Takaful - A Financial Shock Absorber In Bad Times

Takaful - A Financial Shock Absorber In Bad Times
Life is full of uncertainties. It may bring us to a very disturbing position if a closed one dies due to an accident, heart attack or a bomb blast, vehicle gets stolen, factory turns into ashes due to fire or earthquake etc. One may become disabled due to an accident. Such incidents occur around us. Beside psychological and other losses, financial impact also at times becomes unbearable.

When the sole breadwinner in the family dies, the widow and the orphans go through trauma. Sadly, our state is not yet a welfare one where it would take care of widows, orphans, senior citizens and compensate them for their monetary losses.

This situation demands a solution which may absorb the financial shock arising as a consequence of the deceased family member. Insurance is one answer to these problems if such an incident occurs and suitable care is taken. But Islamic scholars object to insurance due to the existence of prohibited elements like interest, uncertainty and gambling.

Muslims are often reluctant and hesitant to take insurance and one of the reasons is its non-compatibility with their beliefs. For addressing the situation, Muslim scholars kept on working for developing a system which could provide financial compensation if such incidents occurred while staying compatible with the religion.

Besides other conferences and meetings on insurance and takaful, in 1985, Islamic Fiqh academy of Organisation of Islamic Countries (OIC) based in Jeddah, declared insurance prohibited and Takaful as an alternative permissible system. Islamic scholars from almost all countries participate in the Fiqh Academy meetings and try to solve the modern world problems through Qur’an and Sunnah. Currently Justice (r) Maulana Muhammad Taqi Usmani is the Chairman of Fiqh Academy. Majority of Islamic scholars declare takaful permissible, however, a minority still considers it to be not aligned with the religion.

In 1979, first Takaful company was established in Sudan and then a mushroom growth of companies was observed in many Islamic countries, including Saudi Arabia, UAE, Malaysia and others. In Pakistan, first takaful company was established in 2006 which shows that Pakistan was a late starter in the area of Takaful but it also brought some benefits. Even in Sri Lanka, first takaful company was established in 1996. However, being late starters, we learnt from the experience of other countries and developed a model of takaful which is considered the most refined model of takaful globally.

Securities and Exchange Commission of Pakistan (SECP) is the regulator of insurance and takaful. In Pakistan, more than 50 insurance and takaful companies are operating. In 2003-4, SECP formed a committee for making takaful rules. The committee members also included Maulana Taqi Usmani and it successfully developed rules for takaful companies which were implemented in 2005.

After the implementation of takaful rules, in 2006 first Takaful Company was established in Pakistan. Presently, there are full-fledged five takaful companies and more than 20 insurance companies offering takaful services. Globally, more than 300 takaful companies are operating and Saudi Arabia, UAE, Malaysia are the market leaders.

Pakistan has the lowest insurance penetration in the region. Bangladesh, Sri Lanka and India have better insurance penetration than Pakistan. It was expected that takaful companies would fill in this gap but unfortunately, it didn’t happen. Need for a financial assistance when something wrong takes place is considered to be a latent need. That means a need exists but is not realised.

We as a nation are not farsighted and we ignore the bitter realities of life i.e. financial consequences of death and other accidents. Takaful companies offer products which provide compensation if something wrong happens. In case of death, takaful companies compensate the deceased family through lump sum payments and monthly, quarterly, half yearly or yearly payments for a specified period. People can take health coverages for their families which cover the treatment costs.

Best hospitals of the country are on the panel list of takaful companies where treatment can be taken and its bill is paid by the company instead of customer within specified limits. Takaful companies also offer motor vehicles coverages and compensate the owner if the car gets damaged in an accident or gets stolen/snatched. Shop owners, distribution firms, factories can take coverage of their stock against the risk of burglary, fire, terrorism, natural disasters like earthquake, and flood etc. Factories, CNG stations, construction companies, hospitals can take takaful coverages for their machineries.

Pakistan is greatly exposed to natural disasters and the Global Climate Risk Index 1993-2012 has ranked Pakistan as the 12th most affected by extreme weather events. In 2005 Pakistan was hit by massive earthquake and in 2010 by massive floods that resulted in human and property loss on a massive scale. It will be a great initiative if Pakistan takes property and life insurance/Takaful coverages against the risks of natural calamities in areas exposed to such risks. So that God forbid, if they happen again, the people will not fall into the "poverty trap".

The writer works as a Lecturer at Centre for Excellence in Islamic Finance (CEIF), Institute of Management Sciences, Peshawar (IMSciences). He can be reached at adnan.malik@imsciences.edu.pk.