Monday, August 20, 2012

Open the takaful markets in Pakistan

The move by Pakistan's 5 takaful operators to try and block conventional insurers from offering takaful through separate windows (the same way conventional banks offer Islamic banking) seems to be myopic, although I don't profess to know the details of their objection.  If it is unsuccessful, it would represent a move in the opposite direction from the Qatar Central Bank directive that prohibited conventional banks from having Islamic windows. 

The reason I view it as a myopic move is because it would place shorter-term profits over the longer-term growth in takaful.  This is not necessarily without evidence from the Qatar Central Bank directive, which was intended to encourage Islamic banking by local, wholly-Shari'ah-compliant banks.  Instead the move led to consumers staying with their conventional banks and allowing their accounts to be shifted from an Islamic window to the conventional side rather than move their accounts, which is a time-consuming process.

Islamic finance has a natural market among Muslims who will either use Islamic financial institutions  or none at all, but relying exclusively on this market risks limiting potential areas of growth in Islamic finance.  Allowing conventional insurance companies, for example, to offer takaful alongside takaful companies may threaten the near-term profits of these takaful companies, but the market competition will benefit the customers of takaful companies. 

With competition from conventional insurers, takaful firms will be forced to compete on quality and price with institutions that have deeper resources than they do.  This will be difficult for smaller takaful companies, especially on the first day they have to compete, but it will prepare them better to draw consumers away from conventional insurers which is where the largest part of the market for their products lies. 

Without conventional insurers as direct competitors in the takaful market, the small takaful operators will manage over time to attract consumers from conventional insurance, but the process will be much slower than if they face competition in their main market to force better pricing and service.  And they will still be able to compete with conventional insurers with takaful windows because many people still question whether conventional insurers with takaful windows are fully able to segregate the takaful funds from their conventional business. 

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