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Takaful is fast evolving into banking system

Published on 15th Sep, Edition 37, 2014


The trait of insurance in the world over is to cover industrial, commercial and social activities and every individual and group of people as it is an agreement in return of payment for specified loss, death or injuries but since it is disputable either the existing form of insurance are risk free or the certain amount paid to the concerned companies making insurance policies are Islamic or un-Islamic way. Many believe that it is a risk transfer mechanism, as it is a method of shifting the responsibility for losses spreading it over a large number of people or firms. Either ways insurance or risk coverage has come to be recognized as a vital instrument ensuring stability at economic and social levels.

Islamic research scholars’ familiar with dynamics of prevailing world economic order say there is nothing un-Islamic as far as concept of insurance is concerned. Problem lies with methodology. Therefore they agree to emerging concept of Takaful, an Islamic version of insurance. In today’s world, insurance importance and relevance is undeniable. Takaful system of insurance is emerging and taking roots at different levels in Pakistan. Like that in banking, a system of Islamic insurance known as Takaful is fast evolving.

In a country like Pakistan, the insurance industry faces a unique challenge. Communities throughout Pakistan, especially those outside the big cities, have become self-sustaining in terms of providing relief for the future. For example, a typical funeral in South Africa can cost up to 25000-00 ZAR (South African rand exchange rate), a major expenditure. So, funeral insurance policies are very popular products which take care of such expenses. However, such a product is more difficult to sell in Pakistan, as occasions like funerals are quickly taken care of by communities. Hence, the challenge for the industry is to create a value proposition, a need for product, which can motivate the public to invest into such insurance products.

Another major challenge is the devaluation of the currency which discourages people to invest in long-term investment vehicles such as life insurance products. The success of the industry would also be dependent on how the economy performs in the coming years.

Experts of insurance industry emphasized the need to focus on need-based selling by equipping the sales force to understand the individual’s needs and recommend tailored financial solutions. Pakistan’s life insurance sector has shown immense growth. However, there is still a huge potential for insurers to tap a large un-served market if they would work harder to remove barriers to insurance sales.

Experts believe that creating awareness of insurance is a long-term game and has to be done through mass media. Insurance companies are working very hard to build their image and to improve their services. They are adopting new ways of communicating with customers. As you can see, all the companies have websites now, policy portals, SMS services and call centers. They are adopting every possible way to communicate with their customers.


According to them, life insurance penetration stands at 0.4 percent of GDP in Pakistan, which is very low as compared to countries like India and Bangladesh where penetration is 4.2 percent and 0.8 percent respectively. Despite people appreciate the security offered by life insurance; the decision to actually purchase a life insurance policy is often delayed. Also, unpredictable and severe power load shedding has significantly affected growth in manufacturing and other business sectors, which has had an adverse impact on growth of group insurance business. In addition, the lack of human resources in the industry is a concern in the short term.

In all developed economies where insurance penetration is higher, as in South Africa, where the number has touched 16 percent, there is a much higher level of awareness about insurance as a wonderful product that contributes to the financial need of companies and individuals. At the same time, the need for a joint effort by the industry and the government is also required. The two main contributing sources for the new premium coming into the life insurance sector are agency distribution and Bancassurance, of which the latter has been responsible for tremendous growth in the industry in last few years.

Bancassurance services were launched nearly twelve years ago in Pakistan; and in that sense it is still the new kid on the block. Ever since, insurance companies have aligned themselves with banks which has been very profitable. As a distribution channel, banks have contributed around 40 to 45 percent of premium income over this period. That says a lot about the success of bancassurance in Pakistan over the past decade, a senior bank official said.

Life insurance has diversified much more in terms of distribution channels compared to general insurance, which has been the major driver of accelerated growth seen in the life segment. However, there are limitations to the current bancassurance model. First, in terms of the level of technical sophistication in overall approach, the model lags behind in matters such as client’s need analysis or performing portfolio analysis. Secondly, the awareness created is limited to the approximately 14 million existing bank account holders, and not the broader market. The Pakistan market for financial products, especially insurance, is still underdeveloped and in an infant stage, with room for improved penetration.
With the boom in the mobile network operator sector and its massive penetration in the populace, it is possibly the best medium to reach the masses that do not have access to financial services. Furthermore, with stability of economy and boom in business activities, insurance business would increase significantly.


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