratio of 80 per cent, Pakistan has immense potential for pro-active insurance companies with innovative product designing capacity. Islamic insurance has a clear edge over the conventional insurance in terms of capacity building. Our population with a predominantly religious mindset is easy to approach for the Islamic product sellers. Strategic brand positioning coupled with an easily accessible distribution network can work wonders to convert the Rs.40 billion worth latent demand into an active product-seeking market. In the given situation, the Islamic insurance is virtually in a zero-competition zone.

If Islamic Finance has found firm roots in this society, why Islamic Insurance can not flourish in tandem?