Academic journal article Academy of Accounting and Financial Studies Journal

Technical, Pure Technical and Scale Efficiency: A Non-Parametric Approach of Pakistan's Insurance and Takaful Industry

Academic journal article Academy of Accounting and Financial Studies Journal

Technical, Pure Technical and Scale Efficiency: A Non-Parametric Approach of Pakistan's Insurance and Takaful Industry

Article excerpt

INTRODUCTION

In this modern era of advanced technology, financial sector becomes a backbone of each and every economy. The financial sector is playing its significant role in mitigating the risk factors but the risk is the main ingredient of most of the business ventures. On the other hand stock market provides the investment opportunities to its investors. The financial chaos of 2007-2008 changed the worldview of the financial market (Harrington, 2009). Thus, experts are compelled to think about the alternative system rather than the conventional one. Islamic financial system, considered as alternative system got more attention than the other alternatives which are available in the financial market. Islamic financial institutions have shown their resilience during the financial distress of 2007-2008. Financial gurus, experts, academicians and policymakers are keen to analyse the different dimensions of the Islamic financial systems and they have shown their interest in the development of the different products and innovations (Chapra, 2011). Currently most of the Islamic Financial Institutions are launching new products which are compatible with the prevailing conventional system; most of their products are asset-based or Shari'ah compliant. Almost 20% annual growth of Islamic finance has been observed (Chapra, 2008).

In the current literature, the academicians and financial experts are trying to compare the performance of the Islamic and conventional financial institutions. A number of studies discussed this behaviour by using different methodologies and observed different findings. Quite a number of studies found that Islamic financial institutions are more efficient, for example, Azhar Rosly and Afandi Abu Bakar (2003) found for Malaysia, (El-Gamal and Inanoglu (2004); El-Gamal and Inanoglu (2005)) estimated for Turkey, El Moussawi and Obeid (2011) for GCC, Sufian and Chong (2008) observed more efficient than conventional institutions in Malaysia, Ul Haque and Mirakhor (1986) observed that these are more stable and contributing to the growth of the economy whereas Beck, Demirguc-Kunt and Levine (2010) found Islamic financial institutions are comparatively cost effective.

It is well observed that Islamic banking industry is passed its infancy stage and moving towards its maturity, however, still Islamic insurance industry (Takaful) is passing the phase of infancy. The concept of cooperative risk sharing is the oldest form of insurance but the term and concept of takaful were first introduced in Sudan in 1979 and later on in Saudi Arabia. Now takaful is operating its business in more than 22 countries and getting popularity in other regions (Qureshi, 2011). Majma-al-Fiqh, the Grand Council of Islamic Scholars, Saudi Arabia, approved takaful as an alternate to insurance according to the shari'ah ruling in 1985 and Takaful industry has its global volume US $25 billion with only 305 takaful-retakaful operators and windows. However, it is worthwhile to note that the growth of takaful industry is 12% per annum which higher than the conventional insurance industry which is only 4% per annum ("Annual Islamic Financial Services Industry Stability Report", 2017).

At the time of independence in 1947, 84 insurance companies were operative in Pakistan but the insurance industry was nationalized in 1972 and merged into State Life of Pakistan. However there was a major breakthrough in the 1990s, the financial reforms took into place and these reforms allowed private and foreign companies to establish their business in the insurance sector (Malik, Malik & Faridi, 2011; "State Bank of Pakistan", 2005).

The Council of Islamic Ideology in Pakistan reviewed the model for Pakistan's financial sector according to the shari'ah rulings, on 29th April 1992 (Khan, 2016) and the Government of Pakistan issued "Takaful Rules 2005" on 3rd September 2005, an Islamic compatible takaful operational model. …

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