An analysis of Dyadic relationship between Islamic Banks and Takaful Operators and their impact on Economic stability

Purpose The objective of this study is examined the dyadic relationship between Islamic banks and takaful operators and their impact on economic stability of Pakistan. It is observed that Islamic nance industry demand increase from last one decade in Pakistan. The Islamic nance industry has signicant importance in existing market through multidimensional contributions and deposits. Design/Methodology/Approach: This study takes ve Islamic banks and ve takaful companies operating in Pakistan from 2009 to 2017. This study implies panel data regression through random effect model (REM), xed effect model (FEM) and generalized methods of moments (GMM) to better understand the time invariant and intercept value among variables. Findings: The results reveal with these remarks that Islamic banks have a relatively more positive and signicant contribution toward economic stability as compared to takaful companies. Whereas, mean deviation of takaful operators is more near to the origin as compared to Islamic banks. It Islamic nance industry in capital inows as compared to conventional This study is a comparative analysis between both Islamic banks and Takaful companies’ performances in


Introduction
Islamic nancial institutions are rapidly expanding in terms of product lines, sectors and geography.
Previously, in 1070's, there were only Islamic banks offering ijarah and Murabaha based products (Othman and Mara, 2013) operating in GCC and other Muslim countries. But now other sectors like takaful, Islamic micro nance, mutual funds, real estate, shariah screening, and shariah auditors are also operating. Islamic banks are now offering new product lines based on Salam. Istisna, wakala, wadiah offered . In addition to GCC countries, Islamic banks are now operating in Singapore, UK, Austrailia, Japan, Russia, Germany and several Asian states . All these institutions are adding into the economic development and they supplement each other in delivery. Moreover, due to asset backed transactions, it also promote real business activities, thus contributing into the economy ( Insurance is considered to be an important element of nancial system. It promotes trade and development through mitigating risks of nancial losses due to various physical hazards. Since insurance doesn't conform to the religion Islam due to presence of prohibited elements like interest, uncertainty and gambling (Farooq, Chaudhry, Alam & Ahmad, 2010; Maysami & Kwon, 1999), therefore many Muslims avoid the use of insurance. Through research, Muslim scholars developed system of takaful or Islamic insurance which lacks the prohibited elements and con rms to the Islamic teachings.
Globally, takaful is growing exponentially and has a double digit growth (World Takaful Report, 2016). Takaful is playing an important in the nancial inclusion of the people who were previously excluded due to non shariah compliant nature of insurance. Takaful provides life as well as non-life or general coverages. In general takaful, in case of loss to the business due to re, earthquake, burglary, oods, voltage uctuation and other hazards, takaful companies compensate businesses through paying claims and help in continuation of the businesses (Ward and Zurbrueg, 2000). In absence of takaful, businesses had to set aside a considerable amount of money for managing the losses that might occur. While takaful costs relatively lesser amount and the setting aside money is also invested in business bringing more return and expansion (Malik and Ullah, 2016).
Like general takaful, life takaful also called family takaful also plays an important role in economy through promoting savings and ensuring circulation of wealth (Ryan, 1994). Clients pay small and large regular contributions (premiums) in life coverage for longer periods which are onward invested by companies in different areas for returns. They invest in Islamic nancial institutions on short and long term basis which onward provide funding to businesses for establishing new and expanding existing businesses. Takaful companies also invest in capital markets and add real estate. Takaful also supports the Islamic banks when they provide nancing to their clients activities. Takaful companies cover properties of borrowers, mortgaged and pledged with the Islamic banks and leasing companies and promote business. Without takaful coverage, Islamic banks seldom provide nancing to their clients. Being an emerging business, takaful operators are still facing the challenges of optimal business structure, price competition from conventional insurance companies and regulatory issues. Still takaful sector is a growing area and companies are bringing good pro t for their owners (World Takaful report, 2016).
Beside other institutions, insurance and reinsurance companies are considered vital for economic development (Outreville, 1990;Arena, 2008;Vadlamannati, 2008). They also support the economic system of a country and encourage circulation of wealth. At one side, they provide a choice to clients for savings in shariah compliant mode (Ryan, 1994) while at the other side, they compensate the nancial losses of the businesses due to re, earthquake, and oods and keep their business continue (Ward and Zurbrueg, 2000). Clients pay their savings in the form of contributions (premiums) to takaful companies while there is always a time gap between premium and claim payment. Takaful Companies utilize this time gap and invests the collected premiums in avenues where they can get best and safe return. Mostly, they invest in Islamic banks through murabaha and ijarah income certi cates, sukuk, stock of companies which are engaged in shariah compliant businesses, mutual funds etc. Moreover, takaful companies provide nancial protection to business enterprises like factories, distribution, transport and many other businesses against the risk of re, natural calamities, riots and many others. They compensate the business if any loss occurs due to these risks and keep the businesses going, thus adding to the national productivity and circulation of wealth.
Since Muslims avoid conventional insurance due to presence of riba, uncertainty and gambling, therefore, as an alternative to insurance, takaful was developed as it doesn't invite objections by the religious scholars (Farooq et al 2010). Moreover, takaful companies started establishing in Malaysia after the passage of Takaful Act ordinance introduced. Over the period of 40 years, there were more than 300 takaful companies operating globally (World Takaful Report, 2016).
First Islamic bank was established in Egypt in 1964 . Dubai Islamic bank, the rst Islamic commercial bank was established in 1975 and dozens of Islamic banks were established after 1980. (Shinsuke, 2012;Okon, 2013). Presently more than 500 Islamic nancial institutions are operating globally (Qorchi, 2005). In Pakistan, assets of the Islamic banking industry up to June, 2018 reached to Rs 2482 billion while market share of Islamic Banks has reached to 12.9 percent in assets and 14.8 percent in deposits of the total banking industry. The number of fully dedicated Islamic banks are ve (5) and number of conventional banks with Islamic banking branches are sixteen (16), whereas, the total Islamic banking branches are 2,685 (SBP, 2018).
In last quarter of 2018, assets of Islamic banks operating in Pakistan increased by 8.1% i.e. from Rs. Rs. 200 billion to 2658 billion. Deposits grew by 9.9% from Rs. 198 billion to Rs. 2203 billion while in banking market, share of Islamic banks in terms of deposits reached to 15.5% and assets reached to 13.5%. Looking at different deposit products, it is found that increase in current and xed deposit is 12.3% and 8.9% respectively and saving deposits enhanced by 3.1%. Pro tability of islamic banks in last quarter of same quarter, it was Rs. 23 billion (SBP, 2018).
World average penetration of insurance is around 6% of its gross domestic product (GDP). In 2014, global insurance premium totaled to USD 4778 billion. (Sigma Study, 2015 Swiss Re Insurance Company). Insurance penetration in India is around 3.9% of its GDP. While in Pakistan, insurance penetration is less than 1% of its GDP (Insurance association of Pakistan, 2017). One of the major reasons for such a low penetration is the declaration of insurance as prohibitive by religious scholars due to presence of such elements which are not acceptable in Islam. Ismail et, al. (2017) reports world total takaful contribution was 14.9 billion US$ in 2015 with a growth rate of 14%. General takaful contribution is around 83% while life takaful has a share of 17%. In Pakistan, takaful was introduced in 2006. In almost eight years, market share of takaful has reached to 5% and is still growing. Moreover, the global takaful market is growing at a rate of 14%, while conventional insurance is growing at 5.5% (Earnest & Young, 2014). Pakistan is a Muslim majority country having around 200 million population with 97% Muslims. It is located in south east part of Asia. In Pakistan more than 40 insurance companies are operating.
In 2014, insurance companies were allowed to establish their window takaful operations. Presently there are ve dedicated takaful companies and more than 15 insurance companies are providing window takaful services (SECP, 2014). Insurance penetration in Pakistan is less than 1% of GDP which is one of the lowest in the region. Takaful companies hold almost 5% of the total insurance / takaful market (Insurance Association of Pakistan, 2016). Takaful is growing at a much higher rate than insurance, so it is important to investigate the effects of religious beliefs on nancial exclusion. While the increasing growth of takaful is indicating its acceptability among people, it is important to nd its impact on economic growth.

