Islamic Banking & Finance Page 16-08-2019

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Muhammad Arif
Muhammad Arif: Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

Dynamics of Takaful (Islamic Insurance) Business

Though Takaful business is expanding but very little has been done for its awareness. This article has been written as a part to create awareness on the subject

The concept of insurance started with marine insurance in 12th century.It was formally formulated in 17th century when sea trade was at its peak. Later, insurance industry developed rapidly and modern insurance systems were implemented throughout the world. Currently, there are several types of insurance contracts including: Marine Insurance, Health Insurance, Agriculture Insurance, Life Insurance, and Vehicle Insurance.

Insurance industry is working since 1947 in Pakistan. Controller of Insurance was operating Insurance industry under Ministry of Commerce, Government of Pakistan, Securities and Exchange Commission of Pakistan (SECP) is regulating the Insurance industry since January 2001.The SECP regulates and monitors the Insurance industry in the country through powers vested in the Insurance Ordinance 2000 and the Companies Ordinance 1984

In Pakistan the growth pattern of the overall insurance industry is 18-20 percent in the top-line. Ever since banc assurance gained momentum, the growth has been in high double digits, in which the big banks have a major contribution. The share of Takaful in the life insurance pie is around 16-18 percent, including the banking window insurance operations. Takaful’s rate of growth has been way faster than the conventional industry growth, much on the lines of Islamic banking growth in its early years.

Presently Malaysia, Saudi Arabia and the nations of the Gulf Cooperation Council (GCC) are the countries where Takaful has the greatest prevalence. As of late, its popularity has grown in other countries such as Indonesia, Jordan, Pakistan and Nigeria. Big multinationals from the conventional finance sector are showing increased interest in Takaful, among them many of the world’s largest insurers such as Allianz, AXA, Prudential, Aviva, Aegas and AIG, which are expanding in the takaful sector through takeovers or by joint ventures or by opening Takaful windows in relevant countries.

In the GCC, Takaful has grown in high double digits in recent years, according to the Global Takaful Report 2017, released at the World Takaful Conference held in Dubai. In detail, Takaful growth in the GCC stood at a compounded annual growth rate of 18 percent from 2012 to 2015, while Southeast Asia reported a negative growth of 4 percent due to currency depreciation and Africa grew 19 percent in the same period.

General Takaful provides protection to participants against losses arising from perils such as accident, fire, flood, liability and burglary. It makes about 83 percent of the global market share of Takaful, while family Takaful, which is designed to cover health and mortgage-related risks, occupies the remaining 17 percent.

Government of Pakistan has assigned the task to Council of Islamic Ideology in 1983 to draw a framework of Islamic Insurance (Takaful).Under the recommendations of Council; Takaful Rules were established in 2005. First Takaful Company was established in 2006 in Pakistan (Pak-Kuwait Takaful Company Limited) following Wakala-Waqf Model which is Riba-Free.

In fact The concept of modern Takaful (Islamic Insurance) is not very old as it started with the beginning of Islamic banking in the world in 20th century The basic principles of Takaful are “Taawun” (mutual assistance) and “Tabarru” (donations, gift, give away) All these terms are the part of “Kafala” concept which means to help each other Therefore, the mechanism of Takaful is based on Wakala-Waqf Model

All the products of Takaful strictly follow Sharia’h rules, regulations and laws. Sharia’h Advisory Board is responsible to watch the business decisions and activities. In Takaful, individuals of a community gather on a common platform to contribute reasonable amounts into Waqf Fund to protect themselves and others from future losses. In case of any loss, it is compensated by Waqf Fund and Takaful Operator is not responsible for the compensation. At every year end, the excess amount which is left after paying all claims and expenses can be distributed among all the participants of the Waqf Fund with the advice of Sharia’h Advisory Board. Shareholders of a Takaful company are not entitled to get the profits which are generated by the insurance operators which is in contrast with conventional insurance companies where profit generations from insurance transactions is the primary objective

Similarly, the policyholders of Takaful Company have the right to cast their vote in the elections of company’s directors and they have the access to the final accounts of the company as well. However, these rights are not available to the policyholders of conventional insurance companies

These differences are making Takaful industry more popular than conventional insurance among Muslim population in Pakistan

As roots of conventional insurance are very deep in the country, it is very difficult for Takaful companies to penetrate in the market Therefore; these companies have to face many challenges for their survival in the market. Many of the consumers are tempted towards Takaful due to religious reasons which provide great opportunities to this industry in Pakistan. A vast majority of consumers also keep in mind the products and benefits being offered by these companies

Lack of Awareness– it is the major challenge for Takaful companies that consumers are not fully aware about the Islamic principles of insurance. Very low literacy rate plays vital role in the creation of this problem. Those, who are responsible to provide full information about Islamic principles of business, are not performing their role. Therefore, there is a very big knowledge gap in the country. Consumers who want to switch from conventional to Islamic mode of insurance are very much confused.

