Sep 19 - 25, 20

Takaful operators have a very brief history in Pakistan when compared with the conventional insurance companies. Ironically, insurance penetration has remained low mainly because many people considered risk hedging contrary to the Shariah covenants, which seems a myth because the Takaful business has not grown the way it should have.

The government put an embargo on the conventional insurance companies and they were not allowed to open up Takaful windows. The policy looked contrary because there has been no restriction on opening up of designated Islamic banking branches by the conventional banks.

Takaful operators say, "For any industry especially where the players are new, progress in the initial 4 or 5 years is slow because of the teething problems. Takaful rules came into being in 2005 and most of the Takaful operators commence their operation in 2008. On the basis of available data, the growth of Takaful operators has been much better when compared with that of conventional risk mitigation companies".

However, some analysts say Takaful or conventional insurance is not an issue but the market dynamics. The market is too small and competition is too fierce.

It is believed that if the number of Takaful operators increases, they would make investment in extending their outreach, which in turn will help in generating more business. For example, bancassurance has flourished because banks distribute a range of products to suit the needs of various individuals. Conventional banks have shown keen interest in distributing Shariah compliant Family Takaful products. So far, Takaful products are sold only through the Islamic windows but the demand is also generated from the conventional windows. Some reports indicate that the demand for Shariah products is more than the collective demand of the conventional products.

There is a growing consensus among the players that increase in number of players will help in creating better awareness and offering products to suit the needs of individuals as well as corporate clients. In fact huge investment by Takaful operators in technology has helped in overcoming the issue of limited outreach. This could be best understood that the technology platform enables a person to buy a Family Takaful policy worth Rs20 million in few minutes because everything is done online. An interesting point is that the products of Pakistani companies are being distributed in Saudi Arabia, Malaysia, and UAE.

A leading Pakistani entity, Pak-Qatar Takaful has entered into a distribution agreement with an internationally recognized distributor, which market products of various international companies also. In fact, this company sells various products around the globe through an elaborate network and also has offices in Pakistan. This makes improving products easer by adding features which are commonly demanded.

Going public was initially considered mandatory for the Takaful operators for the mobilization of capital for which having a credible track record is considered a must. Since the sponsors of many of Takaful operators are global players they decided to meet the minimum capital requirement by injecting funds. Therefore, there seems no need offer shares to general public to mobilize more funds, at least for the time being.

Takaful operators and insurance companies play a vital role in mobilizing small savings, the only difference is Takaful operators provide Shariah compliant options. Takaful operators have request to the government to provide tax exemptions/allowance. In fact Takaful operators are not demanding any exemptions, but there should be some incentive for the individuals for making long term-investment.

Savings to GDP in Pakistan is disappointingly low because there are hardly any incentives for savings. The returns offered banks are negative when compared with high rate of inflation rate in the country. If the government is really serious in eliminating Riba from the economy, there should be some extra incentive to facilitate the transition to Takaful from conventional insurance.

Around the world, growth of Takaful has been substantial due to support of regulators, which has been missing in Pakistan. It was decided that conventional insurance companies will not be allowed to open Takaful windows till end 2010 and then the government will consider it to continue this for another period or abolish the condition. Initially, a proposal was under consideration that the situation would be reviewed after one year but as time passed there was no significant progress.

The country still doesn't have Takaful specific regulations. State Bank of Pakistan has a full-fledged Islamic banking department but securities and exchanges commission of Pakistan doesn't have a Shariah Board and any one who understands the true spirit of Takaful.

For a considerably long time, Pakistan used to have Office of Controller Insurance operating under Ministry of Commerce and even today, insurance is a subject of this ministry.

Despite putting insurance under the control of SECP, the situation has not changed. During the regime of Pervez Musharraf, it was proposed that since insurance is an integral and most important segment of the financial system, the central bank should also regulate it.

There was also a suggestion for creating an autonomous body, Pakistan Insurance Regulatory Authority (PIRA) but the sector continues to be regulated by the SECP, which does not have a full time commissioner to oversee this important segment of the economy.

Over the years various executive directors have come and gone at the SECP, each having some plus and minus points but little progress has been achieved.

Except a few no one understands the basic concept of risk mitigation. The SECP has too many things to do but it does not have even the stipulated number of commissioners, as against minimum requirement of five only two commissioners are there, one also having the additional responsibility of chairman.