Potential of takaful in pakistan
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Potential of takaful in pakistan Potential of takaful in pakistan Document Transcript

  • SCOPE OF TAKAFUL IN PAKISTAN Page 1 The Scope of Takaful Insurance in Pakistani Market __________________ A thesis Presented to The faculty of Management Sciences Bahria Institute of Management & Computer Sciences, Karachi In Partial Fulfillment Of the Requirements for the Degree Master in Business Administration ____________________ By ABDUL WAHAB Reg # 12927 Dec, 2013
  • SCOPE OF TAKAFUL IN PAKISTAN Page 2 BAHRIA UNIVERSITY INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES, KARACHI RECOMMENDATION FOR ORAL EXAMINATION This Project/thesis hereto attached, entitled,“ The Scope of Takaful Insurance in Pakistani Market”, prepared and submitted by Abdul Wahab, in partial fulfillment of the requirements for the degree MASTER IN BUSINESS ADMINSTRATION, is hereby recommended for appropriate action. Date: _______ _________________ Advisor Name: Muhammad Faisal (Muhammad.faisal@bimcs.edu.pk)
  • SCOPE OF TAKAFUL IN PAKISTAN Page 3 PROJECT/ THESIS COMMITTEE In partial fulfillment of the requirements for the degree of MASTER IN BUSINESS ADMINSTRATION, this thesis entitled, “The Scope of Takaful Insurance in Pakistani Market” is hereby recommended for Oral Examination. _________________________ Chairman Name: __________________ _____________________ __________________ ____________________ Member Member Member Name: _____________ Name: _____________ Name: ______________ __________________ Date
  • SCOPE OF TAKAFUL IN PAKISTAN Page 4 BAHRIA UNIVERSITY INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES, KARACHI Project/Thesis: “Potential The Scope of Takaful Insurance in Pakistani Market” Date: ____________ Time: ____________ PANEL OF ORAL EXAMINERS ACTION _________________________ ____________ Chairman Name: _________________ ____________________________ ____________ Member Name: _________________ _____________________________ ____________ Member Name: _______________ ____________________________ Advisor Name: ______________
  • SCOPE OF TAKAFUL IN PAKISTAN Page 5 BAHRIA UNIVERSITY INSTITUTE OF MANAGEMENT AND COMPUTER SCIENCES, KARACHI APPROVAL SHEET This Project/ thesis entitled, “Potential The Scope of Takaful Insurance in Pakistani Market”, prepared and submitted by Abdul Wahab, in partial fulfillment of the requirements for the degree of MASTER IN BUSINESS ADMINISTRATION has been examined and recommended for acceptance and approval. THESIS COMMITTEE ____________________________ Chairman Name: _________________ __________________ _______________ _____________ Member Member Member Name: ____________ Name: ____________ Name: ____________ PANEL OF EXAMINERS Approved by the Committee on Oral Examination with a Grade of __________ __________________________ Chairman Name: _______________ __________________ __________________ ______________ Member Member Member Name: _____________ Name: _____________ Name: ____________ __________________________________ Head of the Department Management Sciences
  • SCOPE OF TAKAFUL IN PAKISTAN Page 6 DEDICATION I would like to dedicate this thesis to my parents who gave me courage and supported me in this task. I would also like to dedicate this to my teachers who support me in Bahria University in my whole tenure.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 7 ACKNOWLEDGMENT I am thankful to Allah who gave help, knowledge, courage, support and strength to complete this task. I am also thankful to my co-coordinator – Sir Muhammad Faisal and my Examiner Sir Akbar saeed, who supported me and helped me with their advices and suggestion and their guidelines with which I would not be able to complete this task. I would also appreciate for Pak – Qatar Takaful Company Ltd to entertain my questions and to solve my queries. Those who help me gather data for this research I am thankful to them too. Last but not least: I would thank my parents for their support and for allowing me to have an opportunity to be a part of a prestigious institute of Pakistan; Bahria University.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 8 ABSTRACT: This research is based upon how Takaful industry of Pakistan is growing and what is potential and future of this market. In this research paper the scope of takaful insurance is highlighted making Pak Qatar Takaful Company an example. Pak Qatar takaful company is chosen for the research paper because it is pioneer of takaful insurance in Pakistan as well as, it has the maximum resource and research and experience in this area. The study is important because it identifies that why and how takaful insurance is better than conventional insurance and on the other hand, it also determines the future of takaful in Pakistani market. The research is based on data gathered though a questionnaire filled by 80 individuals. All of them are user of Insurance either congenital or Islamic. Conclusions and recommandations are totally based on data analysis of questionnaire.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 9 INTRODUCTION - 01
  • SCOPE OF TAKAFUL IN PAKISTAN Page 10 SCOPE OF TAKAFUL IN PAKISTAN INTRODUCTION The process of globalization, every year makes people with different cultural values and conceptions of the world more closely interact with each other. In order to find a common language cannot do without mutual respect based on a thorough knowledge of the globe neighboring cultures, traditions, religious and historical reasons specific to a particular nation or people. Today we'll discuss one of the most numerous of the world community, united by a common religion of Islam. According to «The World Fact book 2004", Muslims make up one fifth of the world population. The main set of rules and regulations, which must adhere to a devout Muslim, sharia, is based on the Quran and the Sunnah, the main books of Islam. Sharia requires not only complying with the numerous religious traditions and rituals, guided by certain principles in daily life, but also imposes certain requirements for finance and business. And insurance is an important component of the economy, is no exception. Traditional insurance in the form in which it is taken in the western world, is not Sharia compliant, and therefore - forbidden. CONCEPT OF TAKAFUL Takaful (the mutual provision of guarantees to each other) is the main Islamic insurance product. 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.). In addition, the insurer is in the dark as to whether the funds
