Surprise rule changes ordered by the government of Pakistan threaten to undermine the profitability of fledgling Islamic insurance houses financed by investors from the Arabian peninsula and Malaysia. Originally assured of a protected market for five years, they will now find themselves exposed to competition from conventional insurers that are also able to offer sharia-compliant products. A breach of earlier government promises means the new regime risks shaking Gulf investors’ burgeoning confidence in Pakistan – but this is surely not enough to halt the booming inflow of Arabian capital.
The rapid growth of takaful – sharia-compliant insurance – exemplifies the increasing significance of Gulf money as a driver for the economic diversification of a country that is among the world’s most populous Muslim nations, but is short of long-term domestic commercial finance.
Telecommunications, banking, real estate and petrochemicals are other industries where there is a natural fit between the funding clout and sectoral business expertise of Arabian entities and the huge sales potential offered by the Pakistani market, home to 165 million people.
The past few years have seen a dramatic surge in Gulf investment, a process facilitated by president Pervez Musharraf’s adoption of liberal, privatizing economic policies, and a welcoming regulatory environment. Indeed, Islamic insurance is a case in point – with the early abolition of a rule limiting foreign stakes in takaful companies.
It was only in September 2005 that Pakistan established a regulatory framework to allow the development of Islamic insurance – after lobbying from would-be takaful investors – who could see the potential for personal insurance in a poor country with little welfare provision, but where much of the 97% Muslim population have felt unable to take out conventional insurance that they see as un-Islamic.
To encourage the new industry, the government promised that for the first five years it would only allow dedicated takaful houses to operate. Conventional insurers would not be allowed to follow the example set by banks and open Islamic product windows; assured of a protected starter market, investors decided to pile in. But now the government has told the Securities and Exchange Commission of Pakistan (SECPP) to draw up new rules permitting conventional insurers to offer Islamic products.
This will not be welcome news to the Kuwaiti, Saudi, Malaysian, Qatari and Emirati investors who have so eagerly funded Pakistan’s growing band of dedicated Islamic insurers.
Rapid growth
“By the end of 2007, you’ll have six or seven takaful companies operating here,” says Rohail Alikhan, general manager of Takaful Pakistan, the second house to be established, with the backing of Emirates Investment Group, headed by Sheikh Tariq Bin Faisal Al-Qasimi, a member of Sharjah’s ruling family.
The group took a direct 17% stake in Takaful Pakistan, and mobilized its Pakistani banking offshoot, Emirates Global Islamic Bank, to take another 17%; Al-Buhaira National Insurance Company, also from Sharjah, took 17% too. Their involvement reflects the enthusiasm of Gulf investors for the Pakistani Islamic finance sector.
“Our biggest problem at the time was that we didn’t have enough shares to go around. A lot of these groups wanted to come in as majority shareholders, and our job was to negotiate them down,” recalls Alikhan.
Pakistan’s first Islamic insurer, Pak-Kuwait Takaful Company, was also set up with the support of Gulf money. And Pak-Qatar General Takaful and Pak-Qatar Family Takaful should soon be operational, financed by Qatar Islamic Insurance Company, Qatar International Islamic Bank and the businessman Sheikh Abdullah Bin Thani Al-Thani.
The natural empathy between Gulf investors – rich but with a small home market – and the opportunities offered by Pakistan – poor but populous – is evident in other sectors too. In 2005, UAE telecoms utility Etisalat bought a 26% managing stake in Pakistan Telecommunications Company; the deal was hugely controversial and provoked workforce protests, but employees’ anger was directed at the government’s decision to privatize the company, rather than the fact that the new strategic investor was Arabian.
Meanwhile, Abu Dhabi Group, chaired by the UAE’s minister of higher education, Sheikh Nahayan Mubarak Al-Nahayan, has a stake in the Pakistani mobile telecoms market through Wateen Telecom, stakes in United Bank and Bank Alfalah, and a real estate offshoot, Taavun Private, a joint venture with the government of Punjab state. Taavun has a hand in the Sheikh Zayed Centre, a major commercial and residential property scheme being developed in Lahore by Dubai-based Emaar.
Converging know-how
Sometimes, property and finance connections come together in such deals. And, as with takaful, the effectiveness and reliability of regulation can be a key issue. Tamweel, a Dubai-based Islamic housing finance group, recently indicated that expansion into Pakistan is “on the radar”, along with other regional markets such as Saudi Arabia, Turkey, Libya and Egypt.
“The company has not yet taken a final decision. Pakistan offers opportunities to develop a substantial business; but Tamweel needs to be sure that the regulations governing the sector would provide a friendly environment for the securitization of its Pakistani mortgage book,” explains Azza Al-Arabi, a housing finance analyst at EFG Hermes in Dubai. “Tamweel finances the growth of its business by bundling its mortgage book into securitized packages and then raising money through Islamic sukuk issues on the capital markets. It recently announced a Dh2.9 billion ($800 million) programme of sukuk fundraising.”
Some of Saudi Arabia’s leading commercial dynasties have also been highly active in Pakistan. For example, the Al-Jomaih Group has paid $265 million for a 73% stake in Karachi Electricity Supply Corporation. Maybe the new rules will not stop the flow.