As we are set to transform Pakistan in to Riyasat-i-Madina there is a need to discuss the future of Islamic Financial Institutions (IFI), specifically Takaful. Islamic finance has developed mainly in two sectors i.e. Islamic banking and Islamic insurance (Takaful). According to a State Bank of Pakistan (SBP) report Islamic banking industry constituted 15 percent share by the end of March 2019 while according to the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) Islamic banking industry in Malaysia to have 40 percent market share in total banking assets by 2020.
As we see Islamic banking is slowly picking up in Pakistan, Takaful is very little known. Though the Takaful operators say that it offers the benefits and services equivalent to its conventional counterpart and has all the potentials to provide the desired risk coverage to individuals who look for a Shariah compliant insurance, a brute majority of even the insurance policy holders are still not aware of the fact that Takaful is a Shariah-compliant alternative to conventional insurance.
Now what was lacking when we launched Takaful. As we know that the first thing in starting a business is to understand the industry we are planning to establish so that we can dominate, secondly a firm commitment is required to face the challenges effectively and thirdly we must assess the risk before moving forward with the business idea so that we are ready with a contingency plan. Sorry to say that we started Takaful half-heartedly without any commitment. Secondly no effort was made to understand the concept of Takaful and thirdly there was no contingency plan.
It is pertinent to mention here that Takaful hit into a snag soon after it was introduced. The Securities and Exchange Commission of Pakistan (SECP) issued rules governing Takaful operations in Pakistan in 2005 but within a year, the stakeholders highlighted a number of practical issues. As such to address these concerns, the SECP constituted a committee in 2007 to review the existing rules and after hectic deliberations officially announced the promulgation of new Takaful Rules in 2012. But even after the promulgation of new rules, Takaful operators failed to promote the concept effectively. According to a survey conducted couple of years back revealed that a reasonable number of finance professionals never considered practices of conventional insurance as forbidden in Islam.
Contrary to the situation in Pakistan the Takaful business is expanding faster than the conventional insurance business in Malaysia because of careful planning and effective execution. And above all government’s will to promote Shariah compliant insurance using better technology as growth potential. According to an international rating agency Malaysia has been positioned as a centre of excellence for IFI and will continue to be a global hub. The Malaysian government relentless support in this regard has been instrumental in transforming the Takaful industry from a single-player with limited products to 15 Takaful operators and four re-Takaful operators; fully integrated into the conventional financial system.
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According to a Research and Markets report, the global Takaful market reached US$ 19 billion in 2017. The market is further projected to exceed US$ 40 billion by 2023, at a Compound Annual Growth Rate (CAGR) of 13 per cent during 2017-2023. The report further adds that the penetration of conventional insurance is relatively low in affluent Muslim regions like the Gulf Cooperation Council (GCC) countries. As a result, Takaful is perceived as a key instrument to raise insurance awareness and has huge opportunities in these countries. Considering the factors such as a 100 percent Shariah compliant option and benefits as good as conventional insurance, it has a strong business proposition, specially for Muslim customers.
Very much like GCC countries, in Pakistan also the Takaful market has a tremendous scope for expansion. All what require is a strong determination from the government to promote IFIs and effort from the committed operators to create awareness among the general public. With Imran Khan’s pledge to turn Pakistan into an Islamic welfare state in line with the principles set by the role model- State of Madina, one may hope that with the passage of time we’ll see Pakistan IFIs competing with Malaysia.
Since Mahathir Mohamad, the prime minister of Malaysia is the role model of our Prime Minister Imran Khan — in fact, our too — we may take a cue from Malaysian Takaful industry, which is the leader in South Asia. Before introducing the concept of Takaful a lot of homework was conducted and to prepare a solid ground for Takaful, Malaysian Government established a Special Task Force in 1982 the to explore the possibility of setting up the Takaful sector. After two years of serious deliberations the first Takaful was established in Malaysia in November 1984 — one year after establishing the first pilot Islamic bank — Bank Islam Malaysia Berhad in 1983. The establishments of these two Islamic financial institutions were well received because of the proper homework.
According to a survey, currently there are three top Takaful markets – Saudi Arabia, Iran, and Malaysia together holding over 80 percent of the market’s share of total Takaful assets. Saudi Arabia is the most significant market that contributed US$ 15 billion in total assets for Takaful markets with 35 Takaful operators including Takaful windows. Malaysia contributed more than US$ 9 billion in total assets with 20 Takaful companies operating in Malaysia including Takaful windows. Iran is slowly picking up with US$ 12 billion in assets with 26 Takaful operators, including Takaful windows. The other two countries that contribute to Takaful markets are Indonesia and the UAE. Indonesia is the second Asian country after Malaysia, which provides more than US$ 3 billion to global Takaful markets.
Takaful has wide prospects in Pakistan. All what required is to take the business rather seriously and educate people about Islamic model of insurance through conferences, seminars and media. Insurance expert however say that the growth of Takaful cannot be seen in isolation unless a formal Sukuk market develops in Pakistan just as other fixed income securities.