  • SCOPE OF TAKAFUL IN PAKISTAN Page 11 paid to them as fees, to be used for permitted or forbidden by Islamic law transactions. The element of riba may occur in the payment of interest on certain types of insurance, and in the event that the amount collected as fees, participate in activities related to the charging or payment of interest, as well as other operations not permitted by Sharia. COMMERCIAL INSURANCE & ITS BASIS In the commercial insurance include such elements as riba (usury), maysir (gambling) and gharar (uncertainty). These elements are unacceptable from the point of view of Sharia law, though Muslim jurists still cannot come to a consensus on the degree of the presence of these factors in the traditional ways of the insured and the insurer. However, the laws of the business world and impose its own requirements for the protection and preservation of financial and property interests had developed an alternative form of insurance, known as "takaful" which in Arabic means giving each other mutual guarantees. Basis of takaful insurance Takaful or Islamic insurance, based on the particular mechanism of distribution of profits and losses, consistent with the principles of Sharia, and therefore satisfies the needs of the Muslim world. The main objective of Islamic insurance - not just protecting their interests against unforeseen circumstances by the joint participation of losses, but also making a profit. Because of this, takaful companies can bring more profits than the traditional (Western-style) insurance company. This goal is achieved by means of the division of responsibility, based on the model of "Mudaraba", which is a recognized institute of Islamic economics.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 12 DIFFERING THE CONCEPT OF TAKAFUL & CONVENTIONAL INSURANCE Risks are characteristic of human life, and they cannot be completely eliminated. Islam is not prohibited risk or uncertainty itself, and the sale or exchange of risk or transfer risk to another person with the contracts of purchase / sale. Takaful - meets the requirements of Sharia agreement on the mutual sharing of risks, which includes participants and operators. 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. Managing Risk in Takaful In assessing and managing risk (underwriting) are not allowed in the takaful gharar (uncertainty or speculation) and maysir (gambling). In the investment and management of the fund is not allowed riba (usury). These three concepts (gharar, maysir and riba) should be completely excluded from the takaful operations.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 13 Although Islam and imposes a number of restrictions on business, but he also preaches and economic activity. The logic is simple: inattention to the economy can be harmful to Islam, because it will be weakened financial base. In practice, this means specific prohibitions, and one of the top cover gharar - the transaction, the terms of which contain unnecessary or excessive risk-taking, for example, where the outcome depends on the occurrence of a specified event. Because of him, first of all, require a substantial revision of the classic insurance schemes. Another known limitation prohibits riba - usury, that is, the percentage of loans. Simply speaking, it is impossible for the money to buy money; fundraising should be based on a division of profits and risks. Therefore, most Islamic loans become a joint venture between the bank and the borrower, in the classical interpretation of reminding financial direct investment. Islamic insurance as a form of business has tremendous potential and has a great potential of growth and development in the creation of new, unique products and innovative technologies to promote them. In order to avoid gharar (uncertainty), there should be complete clarity or disclosure of any takaful contract. Full disclosure is applicable to both sides, as well as to the object and conditions of the contract (the amount of coverage, etc.). It is not allowed to enter into Takaful contract if there is at least one unknown element in the object of the contract and / or unknown risk under the contract. Since this is difficult to achieve an ideal situation, the takaful contract should be drafted so as to avoid any exchange of gharar (uncertainty) between the parties to the contract.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 14 Maysir (gambling) is redundant side gharar. The participants (policyholders) may have an insurable interest in respect of the contract object, but if the distribution of risk (in Takaful) contains any speculative element, such an agreement is prohibited under the takaful. Forbidden of Riba in Takaful Riba (usury) is completely forbidden by Sharia law and, as a consequence, within the takaful. To avoid riba fee for the participants in the distribution of risk is not considered a premium in terms of traditional insurance. Under the takaful similar fee as a contribution or payment (Mushahamah) in the form of donations to the condition of compensation (Tabarru). Moreover, the fund generated from such contributions or donations to parties should be managed and invested in accordance with the laws of Sharia. Participants or policyholders in the traditional sense transmit their contributions to the operator or the insurer as a gift for their effective use with the proviso that when the insured event the money will be refunded. Part of the contributions received in the savings fund from investing which participants have the opportunity to receive a regular income in the amount stipulated in the contract of the share which is usually 50 or 60%. With this investment should be made only in the shares or assets of companies that do not lead contrary to the principles of Sharia activities indicated above. Typically, investments are made in stocks in the Dow Jones Islamic Market Index. BACKGROUND OF TAKAFUL INSURANCE In 1985, the Supreme Council of the Muslim jurists recognized system of takaful alternative form of insurance that meets all the rules and requirements of Sharia. The first attempts to introduce Islamic insurance was implemented in 1970 in Egypt, Sudan and the United Arab Emirates, in the same year, the largest financial-industrial group in Saudi Arabia, "Dalla Al
