Islamic Insurance and Finance History in Pakistan

Islamic Insurance and Finance History  in Pakistan

 

Insurance in Pakistan has a history dating back to the early 20th century when the country was still under British rule. The first insurance company in Pakistan was the Oriental Fire and General Insurance Company, which was established in 1923.

After the creation of Pakistan in 1947, the government took steps to promote the insurance industry, and several new companies were established. The government also established the Pakistan Insurance Corporation in 1952, which was a state-owned insurance company. In 1961, The Insurance Act is passed, which establishes the regulatory framework for the insurance industry in Pakistan.

Insurance

In the 1970s, the government nationalized the insurance industry, and all private insurance companies were brought under state control. State Life Insurance was sole government owned insurance sector. However, in the 1990s, the government began to privatize the industry, and several private insurance companies were established. After 1990s, Islamic ideology of Pakistan was established. Thereafter, Federal Sariah Court was established. Since 1990s, case for islamization of Islamic economy is pending but recently court decreed to shut the banking system operating on the basis on interest by 2026. Many  have appealed against this decision.

Today, the insurance industry in Pakistan is regulated by the Securities and Exchange Commission of Pakistan (SECP), and there are a number of both local and foreign insurance companies operating in the country, offering a range of insurance products including life insurance, health insurance, and property and casualty insurance. 2000: The Insurance Ordinance is enacted, updating and modernizing the regulatory framework for the insurance industry in Pakistan. In, 2007,  Takaful insurance, a type of Islamic insurance, is introduced in Pakistan. In 2015, The Microinsurance Rules are introduced, aimed at promoting the provision of insurance products to low-income individuals and small businesses. In 2019, The SECP introduces new regulations aimed at improving corporate governance and risk management in the insurance industry in Pakistan.

There were 41 insurance companies operating in Pakistan. These include both local and foreign insurance companies, offering a range of insurance products such as life insurance, health insurance, and property and casualty insurance. As of my knowledge cutoff date of September 2021, there were 6 standalone Takaful (Islamic insurance) companies operating in Pakistan. Takaful is a type of insurance that is based on the principles of Islamic finance and operates in a way that is compliant with Islamic law (Shariah). Takaful companies in Pakistan offer a range of insurance products including family Takaful, health Takaful, and general Takaful.

The first Islamic bank, the Dubai Islamic Bank, opens a branch in Karachi, Pakistan in 1979. The first Islamic bank in Pakistan, the Islamic Banking Department of the United Bank Limited (UBL), was established in 1979. UBL launches its first Islamic banking product, called "UBL Ameen", which offers Shariah-compliant deposit and financing solutions. The government of Pakistan took a number of steps in the following years to promote Islamic banking in the country. In 1980, the government established the Zakat Fund, which provided funding for Islamic banks and financial institutions. In 1985, the government established the first full-fledged Islamic bank in Pakistan, the Bank of Islam Pakistan (BIP).

In 1991, the government established the Islamic Banking Department of the National Bank of Pakistan (NBP) and The Islamic Banking Department of NBP was established in 2006 and is known as "NBP Aitemaad".In 1995, the Meezan Bank was established as the first Islamic commercial bank in Pakistan. Since then, the Islamic banking industry in Pakistan has grown rapidly, with a number of other Islamic banks and financial institutions being established. The first full-fledged Islamic commercial bank, the Faysal Islamic Bank, is established in 1991. The Al Baraka Islamic Bank opens its doors in Pakistan in 1992. The first Islamic mutual fund, the Pakistan Islamic Income Fund, is launched by MCB-Asset Management Company in 1995. The first fully-fledged Islamic bank in Pakistan, Meezan Bank, is established in 1997. The first Islamic insurance company, Takaful Pakistan Limited, is established in 2001. The first Islamic microfinance bank, Akhuwat, is established in 2002. The first Islamic credit card, Meezan Visa Debit Card, is launched in 2005. The Islamic Banking Department is converted into a separate division of the State Bank of Pakistan in 2006.

