June 23 - 29, 2008

Takaful is an Islamic alternative to a conventional insurance program based upon a Shariah compliant, approved concept founded on the principles of mutual cooperation, solidarity and brotherhood. Word "Takaful" comes from the Arabic root-word "kafala" which means to guarantee, to help, to take care of each other's needs. It refers to mutual protection and joint guarantee. Operationally, it refers to participants mutually contributing to the same fund with the purpose of having mutual indemnity in the case of peril or loss.

Pakistan is a nation with an estimated 170 million people, 96% of whom are Muslims, where the total insurance penetration is less than 1%. One reason for the low take-up rate is that insurance is regarded as Un-Islamic (Haraam) by a segment of the people. The Fiqh Council of World Muslim League (1398/1978) resolution and The Fiqh Council of Organization of Islamic Conference (1405/1985) in Jeddah resolved that conventional insurance as presently practiced is Haraam, and that cooperative insurance (Takaful) is permissible and fully consistent with Shariah principles. Hence, conventional insurance is prohibited for Muslims (because it contains the elements of Riba, Al Maisir, and Al Gharar). By contrast, it provides risk protection in accordance with Shariah based on the principles of Ta'awun (mutual assistance), brotherhood, piety and ethical operations. In order to address the ideological people, various governments even the non-Muslim countries are devising Islamic financial products. In recent days, traditional trend is changing gradually whereas there was almost no activity on the takaful side prior to September 2005. Some consulting actuaries were providing consultation services to their clients outside Pakistan like in the Middle East and Malaysia.

September 2005 is significant in Pakistan's insurance history because it was when the country first introduced a regulatory framework for Takaful. These rules are incorporated within Pakistan's Insurance Ordinance 2000, which means that Islamic insurance operators' have to comply with not only the rules but also with the insurance ordinance. The main objective of introducing these rules is to promote this business in Pakistan which would ultimately promote the sound development of the insurance sector in the country. According to the Takaful Rules-2005, in Pakistan a Takaful product shall be based on the principle of Wakala or Mudaraba or both. Therefore, such companies in Pakistan follow a refined hybrid model named "Wakala Waqf" model. It is a Wakala model in which the fund is made a separate legal entity by virtue of it being a waqf. The relationship of the participants and the operator is directly with the Waqf fund. The operator is the "Wakeel" of the fund and the participants pay contribution to the Waqf fund by way of Tabarru (contribution).

There is a huge potential for newcomers to the Pakistani insurance market since a large part of the market is still untapped. This is evident from the fact that there is a working population of around 40 million of whom only around 7 million are insured and the total insurance premium in 2007 was 0.8% of the country's GDP. Foreign insurers are also aware of this. More groups are showing serious interest to enter the market and most of them are joint ventures of Pakistani and foreign groups.

Presently, General Takaful operators include Takaful Pakistan, Pak-Qatar General Takaful and Pak-Kuwait Takaful. Whereas Pak-Qatar Family Takaful is the only family Takaful company presently operating in Pakistan. Besides local, foreign investors have also invested in this sector, which includes Etiqa Overseas Investment, Noor Financial Investment Company, Takaful Holdings (Representing Amana Takaful of Sri Lanka), Emirates Investment Group, Al-Buhaira National Insurance Company, Qatar Islamic Insurance Company, Qatar International Islamic Bank, Qatar Islamic Bank, Qatar National Bank FWU Group, Masraf Al Rayan and The Amwal Group.

It is a system of Islamic insurance based on the principle of Ta'awun (mutual assistance) and Tabarru (voluntary contribution), where the risk is shared collectively and voluntary by the group. It is a pact among a group of members who agree to jointly guarantee themselves against loss of damage to any one of them as defined in the pact. It works like this,

The company creates the Waqf Fund by donating initial seed money. Operator receives and deposits contribution (Premium) from the participants into the Fund and pays claims from it.

The operator protects the Fund against risk exposure arranging Re- Takaful and building up reserves out of the Fund amount. In addition, the Operator generates income for the Fund by investing the Fund money prudently in Shariah compliant investment securities.

Underwriting is carried out on behalf of the Fund and therefore all profits or losses belong to the Fund.

Participants (Policy holders) are the beneficiaries of the Fund and apart from the claim amount, all surplus i.e. balance accruing in the Fund at the end of the Accounting period is returned to them on a pro-rata basis.