Review Of Empirical Literature Review
In 1979, First takaful company was established in Sudan (Kwon, 2007; Sherif and Hussnain, 2017). However, Malaysia leads family takaful market while GCC leads general takaful market. Takaful companies started establishing in Malaysia after the passage of Takaful Act 1984 (BNM, 1984). Over the period of 40 years, there were more than 300 takaful companies operating globally (World Takaful Report, 2016). In Pakistan, rst general and family takaful company was established in 2006 and 2008 respectively and rst window takaful was established in 2014. Presently ve dedicated and more than fteen window takaful operators are working in Pakistan.
Haiss and Sumegi (2008) explored the effect of insurance on economic growth. They analyzed twenty nine (29) European countries for the period 1992-2005 and found that economic growth increases with an increase in insurance and economic growth. A study conducted by Kugler and Ofoghi (2005) using data of insurance companies of UK found that with compensating the nancial losses and promoting investments, size of the insurance market has a positive effect on economic growth. They studied the data for the period 1966-2003 of market wise net premium written by UK based insurance companies using Johansen's Trace l and max l co-integration tests. Outreville (1990) analyzed data of fty ve countries and found a higher increase in per capita liability premium with corresponding increase in GDP. While comparing islamic and conventional banks from risk perspective, Al Rahahleh, Bhatti, Misman, (2019), conducted a study using comparative literature review along with tabular methodology approach in which they compared islamic and conventional banks with respect to risk exposure,. They nd that IBs are exposed to a higher level of risk because in conventional banks, relationship between client and bank is always lender -borrower and in IBs customer can be an investor and entrepreneur.

