Takaful, the Sharia-compliant alternative to insurance, is a decade old industry which is 10pc of the conventional insurance industry. Insurance, in itself has a penetration rate of less 0.8pc of the GDP if measured by business volume.

A large population is shying away from insurance due to religious reasons and staying away from Takaful owing to a lack of understanding. By increasing awareness about takaful as an alternate mechanism, the industry can unleash the enormous potential for its growth.

But the industry in its nascent stage of development is fraught with many challenges.

The underlying structure of Takaful industry requires a voluntary pool (waqf pool) from where it gives out funds to those who need it. The size of the pie determines the ability to meet claims; hence, the need to attract a higher number of participants to make the business a viable option.

Since it is predominantly an agent/commission based sale, the infiltration is limited to a particular high end segment; and awareness creation/education of the sales staff remains feeble which causes doubts about Sharia compliance in the mind of the consumers.

According to Dr Arif Hussain, expert in Takaful, the industry needs support from the regulator. “One of the issues which perhaps the regulator can resolve is to look into options of merging life and general takaful, since silos diminish their ability to offer creative products. The industry stresses that the government should support them by making group insurance, passenger accident coverage compulsory”.

Mr Saqib Zeeshan, Deputy CEO of Pakistan Takaful says, “The lack of implementation of labour laws results in low off-take of life takaful by industrialists. The industry as a whole is expanding its reach through direct sales force, banks (banca takaful) and now through alternate distribution channels.”

Alternate distribution channels include large companies with multiple offices throughout the country, such as large courier companies, which can be a point of sale. The overriding issue of understanding and knowledgeable staff however remains.

Industry experts agree on challenges which include lack of re-takaful opportunities in high potential areas, lack of standardisation, weak regulatory support, lack of awareness and lack of short term liquidity management tools.

The industry hasn’t reached the stage where it can adopt International Financial Stability Board (IFSB)

and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) guidelines, which are developing standards for auditing and accounting of Islamic Finance.

Given the difficult circumstances, it may be argued that banks via banca takaful and government with various amendments in regulation, indulged in hand holding for a while; though the government initially protected the industry from 2005 to 2012, since no conventional insurance companies were allowed to establish window operations.

Takaful operators obtained a stay order against relaxation and it was not until 2014, that conventional insurance companies were allowed to set up window operations.

To tap this 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 required to create awareness among users.

Given that wealth management is another aspect of Takaful, the product plate may be expanded to tweek the existing model. With the current model, perhaps micro takaful is a far cry, but some programme lending may be designed to work it out.

The lower middle class, without welfare or a social security net, has an immense need of such insurance.

At the community level, low income household staff is provided protection in times of medical emergencies and health by their employers. However, the poor work for barely sustainable salaries in the hopes of getting bailed out when the going gets tough.

In this regard, the government initiative through the ‘PM’s National Health Programme’ implemented in a few districts of Punjab and KP is worth a mention.

State- run State Life Insurance Corporation supported by a few NGOs is offering health coverage through insurance to low income persons. The coverage is provided through hospitals, which claim medical expense on treatment of the poor from SLIC. According to Dr Arif Hussain, “the off-take is low due to lack of awareness of this insurance among users. Since the Takaful operators lack the capacity of run such an enormous project at this stage, a window operations of SLIC may be able to provide the thrust.”

The Islamic finance industry has long raised the slogan of being a better, more stable model; however, impactful work needs collaborative effort from within the Islamic finance industry.

In this context, an academic combined with industry conference (World Islamic Finance Forum) is being organised by the Centre for Excellence in Islamic Finance, Institute of Business Administration in September to bring together key stakeholders, and global subject matter experts to generate innovative ideas for growth and development. Hopefully such dialogues will stimulate new ideas.

The writer is manager at the Centre for Excellence in Islamic Finance at IBA.

sahson@iba.edu.pk

Published in Dawn, Business & Finance weekly, August 22nd, 2016