KARACHI: The insurance industry is preparing to move to Sharia compliance (takaful) as the country seeks to meet its interest-free Islamic finance target, but challenges such as limited re-takaful capacity and a lack of savings instruments persist, and the regulator is actively working to address these issues.
Islamic finance has been steadily growing in Pakistan, with takaful serving as a bellwether of consumer appetite for Islamic financial products.
According to a report from the Securities and Exchange Commission of Pakistan (SECP), family takaful, which has a negligible share till the last decade, increased to 15 per cent of the life insurance market in 2024, while general takaful grew to 14 per cent of the non-life segment. Despite this growth, Islamic insurance lagged behind other Islamic financial services in terms of market penetration. As of 2024, Islamic banking represented 25 per cent of the banking sector, while Islamic non-bank financial institutions comprised 39 per cent of the non-banking finance space.
Insurance companies submitted their board-approved plans to the regulator in December, outlining the phases through which they would transition to takaful, possibly by 2029, subject to the readiness of the companies and applicable regulatory matters, Pak-Qatar Family Takaful Limited (PQFTL) CEO Waqas Ahmad told The News in an interview.
“Currently, the industry is navigating two critical areas that require collaborative solutions for takaful conversion to be successful,” Ahmad said.
“The first area is general insurance, where adequate coverage and large re-takaful arrangements on a global scale are still being developed,” he added.
According to Ahmad, re-takaful means that if an insurer covers a ship, they retain 10 per cent of the risk while passing 90 per cent to a re-takaful provider. However, there are not yet sufficient global limits for this substantial value. In light of the limited re-takaful capacity, transitional arrangements (like allowing a reinsurer for a limited period) may need to be considered.
He said that the SECP has also acknowledged these challenges and recognised that some flexibility may be necessary for a period like five to 10 years to ensure a sustainable and meaningful transition.
The second area of focus, as the PQFTL CEO mentioned, is life insurance, which involves managing people’s savings. As the insurance industry progresses toward takaful conversion, it will be essential to develop adequate Sharia-compliant investment instruments to support the savings component. Both of these areas need to be actively worked on.
Pakistan is required to eliminate ‘riba’ (interest) from its economy by January 1, 2028, following the 26th amendment. The SECP also aims to increase the share of Islamic insurance within the overall sector to 30 per cent by the end of the same year.
PQFTL was listed at the Pakistan Stock Exchange (PSX) in December, marking it as the first family takaful operator to go public. The company chose to conduct its initial public offering not due to a lack of capital, but as part of its digital transformation efforts.
Last year, the SECP raised the paid-up capital requirement for life insurers from Rs700 million to Rs3 billion and for non-life insurance companies from Rs500 million to Rs2 billion, to be implemented in phases by 2030.
“Our company, which operates as a family takaful company, was fully compliant with the paid-up capital requirement at Rs1.3 billion. Following our IPO, this amount increased to Rs2.3 billion, ensuring compliance until 2028,” Ahmad said.
There are approximately 11 life insurance/takaful companies that have been allowed for the first time to introduce digital products. The SECP has mandated that each company must launch at least two digital savings products this year.
The insurer plans to move toward improving digital service and introducing artificial intelligence in core operations. Ahmad said this year, “We will do two to three micro-projects in AI. We have already completed the first project, in which we built a sales chatbot that simultaneously engages with multiple people online. In the future, we also plan to build a service AI bot.”
The PQFTL currently has no plans for a merger; instead, it is pursuing a strategy of both expansion and consolidation. The CEO said in terms of branches, the company is consolidating and expanding simultaneously. Previously, the number of branches was 125; now it has been rationalised to 75. “We are closing branches in smaller cities that are not effective for our current products, while simultaneously opening new branches in larger cities having potential for wealth manager products,” Ahmad said. “So far, we have opened two new branches in Karachi and one in Lahore, and we plan to open three branches in other big cities. Regarding bancassurance, we previously partnered with 13 banks.”
“We have since introduced new products and signed agreements with three new banks. We will continue our collaborations with 13 of our existing partners, focusing on further expansion and the introduction of new products,” he added.
For the first time, PQFTL is also collaborating with digital aggregators and telecom companies to promote micro-savings. By leveraging digital platforms and telecom services, the company has reduced the ticket size of its offerings, making insurance more accessible than ever before.
Insurance penetration in Pakistan remains alarmingly low, at less than 1.0 per cent of GDP. This means millions of households are vulnerable to financial shocks caused by accidents, medical emergencies, or unexpected deaths. The situation is worsened by higher inflation and rising poverty levels.
In life insurance, there will naturally be some impact from the broader economic environment, when household budgets are stretched, spending priorities shift, Ahmad noted. However, this is also the moment when the value of protection and savings becomes most apparent to people. People are increasingly recognising that if the situation is getting challenging, having a lifetime annuity and thinking about long-term retirement planning is not a luxury, it is a necessity.
This year, the company entered the government pension space. In 2022, the Khyber Pakhtunkhwa (KP) government and, from 2024 onwards, all provinces have been transitioning new government employees to a new voluntary pension framework.
