Pakistan’s regulator has
introduced new Takaful rules planned to boost competition and raise the sector’s
market share by allowing the entry of conventional players, prompt a legal
challenge from Takaful providers. The rules, launched in July 2012, make the
Pakistan the second country after Indonesia to officially allow Takaful windows,
which enable firms to offer sharia-compliant and conventional products
alongside.
Takaful had operated without conventional competitors in Pakistan since 2005
when the first rules was introduced but these rules also said to be that windows
could be allowed after five year period. Though the conventional insurance could
serve a broader share of the Takaful market “with their larger sales force and
vast branch network”, the securities commission said in a statement in July
2012.
Takaful is seen as a bellwether of consumer big eyes for Islamic finance
products. It is based on the concept of mutuality’ the Takaful company in
Pakistan oversees a pool of funds contributed by all policy holders, but does
not necessarily bear risk itself. Takaful firms must follow the religious
guidelines, including bans on interest and pure monetary speculation. The Global
Takaful contribution is forecast to reach $12 billion in 2012, according to
consultants Ernst & Young. Although Pakistan is a world populous Muslim nation,
Takaful share of the total insurance market there is only 2 to 3 percent it is
said by the Karachi based partner at Ernst & Young.
If we look in contrast, the average Takaful share in Muslim countries stood at 5
percent in 2010 and is expected to reach 7 percent by 2015, according to a
report by Swiss Re. The overall share of Takaful in Pakistan could reach 25 to
28 percent for general coverage and 15 to 20 percent in family or life coverage
within face to eight years.
So, after the rules was introduced conventional players appear to enter into the
market by increasing their business volumes, at that time approximately 4 to 5
conventional firms prepared their paper work for it, and if they want to do so
then they have to raised their capital or might need to look for mergers and
acquisitions. The new entrants into the Takaful market could also increase
overall insurance coverage in the country by reaching out to unexploited market
segments.
In Pakistan the insurance penetration, measured as total premiums to gross
domestic products, which was third lowest in Asia in 2011 0.7 percent, against
4.1 percent for India. So, opportunity lies in Pakistan’s rural areas where
there are high growth prospects and now it depends on conventional insurers
having windows devise their marketing strategy.
For restrict the conventional firms the petition submitted by five Takaful
operators in Sindh province, the country’s second-largest Islamic banking
market, to challenge the new rules. “Criticism is against the window concept,”
wrote Tariq Rashid, Karachi-based insurance consultant and associate fellow of
the Institute of Islamic Banking & Insurance, a British-based body which offers
education in Islamic finance.
However, the new rules include requirements for external auditors and internal
compliance officers, and the regulator said further requirements might be
included. If authorities decide to introduce a minimum capital requirement for
Takaful windows that could create a level playing field for pure Takaful and
conventional insurance companies. The Takaful industry’s lobby may not be
powerful enough to convince the authorities to cancel the reforms entirely. I do
not think there is a real forceful Takaful representation” that could make the
regulator reverse its decision. Any change to opposite direction might be hard
to because Pakistan’s conventional banks operate Islamic windows under
the same methodology. The petition may delay the opening of Takaful windows or
prompt the regulator to make some amendments to the rules, but the decision to
open windows is “guaranteed” to go ahead.
I do not think this would not be a good idea to grant permission to conventional
companies to operate Takaful Operations as well. The real problem is that people
are not aware about the ground realities. If Conventional Insurance Companies
will get the right to sell both the Islamic and conventional products they will
definitely exploit the market and the true essence of Takaful will destroy.