Islamic Insurance (Takaful)
The global Takaful market reached a value of US$ 23.7 Billion in 2019. Five Takaful operators comprising of three General Takaful and two Family Takaful Companies exist in Pakistan. The Takaful market is still in a formative stage and market projections were estimated growth rates between 15% and 20% over the next 10 years before 2017-18 but the growth has now come down due to current market conditions.
The estimated 200 million population of Pakistan represents a huge market for Takaful and insurance industry. With a large population shying away from insurance due to religious reasons and equally large population staying away from Takaful due to lack of understanding, Takaful provides with an alternate mechanism for taking care of some of the basic needs of fellow beings in the time of need. Mostly premium generated by the insurance companies both Life and Non-Life are from conventional banks. Whereas the Islamic banking sector’s market share is very low as compared to conventional banks, that’s why growth of Takaful is not enough as compared to conventional insurance. As well as Islamic financing increases the Takaful business will also be increased, moreover the financial strength of Takaful companies is weak as compared to conventional insurance companies, which is also a reason to capture the businesses of large organizations.
The progress of insurance industry is directly related with the progress of economy of the country. Political uncertainty badly effects the growth of economy, which ultimately affects the insurance business. The potential of insurance growth in Pakistan is too much in all areas of insurance classes because the penetration of insurance is negligible as compared to the population of the country. To tap the huge market, injection of creative products is the need of the time. Some of the gaps in the market include Crop coverage and Livestock coverage or Professional indemnity for Engineers and Doctors. Needless to say it’s an uphill task and perhaps greater effort is needed to create awareness among the users. Given that wealth management is another aspect of insurance/Takaful, the product plate may be expanded to tweak the existing model. With the current model, perhaps micro Takaful /insurance is a far cry, but some program lending may be designed to work it out. Especially without a welfare or social security net, the need is immense with the lower middle class. At the community level, the low income household staff is provided protection in times of medical emergencies and health by their employers. However, the poor are in an invisible bonded labor as they are willing to work for barely sustainable salaries in the hope of getting bailed out when going gets tough. In this environment Takaful co. are needed and they have to work a lot to play their due role in economy of Pakistan.
This all started in 1985 when the Supreme Council of the Muslim jurists recognized system of Takaful as an alternative form of insurance that meets all the rules and requirements of Sharia. The first attempt to introduce Islamic insurance was implemented in 1970 in Egypt, Sudan and the United Arab Emirates.
In 1987 Al Baraka Investment & Development established two insurance and investment companies in accordance with the provisions of Sharia and the promotion of investment activities of individuals, banks and corporations.
Saudi Arabia is considered as pioneer in takaful industry whereas Malaysia –is considered as the successor. It is in this country published the first (and only) Takaful Act, which defined its legal basis, taking into account the European and Islamic law.
Takaful is like a cooperative where each member provides the mutual provision of guarantees to each other. Its primary difference from traditional commercial insurance is the absence of elements of gharar (uncertainty) and riba (usury). Element of gharar in the contract of insurance exceeds the permitted level of Sharia, because at least for the insured, there is uncertainty as to the terms of the contract (time, subject, etc.).
Unlike the traditional Takaful, insurance is risk assessment and management, as well as in the management of Takaful fund. In addition, there are differences in the relationship between the operator (in the traditional insurance – the insurer) and the participants (policyholders).
If there is a traditional insurance risk transfer mechanism by which a person or organization can exchange for a fee, to the certainty of its uncertainty, the Takaful insurance, such a mechanism is prohibited. Exchange losses on certain unspecified (insurance premium), as implemented in the traditional insurance falls under the concept of gharar and is not allowed in Islam.
As an alternative to the principle of risk-sharing between the parties for the purpose of mutual aid, Risk is shared between the parties in accordance with the scheme of mutual guarantee or Takaful scheme. Takaful operator must only organize the scheme. One of the responsibilities of the operator – to ensure that each participant pays a fair contribution and that in the event of loss participant will receive appropriate compensation.