Islamic Insurance (Takaful) on its way
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 2017-18. 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.
As per global market share, the GCC remains the dominant region for Takaful with a global market share of 77 percent, followed by Southeast Asia at 15 percent, while Africa and the Levant region, countries such as Pakistan or Bangladesh, as well as a few Takaful operators in Western countries, together occupy the remaining market share.
Assets under management of Takaful companies, which are allocated to Shariah-compliant investments only, were around $35 billion at the end of 2015, and they are expected to grow to over $50 billion by 2020, according to recent report. There are, as mentioned, also a number of challenges for the Takaful market in general.
Those are tighter regulations across all jurisdictions, particularly in the GCC and Malaysia, as regulators increase their focus on consumer protection and the implementation of risk-based capital, the report says.
Takaful companies also are pressured to increase profitability of their operations amid increasing competition in the market space. Currently, many Takaful operators are burning capital by failing to implement processes for cost efficiency and productivity and improve operational, sales and marketing strategies by embracing new technologies and tap into new markets to increase revenue.
The existing portfolio of general and family Takaful needs to be extended towards investment-linked Takaful, retirement Takaful, travel Takaful, community Takaful, legal Takaful, products for certain client target groups such as high-net worth individuals and products for special risk groups, such as sports persons or heavy workers, as well as new variants for corporate insurances for executives, start-ups, entrepreneurs and small and medium enterprises.
The publicly listed Islamic insurers in the GCC generated an estimated net income of US$ 375 million in 2017, compared with about US$ 674 million in 2016 and US$ 269 million in 2015.
First Takaful Company was established in 2006 in Pakistan (Pak-Kuwait Takaful Company Ltd). 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. The procedures and guidelines, practiced throughout Pakistan, were originally drafted by Pak Qatar, and are now being replicated across the local Takaful industry. For the benefits of the policyholders, the Securities and Exchange Commission of Pakistan (SECP) has issued new growth scenarios for life insurance and family Takaful from February 2019.
The SECP says that the life insurance and family Takaful companies may use three nominal growth rate scenarios and three inflation adjusted growth rate scenarios to demonstrate projected benefits to potential policyholders. The SECP specifies these growth rate scenarios based on long-term interest rate outlook prevalent in Pakistan.
As interest rates have increased drastically in the country during the past couple of months and future outlook is also showing the rates to increase further in 2019. Accordingly, the growth rate scenarios for life insurance and family Takaful illustrations have been decided by the SECP to be 10%, 12% and 14%, however, inflation adjusted rate of return will remain at 3%, 4%and 5%.
All new illustrations of life insurers and family Takaful operators (including family window Takaful operators) on or after February 1, 2019 should be made on the above stated scenarios. Furthermore, all life insurers and family Takaful operators are required to submit sample illustrations for each product with this office on or before the aforementioned date.
Hence growth of Takaful is on its way in Pakistan along with GCC, Malaysia, Indonesia and other countries.
Capacity Building and Educating Islamic Banking and Finance
The industry has done well in the last 5 decades, but still faces a number of serious challenges including the absence rigorous academic and professional programs at both undergraduate and graduate levels. Islamic finance requires set of skills and qualifications relevant to the products and services provided by the industry. In other words, the staff working for Islamic financial institutions should have the skills of product structuring and development as well as good grasp of Sharia requirements in all contracts. However, due to the absence of such skills, one of the major criticisms directed at the industry is the lack of suitably qualified personnel which brings us back to the importance of having reputable educational institutions offering high quality educational courses to produce properly qualified individuals to carry out the crucial tasks that the industry so desperately needs. This clearly shows that Islamic finance is in dire need for the development of industry driven standards that can guide Islamic finance education providers.
The capacity building in elsewhere and Pakistan should have been be related with issues that should be tackled with Islamic banking and its situations indeed. The second level should be related with liquidity management to align it with growth rate of Islamic banking that is missing because of its own mistakes and lacking of reforms.
Initially SBP built its strategy by spreading “for my heart satisfactions go to Islamic Banking”. But this approach was absolutely shallow as it missed the main objective that “Islamic Banking can bring social justice by directly connecting monetary side with real sector. It also missed the point that through this we can create a non-criminal society as it prohibits to invest in Haram kind of businesses.
It was also claimed by the SBP that the Islamic banking industry in Pakistan will achieve its 20 per cent market share target by 2020. But this is not enough. By this pace we would reach to full fledge Islamic Banking in 22nd Century.
One big opportunity for banks was to take an advantage of enhanced awareness about Shariah-compliant banking. Banking products in general and Islamic banking products in particular are quite complicated. People want simple and easy-to-understand things. Hence for developing Islamic banking Sharia Scholars, Economists, Bankers, Market Practitioner and Legal Experts all are needed.
Still Islamic Banking stands as a specialized area. Hence State bank has to structure capacity building and educating Islamic banking in all these areas independently and this is the crux of all answers to move forward. Critics argue that in many ways Islamic finance has not lived up to its defining characteristics. Risk-sharing is lacking because profit and loss sharing modes are so infrequently used. Underlying material transactions are also missing in such transactions as “tawarruq, commodity murabahas, Malaysian Islamic private debt securities, and Islamic short-sales”. Exploitation is involved when high fees are charged for “doing nothing more substantial than mimicking conventional banking /finance products”. Haram activities are not avoided when banks (following the customary practice) simply take the word of clients/financees/borrowers that they will not use funds for un-Islamic activities. To resolve these issues immense capacity building is required.