Takaful companies are also responsible for this ignorance as they are not providing proper knowledge to their current and potential consumers. Even, employees of Takaful companies are not fully trained and aware about their system and products, they are also misguiding their consumers.Takaful companies should play their role positively and effectively to provide proper and complete knowledge to the consumers.If they will do it, there is a huge market waiting for these companies.

Unclear Practices by Takaful Companies– As Takaful companies are following Wakala-Waqf Model, there is still ambiguity about the practices being followed by them. Similarly, the products of conventional and Islamic insurance are almost same; questions arise about the practicality of these products of Takaful companies. The operational staff of Takaful companies is also not able to answer the practicality of their respective company. This is the responsibility of Takaful companies that they should provide proper information about the mechanism and practices which they are following. If consumers would know about the practices being followed by these companies, their trust will boost and they will switch from conventional to Islamic insurance

Business Volume– Customers are also very keen about the comparison of business volume in between conventional insurance companies and Takaful companies. Business volume of insurance companies is measured by total premium revenue. For instance by the end of December 2014, total premium revenue of insurance industry in Pakistan was Pak Rupees 192 billion which consists of Pak Rupees 64 billion of non-life companies and Pak Rupees 128 billion of life insurance companies. In this total business volume, the proportion of Takaful companies is Pak Rupees 8 billion which is only 4.2% of the total insurance industry. As Takaful companies are trying hard to increase their business volume but they are not succeeding due to the reason that they are not marketing their products efficiently. Both employees and consumers suggest that Takaful companies should work aggressively to increase their business volume. Unless these companies capture the larger proportion of the market, their survival and growth will be at stake

Re-Investments – All insurance companies reinvest pooled funds of their premiums in different sectors to generate profits which are required by them to manage their expenditures, payment of dividends to shareholders and for the settlement of claims. Conventional insurance companies reinvest their funds in every type of business sectors whether they are Sharia’h compliant or not. Whereas, this is an ethical, moral and legal obligation for Takaful companies to invest only in those business sectors which are Sharia’h compliant.Takaful companies are claiming that they are reinvesting their funds in such business sectors but as consumers do not have complete access to the information and records, there is still an ambiguity in their minds that these companies are not properly following Sharia’h principles. Similarly, Takaful companies are also not trying to satisfy their consumers on this particular issue, which is creating a gap between these two Consumers suggest that Takaful companies should make it clear that in which business sectors they are reinvesting so that they could be satisfied.

Claims Settlements According to the consumers, the services performance of insurance companies is checked by their claims settlements Claims are cross verified by insurance companies to complete their legal obligations and then these are decided to be settled completely, partially or refused. The processing time of this verification plays vital role in whole process. Unnecessary delay in this process loses the confidence of the consumers towards the company as they expect quick settlement of their claims. Therefore, conventional insurance companies are trying their best to lessen the processing time for the satisfaction of their consumers. However, Takaful companies are still facing this problem as their processing for claims settlement is not satisfactory due to several reasons These companies are suggested by their employees and consumers to make valuable reforms in their claims settlement process so that their trust towards consumers can be strengthen further

Tough Market CompetitionAs conventional insurance is the major share holder of insurance industry in Pakistan; it is giving tough competition to Takaful industry. Being a small part of this huge industry (only 4.2%), Takaful companies are facing large number of challenges to overcome the monopolistic position of conventional insurance in the country. The consumers suggest that the only way to be in this competition and to gain a reasonable proportion, Takaful companies have to develop further by providing new Sharia’h compliant products and to provide excellent services to their consumers. In their opinion, new product development, establishment of new companies, extension in current branch network and provision of better quality services would be helpful for Takaful companies to grow in future . In the light of the responses by the employees and consumers of Takaful companies, it is concluded that there is a huge market of insurance in Pakistan as people want to avail life and non-life insurance services. But, majority of the Muslim consumers are avoiding from it due to religious reasons as conventional insurance is based on Interest (Riba). Whereas, the basis of Takaful is Sharia’h compliant and this industry is working according to the guidance and teachings of Islam. Therefore, there is a huge potential of Takaful business in the country as vast majority of Muslim population want to join it due to religious reasons

Final words– The general Takaful operators in the early years failed to adopt a joint approach in promoting the cause of Takaful as a Shariah-compliant risk-coverage mechanism. Overlooking the desired Islamic spirit of transparency in dealings, they harshly competed. This created an unethical image of the Takaful industry.

As regard to human resource factor generally, opportunism has been the deciding factor for individuals with conventional insurance background, to join newly-formed Takaful operators at senior/middle management levels.

The required incitement to acknowledge the Shariah requirements and to obediently contribute for the cause of Takaful on strong and careful commercial practices within the Shariah framework has been missing. The fundamental of Islamic principles, are lacking on the part of general Takaful operators to basically incite attraction for devoted Muslims to opt for Takaful as a system to meet their risk-protection needs in a Shariah-compliant manner.