  • SCOPE OF TAKAFUL IN PAKISTAN Page 15 Baraka Group» (Dallah Al Baraka Group - DAG) established the first insurance company in Manama. Currently, Islamic insurance companies operating in Dubai (Islamic Arab Insurance Company since 1979), Bahrain (Islamic Insurance & Reinsurance Co), Tunisia (BEST Reinsurance), as well as Islamic Mutual Insurance Company, established in 1994, Jordan Islamic Bank and subdivision Al Baraka Investment & Development (ABID). In 1987, it established two insurance and investment company ABID to provide services in accordance with the provisions of Sharia and the promotion of investment activities of individuals, banks and corporations (Al Tawfeek Company for Investment Funds Ltd and Al Amin Company for Securities and Investment Funds). 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. With the development of the Islamic financial services market develop this market and regulatory mechanisms. In 1990, Algeria has established a Commission on Accounting and Auditing of Islamic Financial Institutions (AAOIFI), responsible for the production of accounting, auditing and other standards for Islamic financial institutions. Until recently, the standard of its subordinate mainly Islamic banks, but in 2005 the Bahraini financial regulator (Bahrain Monetary Agency, BMA) plans to introduce them in the Takaful insurance and reinsurance (retakaful). In December 2002 in Kuala Lumpur commission was established by the Islamic Financial Services (IFSB) to create a global system of regulation of Islamic financial market. The Commission was established by central banks of Bahrain, Saudi Arabia, Indonesia, Malaysia, Pakistan, Kuwait, Iran, Sudan and Qatar.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 16 Study by Takaful Insurance Takaful is a brilliant example of a business based on supply and demand-driven customers. Study by the International Monetary Fund (IMF) shows that Islamic economics and Islamic banking, in particular, contribute to the equitable distribution of resources, less exposed to the risks of illiquidity and insolvency. The growth rate of Islamic insurance in some countries is up to 40% per year. Takaful companies are developing dynamically; offering services not only Muslims, but also the rest of the population. Major financial players and Takaful Insurance Such a large insurance field causes the interest of major financial players such as Lloyd's of London and the British bank HSBC, the introduction into the sphere of Islamic insurance and the provision of insurance services to Muslims living in the UK (about 2 million) and the EU (around 15 million people) . Takaful - still a young institution that is gaining popularity in the world. While it accounts for less than 0.1% of the total global annual insurance premium. SCOPE OF TAKAFUL IN PAKISTAN The scope of takaful cannot be overlooked in Pakistani market, as Pakistan is a Muslim country where people believe in the principles laid down by Holy Quran and Sunnah and according to Quran Gharar, Maiser and Riba all these terminologies are haram in Islam. Therefore, for a Muslim it seems to be a sin when following the conventional system of Insurance. This belief and concept of Islam led the growth and development of Takaful insurance fly high in the financial markets. Now international companies are also following the concept of takaful insurance in spite of conventional insurance. The takaful insurance has been introduced in Pakistani market in 2005. There were only two players in the market at that time but with the
  • SCOPE OF TAKAFUL IN PAKISTAN Page 17 passage of time and witnessing the growth prospects most of the private and commercial banks starts their own takaful insurance products. According to Mr. Jamil-ur-Rehman (SBP, PSD) the scope of takaful insurance would one day eat up the share of conventional insurance because it is free from gambling and interest. According a survey conducted by Gallop Pakistan, there are 43% people who are in favor of takaful insurance while there are 21% who have doubts and didn’t agree that there is a difference between takaful and conventional insurance. Although Pakistan is regarded as one of the most densely populated countries of the world, however the share of takaful is stick to only 3 % annually the share is on increasing trend but not with the pace as it was expected too. According Omar Mustafa Ansari, the partner of EnYSidaatHyder, the most important thing is that it is the time we need to maintain strong base and relationships among the people to clarify their misconceptions. Most of the people didn’t even know completely about the methodology while others don’t even try to. In the near 2017 we would be expecting some great numbers in the industry expansion. Now London and markets of UK are also showing their interest in Islamic insurance sector however their advent in the market would be fruitful enough to reap the benefits. PROBLEM STSTEMENT “The Scope of Takaful Insurance In Pakistani Market” SCOPE OF THE STUDY In this research paper the scope of takaful insurance can be highlighted making Pak Qatar Takaful Company an example. This example would lead us to finding the change and growth of takaful industry in Pakistan. Pak Qatar takaful company is chosen for the research paper because
  • SCOPE OF TAKAFUL IN PAKISTAN Page 18 it is pioneer of takaful insurance in Pakistan as well as, it has the maximum resource and research and experience in this area. SIGNIFICANCE OF THE STUDY The study is important because it identifies that why and how takaful insurance is better than conventional insurance and on the other hand, it also determines the future of takaful in Pakistani market.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 19 RESEARCH METHODOLOGY– 02
  • SCOPE OF TAKAFUL IN PAKISTAN Page 20 RESEARCH DESIGN The research design for this research study “THE SCOPE OF TAKAFUL INPAKISTAN” is ‘Exploratory”. In this research study I would be exploring some important facts and figures through a detailed questionnaire study in order to determine the views of people which lead to the scope of takaful industry in Pakistan. RESEARCH OBJECTIVES The main objective of this research is to highlight and demonstrate the scope of takaful insurance and its role in the Pakistani industry. The main objective of this research is to put light to the concept of Takaful and its role in the banking industry of Pakistan. The study has following research questions to examine through analysis. The questions are:-  What is takaful insurance and why it is gaining growth in the whole world?  How Takaful Insurance can be differing through Conventional setting?  Why people go for takaful insurance?  What are the main attributes and competitive advantage’s on conventional setup SOURCES OF DATA The data for this research has been gathered and compiled from a number of sources. These sources are from different authors and researchers and also include interviews and questionnaire. A. Primary Source B. Secondary Source
