Journal Article

Financial Performance Sustainability of Islamic Insurance: Evidence from a Panel Vector Autoregressive Analysis of the Pakistani Market

Alshammari, Ahmad Alrazni, Altwijry, Othman, Kahia, Montassar

2026

Overview

This paper investigates the factors of sustainability of the financial performance of Islamic insurance (Takaful) windows in Pakistan. A large body of literature has examined Takaful providers across many countries; however, there is little research on the dynamics of Takaful windows. This study uses an analytical approach to investigate the effects of various operational and financial measures on Takaful window performance. It is one of the earliest works to examine the profitability of Takaful windows with a dynamic PVAR model, providing new evidence on the peculiar financial forces in hybrid Islamic–conventional insurance frameworks. It explores the effects of the retention ratio, Wakalah fees, commission ratio, gross written contributions, and underwriting surplus on profitability, measured by return on assets (ROA) and return on equity (ROE). It uses annual data from 18 Pakistani Takaful window insurers, employs a panel vector autoregressive framework to capture dynamic interdependencies and endogeneity, and conducts a variance decomposition with impulse response analysis. The findings indicate that the retention ratio and underwriting surplus have significant positive effects on ROA, whereas Wakalah fees have a negative impact. In the case of ROE, the underwriting surplus and commission ratio are associated with positive effects; meanwhile, the retention ratio and gross written contributions are related to negative effects. Variance decomposition emphasizes the commission and retention ratios as the main sources of profitability, with Wakalah fees and underwriting surplus being insignificant. The regulators need to ensure proper fund separation and establish the most optimal rules regarding Wakalah fees. The operation of Takaful windows should focus on commission management and business retention strategies to enhance profitability and financial sustainability. The increase in the financial performance of Takaful windows contributes to the expansion of Shariah-compliant insurance, facilitating the financial inclusion of Muslim communities in mixed markets.

• Publisher: MDPI AG
• Subject: Autoregression (Statistics) / Compliance / Corporate profits / Environmental sustainability / Evaluation / Financial services / Financial statements / Insurance / Insurance companies / Insurance industry / Islamic financing / Islamic law / Methods / Profit margins / Profitability / Religious aspects / Stockholders / Sustainable development / Underwriting