* New rules to let conventional firms open takaful windows
* Four to five conventional firms said to be interested
* Rules may boost takaful's market share to double digits
By Bernardo Vizcaino
DUBAI, Aug 7 Pakistan's regulator has introduced
new takaful (Islamic insurance) rules designed to boost
competition and lift the sector's market share by allowing the
entry of conventional players, prompting a legal challenge from
The rules, launched last month, make Pakistan the second
country after Indonesia to officially allow takaful windows,
which enable firms to offer sharia-compliant and conventional
products side by side, provided client money is segregated.
Takaful has operated without conventional competitors in
Pakistan since the first rules were introduced in 2005, but
those rules said windows could be allowed after a five-year
Conventional insurance firms could serve a broader share of
the takaful market "with their larger sales force and vast
branch network", the securities commission said in a statement
Takaful is seen as a bellwether of consumer appetite for
Islamic finance products. It is based on the concept of
mutuality; the takaful company oversees a pool of funds
contributed by all policy holders, but does not necessarily bear
In their investments, takaful firms must follow religious
guidelines, including bans on interest and pure monetary
speculation. Global takaful contributions are forecast to reach
$12 billion this year, according to consultants Ernst & Young.
Although Pakistan is the world's second most populous Muslim
nation, takaful's share of the total insurance market there is
only 2 to 3 percent, said Omar Mustafa Ansari, Karachi-based
partner at Ernst & Young Ford Rhodes Sidat Hyder.
In contrast, the average takaful share in Muslim countries
stood at 5 percent in 2010 and is expected to reach 7 percent by
2015, according to a report last September by Swiss Re.
The overall share of takaful in Pakistan could reach 25 to
30 percent for general coverage and 15 to 20 percent in
family/life coverage within five to seven years, Ansari said,
with much of that growth being captured by windows.
"Takaful companies did not have the capacity to serve the
Islamic banks, let alone the overall corporate and personal
needs for insurance," Ansari said, noting that no new takaful
firms had entered the market in the last four years.
"While I am considered to be a purist (or at times critic of
the weaknesses in the present system), I feel that for the
purpose of growth of the industry, it is necessary to allow
windows." Ansari added that his comments were his personal views
and not made on behalf of any company or institution.
Conventional players appear keen to enter the market to
increase their business volumes. "At least four to five
companies have prepared working papers," Ansari said.
Incumbents face "fierce competition on pricing and service
quality. They will have to increase their capital bases and
might need to look for mergers and acquisitions," he added.
New entrants into the takaful market could also increase
overall insurance coverage in the country by reaching out to
untapped market segments.
Pakistan's insurance penetration, measured as total premiums
to gross domestic product, was the third-lowest in Asia last
year at 0.7 percent, against 4.1 percent for India, another
report by Swiss Re showed.
Opportunity lies in Pakistan's rural belts where there are
high growth prospects, said Muhammad Ashfaq Ur Rehman, a
Dubai-based management consultant. "It depends how conventional
insurers having windows devise their marketing strategy."
But Pakistan's five takaful operators last week filed a
petition in a court in Sindh province, the country's
second-largest Islamic banking market, to challenge the new
"Criticism is against the window concept (seen as diluting
the sharia)," wrote Tarik Rashid, Karachi-based insurance
consultant and associate fellow of the Institute of Islamic
Banking & Insurance, a British-based body which offers education
in Islamic finance.
However, the new rules include requirements for external
auditors and internal compliance officers, and the regulator
said further requirements might be included.
If authorities decide to introduce a minimum capital
requirement for takaful windows, that could create a level
playing field for pure takaful and conventional insurance
companies, Ansari said.
The takaful industry's lobby may not be powerful enough to
persuade the authorities to cancel the reforms entirely. "I do
not think there is a real forceful takaful representation" that
could make the regulator reverse its decision, Rehman said.
Any reversal might be hard to justify because Pakistan's
conventional banks operate Islamic windows under the same
methodology, a source at one of the takaful firms said.
The petition may delay the opening of takaful windows or
prompt the regulator to make some amendments to the rules, but
the decision to open windows is "guaranteed" to go ahead, the
(Editing by Andrew Torchia)