  • SCOPE OF TAKAFUL IN PAKISTAN Page 21 PRIMARY SOURCES Interviews would be taken from the people of Pak Qatar takaful who define the takaful industry and its scope in Pakistan in real terms. On the other hand, a questionnaire would be filled from the respondents in order to know their perspective about the takaful insurance and their response in Pakistan. SECONDARY SOURCES SydatHyder Report SBP Pakistan Journal Emerald RESEARCH INSTRUMENTS I. Questionnaire analysis QUALITATIVE QUANTITATIVE RESEARCH The research is both qualitative and quantitative in nature. UNIT OF ANALYSIS a) Pak Qatar Takaful b) Takaful Insurance EXTENT OF THE RESEARCHER INTERFERENCE The researcher interference for this research is minimal.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 22 TIME HORIZON The time horizon for this research is Cross-Sectional. The study is cross sectional so as to save the cost and time as we have only 6 months to complete the thesis.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 23 REVIEWING LITERATURE CRITICALLY
  • SCOPE OF TAKAFUL IN PAKISTAN Page 24 According to the report published by the SECP Pakistan in 2007, the analysts are of the view that the scope of Islamic insurance is becoming brighter as the number of companies are still increasing there are now 49 Islamic insurance companies in Pakistan. According to the research conducted by the Muhammad Ayub, the takaful insurance is under some misconceptions. The people are of the view that there is only one way y to strengthen the Pakistani economy that the government should favor the Islamic products as they do it for attracting international investments. However from the research it has also comes to the knowledge that the Government believes on true and fair competition in the insurance therefore giving leverage and advantages would de-motivate the other players. In his research Ayub suggest some recommendations that the Islamic insurance companies should have to design such policies and marketing their product in such a way that they would lead from the front and it is not ban. According to ZulfiqarHasan in 2011, Takaful is the most preferred insurance is the fastest growing business models throughout the world the major share is still with the Saudi and Middle Eastern players however it also strengthens its roots. According to Zulfiqar the Islamic insurance is a balanced approach based on the Islamic principles acting upon which is a binding for a Muslim. According to Abdul Wahab in 2002, the takaful insurance is the most charming and up beating sector of Islamic economy. In Pakistan the scope of takaful of increasing as awareness and knowledge about religion is increasing. In his research along with the SydatHyder associates Wahab is of the view that, there are a number of obstacles which the Islamic insurance had to face but according to the international Reports and the industry professional the Islamic
  • SCOPE OF TAKAFUL IN PAKISTAN Page 25 insurance sector in Pakistan is increasing by 16 to 20% annually. In his research Abdul wahab has also given some recommendations to the Companies so that they can make it better. According Omar Mustafa Ansari, the partner of EnYSidaatHyder, the most important thing is that it is the time we need to maintain strong base and relationships among the people to clarify their misconceptions. Most of the people didn’t even know completely about the methodology while others don’t even try to. In the near 2017 we would be expecting some great numbers in the industry expansion. Now London and markets of UK are also showing their interest in Islamic insurance sector however their advent in the market would be fruitful enough to reap the benefits.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 26 INTEGRATION OF DATA
  • SCOPE OF TAKAFUL IN PAKISTAN Page 27 DATA ANALYSIS The integration and analysis of data for this research is through collecting the views of respondent’s i.e. from the questionnaire analysis. The questionnaire analysis helps us to examine and determine the views of the selected people. The respondents are randomly selected for this research but they are selected keeping in view that they should be clients of even the conventional insurance or they are from the Islamic insurance. The main aim is to analyze the scope of takaful insurance in Pakistan and this can only be gauged through their reviews.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 28 Q. What is your Age Group?  21 – 30 years  31 – 40 years  41 – 50 years  51 – 60 years From the above graph it becomes clear that we have selected 20 respondents from different ages. That is 21 – 30 age people are of 20, 31 – 40 are of 20, 41 – 50 are of 20, 51 – 60 are of 20. This means that from all the ages 20 respondents are selected. 0 5 10 15 20 25 21 - 30 31 - 40 41 - 50 50 - 60
  • SCOPE OF TAKAFUL IN PAKISTAN Page 29 What is your Gender?  Male  Female From the above graph it becomes clear that, most of the respondents for this research are Males as they better know about the matters like insurance while on the other hand, the females selected for this research are 29 and those 29 female respondents are working women. 0 10 20 30 40 50 60 Male Female
  • SCOPE OF TAKAFUL IN PAKISTAN Page 30 Have you ever purchase any kind of insurance?  Yes  No From the above graph it becomes crystal clear that the respondents selected for this research have purchase some kind of insurance in any manner that is, health insurance, Car Insurance, Family insurance etc. for this research only those respondents are selected who have purchase any kind of insurance in any manner. The reason of selecting these respondents is to have a better overview based on all the respondents. 0 10 20 30 40 50 60 70 80 90 Yes No
