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'Takaful Rules 2005' for insurance business notified

ISLAMABAD (September 08 2005): The government has notified 'Takaful Rules 2005', for carrying on insurance business as per Islamic laws, which provide for mutual financial aid and assistance to participants in case of occurrence of certain contingencies and whereby participants mutually agree to contribute to a common fund for the purpose.

The rules were prepared by a task force constituted by the Securities and Exchange Commission of Pakistan (SECP).

Under the Takaful Rules, Wakala (agency) operational model has been introduced. This model is currently being practised in majority of the countries where takaful products have been introduced. In this model, surplus (if any) in the Takaful fund is distributed among the policyholders. The operator charges Wakalah fee from contributions that cover most of the expenses of business.

Rate of fee is fixed in advance, in consultation with Shariah committee of the company. All investments are made in Shariah-compliant instruments.

As per new rules, the Takaful operator may invest its funds in joint stock companies. However, investments in non-Shariah-compliant preferred stocks, debentures and interest based redeemable capital securities are not allowed.

The Takaful operator may also make its portfolio investments through various mutual funds operating under Shariah principles and approved by the Commission. Before making any investment therein, the Takaful operator shall have the procedures and practices being followed by such funds scrutinised by its Shariah Board.

Takaful operators may invest their funds in Shariah-compliant instruments like Musharika Certificates, Term Finance Certificates (TFCs), Participation Term Certificates (PTCs), etc.

Takaful operators may invest a portion of their funds in liquid or short notice deposits schemes of Islamic banks and their branches or other Islamic financial institutions, placements in PLS saving accounts of Islamic banks and placement in current accounts of traditional banks without any return thereon. The operators may make arrangements with the Islamic banks operating in Pakistan to directly finance under musharika, murabaha, ijara (lease), salam, istisna contracts approved by the Commission.

As per these rules, there is no provision for window products or takaful operations by conventional insurers. It means that the existing life and non-life or general insurance companies carrying on conventional business shall not be permitted to underwrite Takaful business or launch such products.

With the notification of Takaful Rules, Pak-Kuwait Takaful Company (PKTC), which has already been granted certificate of registration for conducting general takaful business, would now be able to start its operations. PKTC is a joint venture between Pak-Kuwait Investment Company, Takaful National, a Malaysian Company and Meezan Bank. Applications of certain other local and international sponsors for launching takaful companies are in the pipeline.

The notification of Takaful Rules is an important step in pursuance of the government's objective of Islamization of economy and to provide insurance coverage to institutions undertaking Islamic financing.

According to these rules, SECP shall not grant registration to any applicant, nor would it permit/grant an existing insurer the permission to underwrite and to carry on the businesses both of Family Takaful and General Takaful conjointly.

A 'Participants Takaful Fund' (PTF) shall be a separate fund the purpose of which shall be pooling of risks among the participants. The role of the Takaful operator shall be management of the PTF and related risks. At the initial stages of the setup of the PTF, the Takaful operator and any of its shareholders may at their discretion, make an initial donation or 'qarza-e-hasna' to the PTF. The objectives of the PTF shall be to provide relief to participants against defined losses as per the PTF rules and the PMD.

A 'Shareholders Fund' shall be maintained for Family and General Takaful business, on similar basis as per the requirements under the Ordinance and the Securities and Exchange Insurance Rules, 2002, for life insurers, and non-life insurers, respectively. The Shareholders Fund shall be maintained under the guidelines provided by its Shariah Board and Central Shariah Board. The SHF shall consist of the paid-up capital and undistributed profits to the shareholders.

The task force, which prepared the Rules, was headed by former Chief Justice of Federal Shariat Court, Mian Mahboob Ahmed, and included Saif-ud-din N Zoomkawala, Managing Director, EFU General Insurance Company, Abdul Rahim, Executive Director, Sidat Hyder Morshed Associates, and Shafaat Ahmad, Executive Director, SECP, as member/secretary.

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