Prior, Motor Takaful has been the dominating class (being well over 50 percent as against conventional around 20 percent). There has not been any of the entire business, important change in the said trend, after Windows. All classes combined loss ratio, has come down to a commercially viable level. The expenses outpacing 40 percent against Wakala Fee ranging from 35-40 percent remained a source of matter for the general takaful industry.

The cause and sprit of Takaful in Takaful Rules 2012 (the Rules) have not been sufficiently addressed to up-held the writ of the Shariah. The Rules present Takaful as a product rather a true reflection of a legal frame work featuring supremacy of Shariah, distinctly distinguishing Takaful from conventional insurance.

The non existence of a Shariah Advisory Board, leaving Shariah Advisor of each company at the helm of Shariah matters of respective companies, which understandably created confusion chaos, thereby generating/promoting corrupt practices. However In 2016, the Securities and Exchange Commission of Pakistan (SECP) specifically mandated through an amendment, for regulating and facilitating the growth of Shariah-compliant financial products.

Overall Share of Shariah Compliant assets of NBFI industry has steadily grown from 12 percent to 35 percent in seven years, whereas mutual funds have sharply risen from 9 percent (2010) to 43 percent (2017).

Capacity in non-motor Takaful is serious issues as ‘A’ rated Retakaful Operators are few and highly demanding.

Still the Islamic insurance, or Takaful, industry stands somehow in the shadow of the Islamic banking sector, partly because it doesn’t have such prevalence even in Muslim countries, and also because its business strategies and product offerings still have a lot to overtake.

International Islamic Trade Finance Corporation signs Six High-Level Trade Agreements over UU$1.1BN

                           

The International Islamic Trade Finance Corporation (ITFC) member of the Islamic Development Bank (IsDB) Group, has signed six major Trade Financing and Development Agreements worth in excess of US$1.1 Billion with Organization of Islamic Cooperation (OIC) member countries including the Commonwealth of Independent States (CIS), MENA, South America and Sub-Saharan Africa regions. The agreements were signed at the 44thIsDB Annual Meeting in Marrakech earlier in July 2019.

 The framework agreements, provides state and private sector financing as well as capacity building programs for export and SME development initiatives, targeting high growth industries including agricultural commodities, energy commodities such as crude oil, agricultural inputs, medical supplies, construction materials, metals and livestock.

The signing of these framework agreements represents major strategic steps in ITFC’s efforts to develop sustainable value chains and enhance trade between OIC countries and across the South-South corridor. They have been formed through careful alignment with national development strategies in member countries to support economic diversification and job creation policies.”

The signings were held with-

  • The African Export-Import Bank (AFREXIMBANK) agreement with the ITFC, worth US$500 million, finances a comprehensive program, Arab-Africa-Trade Finance and Promotion Program (AATFPP) to boost trade cooperation between African and Arab Member Countries. The program aims to promote Arab-African economic integration by facilitating the expansion of trade and investment in African countries with Arab countries.
  • A new framework agreement with the Republic of Mali will be implemented for a total financing amount up to US$300 million. ITFC will mobilize financing from international and regional banks and financial institutions to be channeled towards imports of energy products such as crude oil and refined petroleum products, exports of agricultural commodities, and imports of agricultural inputs and foodstuff. The framework agreement will also cover lines of financing to local banks to boost the SMEs sector, as well as implementation of capacity building programs for the strategic sectors of the national economy.
  • A new MoU with the Moroccan Investment and Export Development Agency (AMDIE) will strengthen trade development efforts in the Kingdom of Morocco and across the wider African region. The agreement seeks to foster export-led economic growth between Morocco and key African OIC member nations in line with the Kingdom’s vision to build a robust export-led SME sector.
  • A US$80 million framework agreement with the Republic of Niger aims to aid socio-economic development through the provision of finance to SMEs and to boost trade links between the Republic of Niger and other OIC member countries. The agreement will support financing operations for the export of agricultural and livestock commodities. The provision of financing in Niger will also support a new food security program and a new operation with the Country’s national power company for the import of electricity and petroleum products.
  • A new 3-year framework agreement worth US$150 million underpins ITFC’s strategy to finance local institutions and boost trade links between the Kyrgyz Republic and other OIC countries.  The main areas of cooperation include the provision of a line of financing to local financial providers to support the private sector, in addition to the provision of financing to the Government of Kyrgyz Republic to fund strategic commodities. The financing will help to import essential commodities and products needed by the Government and will pave the way for a greater cooperation between the ITFC and the Kyrgyz Republic. .
  • ITFC’s framework agreement with the Republic of Suriname will see it mobilize up to US$75 million financing for SME’s, exports and lines of finance to local banks, in addition to a Murabaha agreement over three years to boost the import of essential goods.

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