  • SCOPE OF TAKAFUL IN PAKISTAN Page 31 Are you a customer of Conventional OR Islamic Insurance (Takaful)?  Conventional Or General Insurance  Takaful / Islamic Insurance. From the above graph it becomes crystal clear that, the respondents are the customers of both conventional and Islamic insurance i.e. out of 80 respondents 30 are those who are customers of conventional insurance like (Car Insurance, Home Insurance, Business Insurance) while on the other hand, the remaining 50 are the customers of Islamic insurance like (Islamic Ijarah, Family Takaful etc). This means that most of the respondents are the customers of Islamic insurance this is because the hype of Islamic banking and Islamic insurance. 0 10 20 30 40 50 60 Conventional Takaful
  • SCOPE OF TAKAFUL IN PAKISTAN Page 32 What is the reason why you purchase Islamic Insurance (Takaful)?  It is Islamic  Religious reasons  Personal Satisfaction  Others Influence When a question regarding the reason for the usage of Islamic insurance is asked from the respondents they have of the view that, out of 80 respondents 22 are of the view that they have selected the takaful model because it is Islamic, 16 are of the view that they are using it because of religious reasons while 30 respondents when asked said that, it is because they are personally satisfied with the Islamic insurance on the other hand, 15 are of the view that, they have chosen takaful because others (Family and friends) ask them to choose it. 0 5 10 15 20 25 30 35 It is Islamic Religious Reasons Personal Satisfaction Other Influences
  • SCOPE OF TAKAFUL IN PAKISTAN Page 33 Are you a prior customer of Conventional Insurance?  Yes  No When respondents are asked about their prior experience with the conventional type of insurance they are of the view that, out of 80 respondents 51 are of the view that they were priory the customers of conventional insurance while on the other hand, 29 are of the view they didn’t have prior experience of Insurance. This means that, most of the customer has prior experience of insurance and they can better differentiate in the service. 0 10 20 30 40 50 60 Yes No
  • SCOPE OF TAKAFUL IN PAKISTAN Page 34 Q. Did you find any Difference in Islamic and Conventional Insurance?  Yes, they are Different  No, they are Same When respondents are asked about their views on the question that what they feel about Islamic and conventional insurance is there any difference. Out of 80 respondents 52 are of the view that yes, both of them are different with distinctive ideas and separate origins. However, there are 28 out of those 80 who are of the view that they are both the same without any significant difference is to put a tag of being Islamic and earn the same interest in the name of Rent. This concludes that most of the respondents are of the view that, Islamic concept of insurance is different from the conventional insurance. 0 10 20 30 40 50 60 Yes, They Are Different No, They are Same
  • SCOPE OF TAKAFUL IN PAKISTAN Page 35 Q. What do you think in Pakistan the companies are implementing the proper model of Takaful or not? SCALE 1 2 3 4 5 Strongly Disagree Disagree Neither/ Neutral Agree Strongly Agree 1 Properly Implementing the model 11 15 10 16 27 2 Somewhat Implementing From the above scale table it becomes clear that how respondents and customers of insurance companies feels and views about the implementation of the basic model upon which the Islamic insurance is based. Most of the respondents are of the view that the insurance companies are implementing the full fledge model of takaful. While some of them i.e. 15 shows disagreement and 11 are Strongly Disagree. On the other hand, it comes also into consideration that some of the respondents didn’t have proper understanding of the model.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 36 Q. Rate the following? SCALE 1 2 3 4 5 Strongly Disagree Disagree Neither/ Neutral Agree Strongly Agree 1 Takaful is free from element of gharar (uncertainty), riba (interest) and Maysir (gambling) 7 4 9 15 35 2 The refusal of uncertainty, gambling and usury elements differentiate Takaful from the conventional insurance 4 9 2 15 40
  • SCOPE OF TAKAFUL IN PAKISTAN Page 37 Q. In your opinion what is the future of Takaful insurance in Pakistan?  It is bright  It is not bright From the above graph it becomes clear that the future of Islamic insurance in Pakistan is quite high. However there are some facts which are related and supportive with the argument. The future of Takaful would be high in case of proper awareness should be given to the customer. Currently the customers are confused they are going for takaful insurance because it is Islamic and they have to follow it. However they are not following the Islamic insurance according to their own will and choice. 0 10 20 30 40 50 60 70 80 It is Bright It is not Bright
  • SCOPE OF TAKAFUL IN PAKISTAN Page 38 Q. Is government of Pakistan Supporting or giving some benefits or advantage on Islamic insurance?  Yes  No When respondents are asked that if the government of Pakistan is giving any kind of favor or relaxation for choosing the Islamic insurance, the respondents are of the view that no the government is not giving any kind of advantage. Out of 80 responds only 12 are of the view that yes the government is giving them some advantage while on the other hand, 62 out of 80 respondents are of the view that the government of Pakistan is not giving any kind of advantage and favor to them even in taxes. 0 10 20 30 40 50 60 70 80 Yes No
  • SCOPE OF TAKAFUL IN PAKISTAN Page 39 Q Did you know what kind of model the Islamic insurance companies are following?  Yes  No From the above graph it becomes clear that When respondents are asked that if they know about what business model the Takaful companies are following then out of 80 respondents 69 were of the view that they dint have any idea and the company didn’t even mention them this. On the other hand, only 11 are of the view that they know which model the company is following for this business. This means that most of the people who are even clients have any kind of knowledge about the model 0 10 20 30 40 50 60 70 80 Yes No
  • SCOPE OF TAKAFUL IN PAKISTAN Page 40 Q. What is the main point which a takaful company needs to enhance the scope of Islamic insurance?  Awareness Sessions  Leverages and discount Offers  Market the Islamic Factor  Contract Directly with Banks When respondents are asked that how the takaful insurance would tend to grow in the Pakistani environment. They were of the view that the scope of takaful insurance is quite higher in Pakistani market. The market capitalization is also big and these companies need to adopt certain measures to lead the market. Out of 80 respondents, 27 are of the view that through awareness sessions that can be developed because people are not aware of the facts about the Islamic insurance however 20 are of the view that, they should market the Islamic factor in it 0 5 10 15 20 25 30 Awareness Sessions Leverages Market Islamic Factor Contract Directly With Banks