NIBAF constituted by SBP to undertake education of Islamic Banking have still not been able to achieve the actual targets. Individually Islamic Banking are carrying out their courses by just involving Sharia Scholars. IBA and LUMS are also doing the same i.e. to use them for marketing purpose of some banks. If this remains the trend than it would be the same what the other universities and institutions in Pakistan are doing. Only awarding degrees without giving stuff to the students to lead their respective areas with practical developments like other countries are doing.
Real Objectives of Islamic Banking in Pakistan
Islamic banking has now become a reality but still it needs to be developed a lot.
Islamic Banking and Finance based on Islamic economics comes from the trading activities of any society with the objective to achieve its welfare goals.
As provided in advertisements of Islamic Banks that “for Falah and getting better place in Yome Akhrat you should place your deposit with Islamic Banks” is not enough? General perception about Islamic banking is that it is nothing but Conventional Banking with change of name. This perception is required to be changed by taking practical steps and devising products and techniques to make it a part of overall economy in the light of Quran and Sunnah.
People are not interested that how much growth Islamic Banking have achieved and how much well-furnished buildings they did make but they want to know that how far these institutions are playing their role in betterment of economy that is not up to the mark in most of the Islamic Countries and particularly in Pakistan.
Today the Islamic world comprises a population of more than 1.5 billion people which is 24 % of the world population, including more than 835 million youth under the age of 24 years. It has a combined GDP (PPP) of $ 28 trillion, which is only 22.06 percent of the world GDP. These countries are spread over a land mass which is 1/3rd of the world and possesses vast amount of world’s natural resources. They connect East with the West yet their exports and imports are only 12 % of the global exports and 2.16% of global imports. Average GDP per capita in 57 Islamic countries is $ 4,900 which is significantly less than global average of $17,300. Despite sporadic efforts over the last 50 years Islamic world have failed to realize their true potential. They need to make sustained efforts for rapid social and economic development.
It is a fact that the richest country of the world with $ 133,357 per capita is a Muslim state i.e. Qatar and the poorest country in the world with very less per capita with $450 is Central African Republic. So with this position we have to address our home first by denting poverty in these areas. Islamic Banking started developing from 1977 and in Pakistan from 2000 onward. It should have remained the main tool for bringing welfare to the people in these countries otherwise its growth seems meaningless for them.
Taking example of Pakistan like old rhetoric, Islamic banking industry (IBI) continued its growth momentum during the third quarter of CY18. Both assets and deposits registered growth as asset base of the industry reached to Rs. 2,458 billion while deposits reached to Rs. 2,005 billion by end September 2018. In terms of market share in overall banking industry, share of both assets and deposits increased during the review quarter to reach 13.6 percent and 14.7 percent respectively. Profitability of the Islamic banking industry reached above Rs 23 billion by end September 2018 from Rs. 15 billion by end June CY18.
On financing side it contributed in Agri business as 0.3% of its total financing with financing as 3.0% in SME, to consumer as 10.5% to commodity as 11.6 % and in other financing around 74 %. So in nut shell its financing is not focused on 23% of our GDP which is the back bone of Pakistan i.e. Agriculture. Further most of financing is based on debt based financing rather than in Musharkah and Mudarbah.This makes no chance for creation of Islamic Money Market. SBP is not interested to account for Islamic Banks for its monetary policy operations except devising Bai Muajjal with little scope to operate. In this regard like Indonesia or Malaysia no serious efforts seems to be on agenda. Government has not yet devised any short term liquid security to replace Ijarah based security for 3 years to create Islamic benchmark rates. No legislation on Islamic Banking is available.
Going forward lot is required to be done. Unfortunately Islamic Banking Department of SBP cannot do this. For that proper Staff with analytical abilities is to be placed there. Viable alternative can be to form an independent forum for bringing clarity on the subject. Banks like Meezan Bank, Bank Islami, Dubai Islamic Bank and others can do that but with focus on to increase only their size with corrupt ideas like usurping KASB Bank by Bank Islami they cannot do that.
Islamic banking in Pakistan is an established industry with 14 % market share. There are 5 full-fledged Islamic banks and 16 other commercial banks that operate Islamic banking windows alongside conventional banking in Pakistan.
Pakistan is standing as the second largest Islamic nation in the world where Islam is the predominant religion, the population of second largest Islamic nation is over 200 million people and it is growing rapidly but on the other hand the banking sector has only been able to grab only 20 million customers. Couple of years back Pakistan had only one Islamic bank but today five Islamic banks are doing its operation in the country.
A hallmark of Islamic banking and finance in 2015-18 has been the resilience of Islamic retail banks in the Gulf Cooperation Council (GCC) countries in the wake of historically low oil prices.
The earlier revealed Islamic banking strategy by the State Bank of Pakistan asked to double the number of Islamic banking branches from 1,200, and to increase its market share from 12% to 20 % by 2018. Target of increase in branches at the end of 2018 has been achieved with 2709 branches now but to get 20% share by the end of 2018 has not been achieved.
Still to get Maqasid-e-Shari’ah fulfilled, Islamic banking is trapped in path of dependency and debt based product structures. Islamic banks do not look serious in search of a distinct identity for themselves and to showcase their significant and marginal impact on the economy that can legitimize their economic merit over and above their conventional counterparts.
Hence to achieve faith of customers and confidence of people of Pakistan, SBP and Islamic banking sector require immense research, capacity building, and products to create Islamic money market for its own benchmark and the role to align its activities with macroeconomic objectives.