The insurance (and takaful) penetration is very low in Pakistan. This is attributable to various reasons, ranging from low financial literacy, low saving rates, high informal economy, and religious dissuasion. Government has also rarely pushed the industry to grow, with policy incentives and mandatory coverage both lacking. The recent effort of Sehat Card is a right step towards enhancing health penetration; but it is being offered from the lens of consumers (voters).

Within the insurance industry, Takaful is a recent phenomenon in Pakistan, and it has the potential to grow and fill in the gaps. Many households and SME businesses don’t use health, life, and other insurances, possibly due to reason of faith. This is similar to consumer behaviour during pre-Islamic banking times, when many businesses banking relationship were confined to deposits and transactions.

Moreover, takaful is a preferable product for buyers as risk mitigation is better. In Takaful, members contribute money into a pool system to guarantee each other against loss and damage. In case where claims against collection are low, the remainder is shared back with members.Takaful companies charge upfront fee (Wakalah) for managing the pool.That is how risk is shared by participants while in case of conventional insurance, risk is transferred to contributors. Then the windows get credit rating based on the conventional company while Takaful firms have to develop from scratch.

Thus, in essence, Takaful is better priced for buyers as compared to conventional insurance. And there could also be non-religious reasons to buy it. However, market penetration is not reflective of this advantage, as takaful share is not even 10 percent in the overall insurance market. And the overall market penetration is less than 1 percent of GDP as compared to 3-4 percent in India and global average of 7 percent.

There is big room for the insurance market to grow in Pakistan and within it, Takaful can leap forward. First there could be conversion of existing consumers from conventional to takaful for religious and commercial reasons, and then Takaful perhaps has greater chances (due to religious reasons) to grow in Pakistan. The overall industry can quadruple to reach the size of Indian insurance industry in terms of GDP.

Takaful is a nascent industry in Pakistan. SECP introduced its rules in 2005. At that time, only full-fledged Takaful companies were allowed to operate, and in 2012, conventional insurances were allowed to have Takaful window. This is just like Islamic banking where both fully operated Islamic banks as well Islamic windows within conventional banks are operating. However, SECP is not as vigilant regulator as SBP, and industry participants fear that level playing field does not exist between Takaful windows and Takaful firms. There might be elements of cross-selling in case of windows within conventional firms. Then the windows receive credit rating based on the conventional company while Takaful firms must develop from scratch.

As of today, Takaful firms are less than five in numberwhile almost two and half dozen Takaful windows of conventional insurance companies operate. The trust factor – especially, for religious reasons is hard to develop for conventional companies. There are examples in banking – such as Meezan bank where the overall culture of banking is very different, and consumer gets different vibes and feels. Then the bank’s strategy and execution is in line with its core principles and it operates differently from many banks. Recently, Bank Islami has been growing fast in certain segments and has a unique revamped strategy.

There could be such example(s) in the Takaful companies – currently three are operating with guns blazing and a new one is in the making. Let’s see would anyone of these will become Meezan Bank of the Takaful industry. However, due to this skewed incentive towards Takaful windows, there are lower incentives to open a Takaful company.


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