  • SCOPE OF TAKAFUL IN PAKISTAN Page 41 Q. what is the major product which is frequently used by you?  Marine Insurance  Motor vehicle Insurance  Home Insurance  Health Insurance  Business Insurance When Respondents are asked about what kind of insurance product they would use frequently they were of the view that, 80% of the people use Auto Insurance and Business Insurance products. While for the business purpose most of them are insured as marine insurance. This concludes that in Pakistan two major products are used i.e. Business insurance and Auto Insurance. From the respondents reviews it comes to knowledge that, people use these insurance because of burglary and dacoits. 0 5 10 15 20 25 Marine Auto Home Helath Home Business
  • SCOPE OF TAKAFUL IN PAKISTAN Page 42 Q. Is Takaful insurance providing all these products as conventional is providing them?  Yes  No When respondents are asked about the takaful insurance that if they are providing these products or not. Out of 80 respondents 53 are of the view that yes the takaful insurance is providing all the products which the commercial insurance is providing while on the other hand, 27 are of the view that takaful is not providing all the insurance because of some restrictions and because they are also new in the market. The people who are saying that takaful is not providing the insurance are of the view that it takes time for takaful insurance to change the belief of a common man because most of the people think that they are the same. 0 10 20 30 40 50 60 Yes No
  • SCOPE OF TAKAFUL IN PAKISTAN Page 43 INTERNATIONAL TAKAFUL INDUSTRY AND ITS INCREASING SCOPE From the current estimates it has been come to the knowledge that the current takaful industry reaches up to US$11b in 2012 (from US$9.4b in 2011). However the contribution in these increasing trends includes Saudi Arabia with the highest 51% share. However in some parts of the world the scope of takaful is connected with the awareness among people and the growth rate remains in between 13% to 16% annually. The potential of growth in these countries are higher but some strategic kind of activities needs to be done on priority basis so as to boost up the ratio. Figure 1 Country Wise Growth Chart
  • SCOPE OF TAKAFUL IN PAKISTAN Page 44 The Main Business Centers of Takaful INSURANCE Their business centers are basically the countries in which we are analyzing the growing trend of takaful insurance. One of the main reason for faster growth in these countries is that they have proper awareness sessions or mostly they are densely populated Muslim world with Strong Governments. The above picture shows the growing trend of takaful in different parts of the world. Saudi Arabia being the center of Islam and practices is on the highest trend. The GCC countries include North African countries.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 45 FINANCIAL PERFORMANCE OF TAKAFUL COMPANIES IN PAKISTAN 2010 2011 2012 CLAIMS RATIO 63 50 48 CUSTOMER BASE 14 27 49 EXPENSE RATIO 38 23 21 ROE 1.2 5 14 Figure 2: Financial performance of takaful companies 2010 – 2012at a glace report The above Financials shows that the takaful companies are on a better and increasing trend in Pakistan. According to Jaweriyia Ahsan (Assistant Director, Pak Qatar Takaful) the takaful industry is in the developing phase in Pakistan and we are the biggest institution to lead from the front. It is still a long way to go and we are working on the new and innovated Islamic products. Our customer base is increasing day and day and globally. In order to boost up the ratio of takaful insurance the company has already designed a phase wise plan. The company is also focusing on the future marks i.e. enhancing the Motor Vehicle and Marine insurance plans so that we can make it better.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 46 CRITICAL DEBATE
  • SCOPE OF TAKAFUL IN PAKISTAN Page 47 CONCLUSION The takaful industry has now become one of the leading and most emerging Islamic economic and financial segments of the economy. it is not only recognized in Pakistan but its recognitions was also remarked by international financial institutions, Stock Markets and economies. The main aim of Islamic insurance is to maintain a balance in the economy and treat it in an Islamic manner which is free from the elements of gharar, Interest and gambling. The Islamic insurance is based on the principles of Sharia. The trend of Islamic insurance is growing in rapid manner and this is the sign of change in the economy and in the minds and perception of people. The main aim of this research paper is to analyze the scope of Islamic insurance in the Pakistani market. In Pakistan the insurance sector is divided into Private as well as public companies, in private there are 50 companies while in public there are 4 companies operating with maximum market share. However Islamic insurance begin to start their operations with a tough competition but being Islamic is one of the most contrasting and competitive edge for them. Islamic insurance has defined its own business model totally based upon the Islamic practices of sharia. In this research paper the scope of Takaful insurance in Pakistan is analyzed with the help of interviews and questionnaire floated among the general public who are clients and customers of conventional and non-conventional insurance. The main aim is to analyze the perception of the people because it is the perception which becomes the final decision. However we have witnessed that people are quite satisfied from the Islamic insurance and welcomes the growth of takaful in Pakistan. From the research it has also been concluded that the future of Islamic insurance in Pakistan is brighter but there are some obstacles and misconceptions. This can be eliminated with the help of
