June 29 - July 5, 2009

From the very independence of Pakistan Insurance Act 1938 regulated the insurance sector. The Insurance Association of Pakistan was formed to oversee the insurance practices in Pakistan and to provide guidance to its member companies. The IAP devised tariffs for Fire, Marine, Motor and Workmen Compensation businesses for its member companies and they were advised not to charge less than what was given in these tariffs. This was necessary to give support to the newly formed industry in Pakistan, which was in its infancy. Unfortunately, these tariffs, although very well drafted, were not reviewed from time to time in light of industry experience as such all tariffs were breached. Another reason for this was increased globalisation due to introduction of modern technologies like computer and internet, etc. made it not possible to follow tariffs. Finally, in August 2000 Insurance Ordinance 2000 was introduced which repealed the age old obsolete Insurance Act 1938. This ordinance brought the following major changes.

1. Paid up capital for an insurance company was enhanced-it is now a minimum of Rs 300 million for a general company and Rs 500 million for a life company. The same limits have been applied to conventional and takaful companies.

2. This was the ordinance through which the possible incorporation of Takaful companies were recognised and allowed.

3. This ordinance specified the solvency requirements, re-insurance arrangements, accounts & audit. A chapter on market conduct has been introduced which provides full protection to the policyholder. No claim can now be repudiated on the grounds of non-disclosure or non-payment of premium/contribution. The only reason on which an insurer/takaful operator can avoid a liability is when he is able to prove that the claim is fraudulent.

After introduction of the insurance ordinance committees were formed to frame the Rules & Regulations of Insurance business and that of Takaful Operations. Insurance rules were introduced in the year 2002 while it took the government 5 years to draft Takaful Rules. These rules were finally introduced in the year 2005.

After the takaful rules became public, the investors became interested in forming Takaful Companies in Pakistan. The first takaful company was incorporated sometime in 2006. Today five Takaful Companies are operating in Pakistan as dedicated Takaful Companies. Two of these are family takaful while three are working as general takaful companies. As per law, all these companies must have a Shariah Board comprising of at least three eminent scholars in Muslim Jurisprudence having knowledge about Islamic Finance.

There is a provision in Takaful Rules that, if desired, any existing conventional insurance company can convert their operations into a takaful company in a span of one year after its announcement or the existing conventional companies can establish a separate dedicated company with the stipulated paid up capital. It is also mentioned in the rules that the government may consider to allow opening of takaful windows to conventional insurers after a period of five years. This period of 5 years is likely to end in the year 2010.


Out of the 5 takaful companies only one has completed its three years of operation while the others have just completed their first full year in the year 2008 or have not even completed the same. It may, therefore, be said that takaful industry in Pakistan is in its infancy stage. Furthermore, we cannot treat the year 2008 as the base year. Most of the time this year was spent on establishment of the new set ups, arranging treaties, gathering team of experts in line management, forming of marketing team, implementing business applications and establishing offices in various parts of Pakistan etc.

The takaful model followed in Pakistan is Wakala - Waqf Model both for general and family operations. Element of Waqf has been introduced to provide an entity to the Participants' Takaful Fund. Renowned scholar of the world Maulana Mufti Taqi Usmani has introduced this. When contributions are given to the Waqf fund, the participants disown them immediately. Thus we see there is a Tabarru at the time of giving contributions and a Tabarru at the time of settling claims out of this Waqf Fund as per terms and conditions of the of the Participant Membership Document. The model of Wakala Waqf is re-produced in a simple diagram below.


Most of the challenges faced by Takaful in Pakistan are similar to the ones being faced all over the world. The biggest and the foremost challenge is that of Creating Awareness. The concept and the process of takaful has to be taken to every nook and corner of Pakistan. The people living in the rural areas of Pakistan are more religious minded and the message has to be taken to them. To achieve this objective Takaful companies in Pakistan have joined together for a print campaign for raising awareness of takaful concept.

The second major challenge that we face is the presence of about 30 conventional insurance companies in Pakistan. Unfortunately, there are many mal-practices present in them under the pretext of "market practice". In takaful set-up, it is not in line to follow these so-called market practices. On the other hand, the participant is accustomed to these practices and expects the same from takaful company.

Thirdly, takaful companies being new companies are assigned smaller limits by banks and re-takaful companies. In contrast, the conventional companies, in the market for the last 50 to 60 years, have developed huge resources over this period, and because of their long standings are given higher limits. Thus, the takaful companies can only concentrate on Small & Medium Size Enterprises (SMEs).

Fourth challenge faced by the takaful industry in Pakistan is the possible permission for opening windows by conventional insurance companies. The takaful industry is of the opinion that the takaful windows may not be able to do justice to takaful cause. A dedicated takaful company on the other hand would be more responsible as they have no other option. Only if the takaful windows are made to operate in the same manner as that of the dedicated takaful companies and same rules and regulations apply and on top of that they are allowed to work independently by their parent companies they will provide a fair competition, which may be to the benefit of participants. However, if they work under the umbrella of their parent companies and regulators are unable to keep a good control on them this may lead to harm the takaful cause.


It was felt that the takaful rules were framed in a hurry or due to less experience at that time there was a need to re-visit takaful rules. A committee was formed by the SECP, which has now finalised its recommendations for changes in the takaful rules. It is likely that very soon these revised rules will be put before the public for comments before they are adopted. The revised rules are expected to lay out the proper accounting system to be followed uniformly by all takaful operations. There is also a possibility of forming a Central Shariah Advisory Board so that uniform advice may be given to all operators.

Pakistan is a population of 140 million people out of which only 11% possess a bank account. The insurance penetration in the market is 0.70% of the GDP. From these facts, one can get an idea about the potential for Takaful in this country. One of the major reason why banking and insurance could not prosper in this country is that the conventional system is against the belief of 97% Muslim population in this country. If the message of Islamic Finance & Takaful is spread throughout the country there is immense possibility for the growth of Takaful.

(Author is Chief Executive Officer Pak-Qatar General Takaful)