Risk or uncertainty can be divided into: Pure Risk and Speculative Risk. Pure Risk involves the possibility of loss or no loss. For example, damage to property due to fire. Pure Risks are the subject of insurance risk protection and Takaful. On the other hand, Speculative Risk involves the possibility of loss, no loss or gain. For example, venturing into a new business, or gambling on horse race. Speculative Risks that include a potential Gain or Profit cannot be insured. The schemes use the principle of indemnification to compensate for the loss that occurs to a Takaful Participant. It insures only Pure Risks and the claims are only payable in the event of Loss to cover repairs, damage, replacement of property, or an agreed fixed amount.

Most conventional insurance companies are stock companies that seek to maximize profits. Since the interests of shareholders conflict with those of the policyholders, these insurers can boost profits for shareholders by raising prices, denying claims, etc. Its operators, by contrast, are mutual or cooperative entities. The goal of this insurance is community well-being and self-sustaining operations, not high profits. Under the Takaful Mudarabah Model, surplus (or profits) is shared fairly and equitably between the shareholders and the policyholders (i.e. the "Participants") Under this Wakalah Model, surplus is returned entirely to the Participants.

The distinction between the conventional insurance and Takaful business is more visible with respect to investment of funds. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Such companies undertake only Shariah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreement. Likewise they share in any surplus or loss from the pool collectively. This system has a built in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the participants in proportion to their contributions. Unlike insurance companies, whose investment income may contain Riba, Companies invest funds in Property, Islamic Banks, Shariah compliant Stocks and other Shariah approved securities like Sukuk bonds etc. Although the end result is the same since both insurance and Takaful aim to provide compensation against possible losses, yet the crucial difference lies in the way that each does this. The notion "ends justify means" does not hold when it comes to Islam where both the ends as well as the means have to be in order. Chicken can either be slaughtered or given an electric shock; both achieve the same end, a dead chicken. However, the former way makes the meat Halaal for eating whereas the later renders it Haraam.

Some criticize that on the face it is Islamic but at the back it is the same conventional Reinsurance support. Companies in Pakistan can only arrange Reinsurance support from dedicated Re-Takaful operators conducting business in accordance with Shariah guidelines. Even a Re- Takaful syndicate has been formed at Lloyd's in London that started underwriting by the end of 2007.

The business has proved its viability in a period of only two decades. Sources claim that it has been growing at the rate of 10-20% p.a. compared to the global average growth of insurance 5% p.a. A large number of companies exist in the Middle East, Far East, Iran, Turkey, and Sudan and even in some non-Islamic countries. There are over 60 companies offering such services (including Windows- 5%) in 23 countries around the world. United Kingdom and Malaysia has developed Re- Takaful business as well. These products are available to meet the needs of all sectors of the economy, both at individual as well as corporate levels to cater for short and long term financial needs of various groups of the society.

Currently, conceptual training programs for Takaful are being offered by a few institutes like Center for Islamic Economics, Pakistan Insurance Institute, Al-Huda CIBE along with on the job training. One of the areas, where Pakistan lacks most in this market is the development of their human resource. Pakistan's business and trading community is not fully aware of its benefits. In order to educate the people, companies first have to develop a pool of human resource. Moreover, if companies utilize knowledge of global financial markets for their clients' then the story would be significantly different.

Rules have been in place since 2005 and more comprehensive amended rules are in the process. Sector experts urged SECP to follow SBP's footsteps in taking a more proactive approach to monitor and regulate operations of the industry. It is said that the involvement of Ministry of Commerce should be minimal or non-existent. Further, greater incentives should be provided to operators so as to promote the industry and encourage investors.

Takaful is not just another tool for risk mitigation and financial protection. Rather, it is a system which works as a source of good for those that use it and the community at large. Tools like these are critical for developing nations, especially those seeing rapid economic growth. Increasing personal debt, the widening divide between the haves and have-nots, and other such issues regularly plague those in rapidly growing developing nations. Pakistan is one of those countries. To truly comprehend the opportunities in Pakistan, it is vital that present and future Takaful operators must go after those individuals which are religion-centric. In order to provide comfort feelings to the people, they need to develop new products, market them aggressively, highlight its importance, and communicate people effectively that their products are Shariah compliant thus the customers need not to compromise on their beliefs to be able to get the financial protection.