  • SCOPE OF TAKAFUL IN PAKISTAN Page 48 continuous awareness sessions and defining the real aim of takaful for the public. Still the people who prefer Takaful over conventional didn’t even know the difference between the two. The companies need to consider a number of factors keeping in view the Pakistani culture and environment which has now become a mixture of western and eastern values. Important Findings from the Research According to the statisticsof 2008 published in the report of SydatHyder Associates Pakistanindicated the insurance market premium is of Rs. 12.5 billion with the operation of 40 companies. a) Population Base: The Population of Pakistan is approximately reached up to 18 billion and around 95% of the population is Muslim. Muslims are those who practice the things as defined by their religion. Interest and Gambling which is the basic elements of conventional insurance is totally forbidden in Islam therefore, keeping in view this factor the takaful companies could brand their name as Islamic and market them as much as they can to beat the local market. b) Industry Base Currently the insurance industry of Pakistan is totally dependent upon the conventional insurance companies as they are greater in numbers, have professional employees even the Government of Pakistan which is Islamic republic of Pakistan is following the conventional setup. This means that the major share of the market is under the control of these conventional players.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 49 c) Misconceptions From the research it has been analyzed that a number of people have misconceptions about the Islamic insurance they are mostly of the view that there is no difference among the one another both of them are same the only different is they call it interest and Islamic called it rent. This misconception among the people is the major obstacle among the growth of Islamic insurance in Pakistan however, still the people believe on the Fatwa and are opting the Islamic insurance because of being Islamic and interest free. d) Preferences People now prefer the Islamic insurance because of the fact that it is Islamic and they are of the view that they have selected the right choice as said by the religion and sharia. Still the Islamic insurance market is in the growing phase in Pakistan because they are lack with the professionals. e) Major Business Products The people of Pakistan mostly used three main insurance products: Vehicle insurance, Home insurance and business insurance. These products are widely in Pakistan especially the Motor vehicle insurance however the major market share in this sector is with banks and local conventional insurance companies because they have direct linked and contracted with the banks and companies. f) Industry Professionals One of the major facts which also become the factor for the future growth of takaful in Pakistan is the professional experts. From the research we have analyzed the fact that there is still a shortage of the industry professionals in takaful insurance. On the other hand, in the
  • SCOPE OF TAKAFUL IN PAKISTAN Page 50 conventional setup there are a number of professionals and policy makers who define and design such a policy so that their market share is still on the higher side. g) Government Advantage and Leverage From the research it has come to the knowledge that the government of Pakistan is not giving and offering any kind of advantage to the Islamic insurance clients. This is the need of the hour and the government should focus on this. However in countries where the Islamic insurance is on its boom like Saudi countries the Government of Pakistan has strict bans on Conventional insurance however in some parts of UK and Middle East the local government is offering some leverages in taxes and they are giving other benefits too. The people are of the view that there is only one way y to strengthen the Pakistani economy that the government should favor the Islamic products as they do it for attracting international investments. However from the research it has also comes to the knowledge that the Government believes on true and fair competition in the insurance therefore giving leverage and advantages would de-motivate the other players. The Islamic insurance companies should have to design such policies and marketing their product in such a way that they would lead from the front and it is not ban. h) Islamic Insurance Business Model The research also clarifies that the business model which is followed b the Islamic insurance companies is unique but not known by the clients.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 51
  • SCOPE OF TAKAFUL IN PAKISTAN Page 52 RECOMMENDATIONS Based on the above research insights some of the important recommendation which in my opinion becomes the growth prospect of the future of Islamic insurance companies is as follows: 1. The population of Pakistan is increasing and hence the consumer base is also increasing. The people of Pakistan have now become more conscious about the insurance and mitigating the risk however there is still a huge market to go on with. The Islamic insurance companies 2. The insurance companies hold has to initiate awareness sessions free phase wise. In the initial phase they have t to train the people of banking institutions so that they can guide the pubic in a better way while on the other hand, in the second phase they have to come to public and inaugurate public awareness sessions in which they market the Islamic point of view. 3. The Islamic insurance companies would have to clarify the misconceptions regarding the Islamic insurance and their match with the conventional ones. 4. The Government of Pakistan would have to focus on implementing the Islamic insurance however if they didn’t do it, just give some benefit to the users of Islamic insurance. Being an Islamic Republic of Pakistan the country Government should have to focus on it. 5. Strategic collaboration with the Saudi companies and other Middle Eastern companies should be strengthen and develop with a view to have more groomed product.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 53 6. The major sectors of insurance sector growth are Automobile sector, Business insurance and home insurance sector. The Islamic insurance companies should have to focus on this avenue to groom up this opportunity. 7. Regulatory framework for the policy should be made and policies are designed in such a way that the new customers would feel some flexibility.