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Takaful products set to be a game-changer for nascent Islamic insurance market

Published on 9th Nov, Edition 45, 2015


In today’s world, no country, irrespective of ideological differences, stands isolated today. Foreign Direct Investment (FDI) is a strong and vibrant instrument for an accelerated socio-economic development but conducive atmosphere in this regard is a must. There are two sources of FDI namely, Direct Investment and Portfolio. Direct Investment refers to investment in various industries. This represents fixed investment and is generally expected to be on long run basis while portfolio refers to investment in stock market and this investment is temporary.

Analysts told PAGE that foreign non-life insurance companies operating in Pakistan enjoy a small portion of the business compared to their local counterparts, particularly the big ones who have a much deeper penetration of the market. Despite their insignificant share the foreign general insurers pay a much higher taxes and revenues to the government compared to their local counterparts. The poor law & order situation has taken a heavy beating on the profitability of the insurance companies, particularly the foreign companies who enjoy a small share of the market.

As per latest export figures, Pakistan’s exports shrank by $538 million, or 9 percent, on an annual basis during the first quarter of the current fiscal year. Although the year-on-year rise in the FDI for July-September was $15.6 million, or 7.7 percent, the increase seems unimpressive in view of the GSP Plus status that Pakistani exports enjoy in the European market.

Financial experts told this correspondent that the country’s Islamic insurance industry is set to change with the entry of conventional insurance giants in the Takaful market. Jubilee Life Insurance and EFU Life Assurance, which control over Rs115 billion in total assets between them, have launched Takaful products – a development that analysts call a game-changer in the country’s nascent Islamic insurance market.

Shariah-Compliant business

After the introduction of regulations governing the Islamic insurance market, two full-fledged Takaful companies started operating in Pakistan in 2007. Although these companies have grown substantially in the last eight years, their size relative to the conventional insurance footprint in Pakistan is still miniscule.

Total assets of Pak-Qatar Family Takaful and Dawood Family Takaful at the end of 2014 amounted to a little over Rs9 billion. It equaled only 6.5 percent of the total assets of private conventional life insurance companies, which equaled Rs139.1 billion in 2014, statistics show.

It may be noted that the first set of rules governing the Islamic insurance industry did not allow conventional insurance companies to enter the Takaful market unless they set up stand-alone subsidiaries with separate paid-up share capital. However, the Securities and Exchange Commission of Pakistan (SECP) replaced Takaful Rules 2005 with Takaful Rules 2012 three years ago, which allowed conventional insurance companies to set up Islamic ‘windows’ to conduct Shariah-compliant business.

The entry of conventional insurance companies into the Takaful market by means of window operations will not lead to cannibalization in the insurance industry.

Under the rules, the SECP mandates that a conventional insurance company must set aside at least Rs50 million as capital contribution to the statutory fund if it wants to set up a Takaful window operation.

Jubilee Life, which is the second largest insurance player in the private sector in terms of total assets, has entered the Shariah-compliant business with the intention of allocating Rs200 million to the statutory fund. Jubilee Life is expecting a three-year gestation period for its Takaful business because it is going to use its existing infrastructure to sell Islamic products.

The compound annual growth rate (CAGR) of gross contributions received by the full-fledged Islamic companies has been 39.2 percent for the last three years. The CAGR for gross premiums generated by conventional insurance companies in the private sector over the same three-year period has been 28.6 percent. However, as per data made available to PAGE, gross premiums of Jubilee Life alone have registered annualized growth of 38.5 percent in the last three years.


Faith in Govt policies

Commenting on the low level of FDI, businessmen expressed concern and said $613 million FDI in the first eight months of the current fiscal year, as recently reported by the State Bank, is poor and not even 1 percent of the country’s GDP. “This level of FDI is well below Pakistan’s capability and past performance,” one leading businessman said, adding: “Pakistan needs significantly higher FDI – at least 3 percent of GDP – to generate the desired level of economic growth and employment opportunities.”

Economists estimate that there is a need for five million new jobs every year to cater to the young population and the fast growth in the number of educated youth.

Highlighting some of the factors impeding FDI, the businessmen mentioned the continuing concern over security, the energy demand-supply gap and fast deteriorating position on the World Bank’s Ease of Doing Business (EODB) indicators besides the gap between the policy and its implementation. Moreover, inadequate protection of Intellectual Property Rights (IPR) was also a key deterrent to the new FDI in the country.

According to leading businessman, Mohammad Pervez Malik, the present government is making dedicated efforts to not only bring new foreign investment in the country but also provide an ample opportunity to the businessmen. The PML-N government was putting in all out efforts to bring the economy back on track and utilizing its all resources to attract Foreign Direct Investment in the country. He said that Prime Minister Nawaz Sharif would visit China in the first week of November and sign various projects. He said the government has already initiated meaningful discourse with the private sector to boost up Foreign Direct Investment (FDI) that is not up to the mark. He said that rising risk perception about investing into Pakistan is hitting hard the entire economy but the government is tackling the issue through a comprehensive policy approach by involving Chambers of Commerce in the country.

Pervez Malik said that government was addressing all key issues including energy crisis on priority basis and various power projects were in the pipeline. He expressed hope that employment opportunities would increase following an increase in business activities, adding that once the country’s economy is put on the trajectory of growth and it would have a consequential impact on inflation.


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