Vadlamannati (2008) conducted a study in India
Mansor, Al Rahahleh & Bhatti (2019) compared the performance of Islamic and conventional mutual funds before and after crisis during the period 1990 to 2009 and nd that Islamic mutual funds (IMF) performed a little better than conventional mutual funds (CMF). The study also nds that on a particular market trend, universally, there is universally no better performer between IMF and CMF.
Azmat, Bhatti, & Ghaffar (2020) compared the pro tability of Islamic and conventional banks while considering the higher costing in Islamic banks due to religiosity. They collected data from 17 muslim countries having both islamic and conventional banking for the period from 2000 to 2015. The study nds that asset and liability side returns of Islamic banks are greatly affected in competition with conventional banks, resultantly, Islamic banks are losing market power due to price competition. Whereas, random effect model is good choice in rest of cases. Concretely, this study proposed the below two models to estimate and analyze the effects of Islamic nancial institutions and takaful companies on economic stability respectively.

Data Description And Methodology
In the above two equations the subscripts i and t represent the Islamic nancial institutions and takaful companies respectively, where i = 1-10 and t = 2009-2017. an increment in total contribution of takaful companies boost the economic stability of Pakistan.

Descriptive Analysis
The purpose of this descriptive statıstıcs is to explaın and summarıze the data through formal way. Thıs test further ınforms us the usage of parametrıc and non-parametrıc tests. It ıs essentıal for qualitative and quantıtatıve research to ıdentıfy that sample of our study ıs normally dıstrıbuted. It also describes the characterıstıcs of the entıre sample or populatıon. The mean tables explaın the average values among the varıables. The standard devıatıon tells us the devıatıon of each mean wıth respect to each varıable. The maxımum and mınımum values indicate that range among the varıables ın the partıcular sample.  Furthermore, these variables may be have different intercept value. Moreover, the term xed effect is due to the fact that although the intercept may differ across variables such as dependent variable. Whereas, the intercept does not vary over the time and it is also called time invariant. In random effect model (REM) all variables have a common value for intercept. Finally, the generalized methods of moment (GMM) is a technique of statistics, where we combine the observed economic data with particular information from moment's conditions of population. This technique further produces the estimation of unknown parameter of that particular study. However, as we can see in the empirical analysis the multicollinearity diagnostics (Variance In ation Factor) and tolerance indicate the absence of multicollinearity among the right hand side variables.
The result of panel data regression expresses that FPI as percentage of GDP is positively signi cant in model (5) of GMM at 10 percent level of signi cance. It means that foreign private investment has reliable contribution toward IFI's and economic stability in Pakistan. The KIBOR as interest rate and in ation are also signi cant in FEM model (4)   The below Table 4 shows information regarding panel data regressions of the takaful companies and its impact on economic stability in Pakistan. The foreign investment plays a vital role in development of any nation, especially developing countries. The FPI value shows positively signi cant at 5 percent in GMM model. While the KIBOR as interest rate and in ation as consumer price index both are positively impact on economic progress in model (4) (3) and (2) have positive association between time dummies and trends respectively. The value of R-square in REM is less as relatively compared to FEM models and overall model is best tted. Signi cant level indicates as 1%, 5% and 10% as *, ** and ***

Conclusion
The purpose of this study is to investigate the join relationship of both Islamic nancial institutions and takaful companies and their impact on Pakistan economy. However, we didn't nd any comprehensive study on this topic to address this particular kind of work. The premise of this study is to ll the entire gap and adhere the problems occur in the system. This study takes ve different Islamic banks and takaful companies to conduct this study into a particular direction and check its impact on economic stability.
This study uses dependent variable as percentage of GDP, total deposits of IFI and total contribution of TC take as independent variables. Whereas, economic prosperity, foreign private investment (FPI), Karachi inter-bank offering rate (KIBOR), In ation and nally, the level of awareness and risk aversion (ARA).
The data has been taken from different sources such as, statistics house, hand book of Pakistan economy, annual nancial reports and economic survey's. Whereas, the annual data set consists of 2009 to 2017. This study develop two different hypothesis for both Islamic nancial institutions and takaful companies. However, we accept our both null hypothesis (an increase in the Islamic banks deposits upsurge the economic stability of Pakistan) and (an increase in the takaful company's contribution boost the economic stability of Pakistan). The results of Pearson correlation designates that there is strong correlation between dependent and independent variables. Whereas, a week or less correlation found among dependent variables and explanatory variables.
The panel data regression analysis for Islamic banks and takaful companies and their impact on economic stability con rms that IFI's and TC have positive signi cant impact on economic development especially in FEM model, but minor impact shown in REM Model among variables. Whereas, dependent variables shows signi cant but negative relationship with previous year in GMM model. The overall results express that IFI's has more contribution to build the economy as relatively compared to takaful companies. While the result of takaful companies in all models reveals near the center of deviation as compare to Islamic banks results. The deviation scores subtract the mean from each variable. They are called deviation score because they indicate how far each value deviates or departs from the mean.

Availability of data and material
The data is available on request

Competing interests
The authors declared no potential con icts of interest concerning the research, authorship and publication of this article.