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 54 References Anwar, M., & Hussain, M. (1994). Comparative Study of Insurance and" Takafol"(Islamic Insurance)[with Comments]. The Pakistan Development Review, 33(4), 1315-1330. Bekkin, R. I. (2007). Islamic insurance: National features and legal regulation. Arab Law Quarterly, 21(1), 3-34. Bhatty, A. (2005). The growing importance of Takaful insurance.In Asia Regional Seminar organized by OECD and Bank Negara Malaysia under the sponsorship of the government of] apan (pp. 23-24). Bhatty, Ajmal, "Takaful Industry: Global Profile and Trends, 2001" , New Horizon, Institute of Islamic Banking & Insurance, London, April 2001 Data Retrieved From http://www.kantakji.com/fiqh/Files/Insurance/DiffbwConvIns.pdfDated, 08th December, 2013 Data Retrieved From http://www.sbp.org.pk/departments/ibd/Takaful.pdf Dated, 08th December, 2013 Dr. M.M. Billah, "Life Insurance-an Islamic View". Arab Quartely, Vol. 8 part 4. 1993 Institute of Islamic Banking and Insurance, Directory of Takaful Companies 2000, London Fisher, Omar, "Growth of Islamic Finance and Scope for Retakaful", speech International Takaful Conference, KL Malaysia, June 2000.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 55 Kader, H. A., Adams, M., & Hardwick, P. (2010).The Cost Efficiency of Takaful Insurance Companies&ast. The Geneva Papers on Risk and Insurance-Issues and Practice, 35(1), 161-181. Khorshid, A. (2013). Islamic insurance: a modern approach to Islamic banking. Routledge. Mankabady, S. (1989). Insurance and Islamic Law: The Islamic Insurance Company. Arab Law Quarterly, 4(3), 199-205. Maysami, R. C., & Williams, J. J. (2006).Evidence on the relationship between Takaful insurance and fundamental perception of Islamic principles.Applied Financial Economics Letters, 2(4), 229-232. Taylor, Dawood, "Developing Takaful Taawuni in Saudi Arabia" speech International Takaful Conference, KL. Malaysia, June 2000 Wahab, A. R. A., Lewis, M. K., & Hassan, M. K. (2007). Islamic takaful: Business models, Shariah concerns, and proposed solutions. Thunderbird International Business Review, 49(3), 371-396.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 56 APPENDIX OBSTACLES in Takaful Legal (Takaful Rules / Shariah Board) Aspects 1. As per the Insurance Ordinance 2000, “Takaful” means a scheme based on mutual assistance in compliance with the provisions of Islamic shariah, and which provides for mutual financial aid and assistance to the participants in case of occurrence of certain contingencies and whereby the participants mutually agree to contribute to the common fund for that purpose. 2. There are at these stage legal obstacles in the establishment of a takaful operator. Takaful Rules need to be developed so that a takaful operator can be given permission to operate under the guidelines of those rules. 3. There would also be a need to have a central Shariah Advisory Board with which SECP would need to take approval/advice prior to approval of products and other documentation filed by insurance companies. Consumer Mindset Consumer’s mindset has become such that they have the tendency to try to recover the premium that they have paid to an insurance company. A number of malpractices have crept into the system because of this mindset. Changing this mindset can become a major challenge for a takaful operator. It would need to ensure that like the conventional system, compromises do not creep into the system due to pressures from clients. It may be important for a takaful operator to avoid insuring such consumers as they can affect the credibility of the takaful system and ensure that operational controls are not compromised.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 57 TAKAFUL BUSINESS MODELS Presently different takaful models are prevalent in different countries. The basic models being two i.e. Mudaraba based (Malaysian Model) and Wakalah Model (Middle Eastern model). However there are a number of finer issues and combinations of models that exist in practice which have been discussed briefly in Annex 1. Discussions with scholars in the country show a clear preference for the Wakalah model due to less serious Shariah related concerns with this approach as opposed to the Modaraba model where scholars have a number of serious concerns. A refinement of the Wakalah model has also been made which is called Wakalah with WAQF Fund that has been evolved by DaroolUloom, Karachi. I had the opportunity of assisting in this process and a model has taken shape which still needs to be discussed on a larger platform before it can be considered as being ready for implementation by Takaful operators. The general perception also is that people would be more comfortable with the approach acceptable to Middle Eastern Shariah scholars compared to the Malaysian approach which is generally considered as more liberal even in Islamic banking. A final consensus needs to be developed and decision taken on the model that we wish to adopt for Pakistan. It is hoped that urgent discussions take place on the model issue and consultations are done with Shariah scholars from other countries to arrive at a consensus approach. A central Shariah Board would also be required to advice SECP on the approval of specific products that would later be submitted to SECP by different companies. Once a consensus has been reached, it is equally important to emphasize that the Takaful Rules should specify the specific model to be adopted to avoid confusing the public at large with different models and further different variations of models being adopted by different companies. The Rules may however allow for some flexibility in certain aspects which may be left to the Individual Shariah Boards. This step would go a long way in ensuring public faith and acceptability of the takaful system and avoid creating confusion and interpretations of different models.
  • SCOPE OF TAKAFUL IN PAKISTAN Page 58 In conclusion, Islamic Finance and Islamic Takaful are ethical financing and cooperative risk protection methods that are superior alternatives precisely because they reinvigorate human capital, emphasize personal dignity, community self-help, and economic self- development..generating manifold benefits for all participants. Islam is an integrated way of life. Thus, interest-free financing and Takaful are mutually reinforcing systems that promote at once economic efficiency, communal risk-sharing and individual rewards through self-purification. In as much as the Takaful system resolves around active participation by members of the community, it is imperative that public awareness be enhanced. As Muslims and non-Muslims alike come to understand the real benefits of Takaful and cooperative risk sharing, the evolution of the Takaful industry will accelerate making the projections described herein overly conservative.