Islamic banking in Pakistan has a history dating back to the 1980s, when the first Islamic bank was established in the country. The Islamic Development Bank (IDB) establishes the first Islamic bank in Pakistan, known as the Bank of Khyber. The bank initially operates as a branch of the IDB but later becomes a separate entity. In 1985, government of Pakistan establishes the Pakistan Islamic Banking Council (PIBC) to promote Islamic banking in the country. In 1991, State Bank of Pakistan (SBP) establishes the Islamic Banking Department to regulate and oversee Islamic banking operations in the country. In 2002, SBP introduces the first set of comprehensive guidelines for Islamic banking operations in Pakistan, known as the Islamic Banking Regulations. In 2003, The first full-fledged Islamic commercial bank in Pakistan, Meezan Bank, is established. In 2006,  SBP establishes the Shariah Board for Islamic Banking to provide guidance on Shariah compliance for Islamic banks in Pakistan. In 2007, SBP introduces the Islamic Banking and Takaful (Insurance) Regulations, which provide a regulatory framework for Takaful (Islamic insurance) operations in Pakistan. In 2013, The Islamic Banking Industry in Pakistan reaches a milestone by achieving a 10% market share in the banking sector.

 

Banking System 

The government of Pakistan launches the Pakistan Banao Certificate, a Shariah-compliant savings scheme in 2015. The total assets of Islamic banks in Pakistan cross the PKR 2 trillion mark for the first time in 2018. The State Bank of Pakistan introduces the Islamic Financing for Agricultural Production scheme to promote Islamic agricultural financing in 2020. Overall, the growth of Islamic banking in Pakistan has been significant over the past few decades, and the sector continues to expand and innovate.

Interest-based banking (also known as conventional banking) has been a part of Pakistan's financial system for many decades. However, in recent years, there has been a growing demand for Shariah-compliant banking products and services in the country.

 

To meet this demand, a number of Islamic banks and Islamic banking windows of conventional banks have been established in Pakistan. These institutions offer a range of Shariah-compliant financial products and services, including deposit accounts, financing solutions, trade services, and more.

 

The Pakistani government has also taken steps to encourage the growth of Islamic finance in the country. In 2015, the State Bank of Pakistan launched the Islamic Banking Industry Plan 2015-2020, which set out a roadmap for the development of Islamic finance in the country.

 

Despite these efforts, interest-based banking remains the dominant form of banking in Pakistan. However, with the growing demand for Shariah-compliant banking products and services, it is likely that the Islamic finance industry will continue to grow and play an increasingly important role in Pakistan's financial system.

 Pakistan has a relatively well-developed Islamic insurance (Takaful) industry, with a significant penetration rate. The industry has grown rapidly in recent years, with the government's support and the increasing awareness and demand for Shariah-compliant financial products.

 

According to the latest available data, the Takaful industry's market share in Pakistan was around 15% in 2020, which is a significant increase from the previous years. This indicates that a considerable portion of the population prefers Takaful products over conventional insurance. Moreover, the Takaful industry in Pakistan has been growing at a compound annual growth rate (CAGR) of around 18% over the past five years.

 

The Takaful industry in Pakistan offers a range of products, including general Takaful, family Takaful, and health Takaful, among others. These products are available through both standalone Takaful companies and conventional insurance companies that offer Takaful products alongside their conventional offerings.

 

The Pakistani government has also taken several measures to support the growth of the Takaful industry, including providing tax incentives to Takaful companies, encouraging the establishment of new Takaful companies, and promoting awareness of Shariah-compliant financial products.

 

Overall, the Takaful industry's penetration rate in Pakistan is relatively high, indicating that there is a significant demand for Shariah-compliant insurance products in the country. With the government's support and the increasing awareness and demand for Takaful products, the industry is expected to continue to grow and expand in the years to come.

 In Pakistan, non-banking financial institutions (NBFIs) play an important role in the country's financial sector. NBFIs are financial institutions that provide financial services and products to customers but do not hold a banking license.

 

Some of the key types of NBFIs operating in Pakistan include:

 

Leasing companies - provide leasing services for vehicles, machinery, and other assets to businesses and individuals.

 

Investment companies - offer investment services, such as asset management, mutual funds, and investment advisory services.

 

Modarabas - are Islamic financial institutions that operate under a profit-sharing agreement between investors and the company.

 

Microfinance institutions - provide microfinance services, such as microcredit and microinsurance, to low-income individuals and small businesses.

 

Housing finance companies - offer home financing products and services to individuals and businesses.

 

Venture capital companies - provide financing to start-ups and early-stage businesses.

 

The regulatory framework for NBFIs in Pakistan is overseen by the Securities and Exchange Commission of Pakistan (SECP). The SECP is responsible for issuing licenses to NBFIs and regulating their operations to ensure compliance with regulations and protect customers.

 

NBFIs have played an important role in expanding access to financial services and products in Pakistan, particularly for underserved segments of the population. However, there are still some challenges to be addressed, including ensuring adequate regulation and supervision of NBFIs and increasing financial literacy among customers to enable them to make informed financial decisions.

 

 

Author

 Maryam Saeed Dogar

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