Assessing the Role of Islamic Financial Literacy in Adoption of Islamic Insurance in Pakistan

Abstract

This research assesses the key factors influencing the adoption of Takaful in Pakistan, with particular emphasis on Islamic financial literacy, demographic factors, and contextual factors. The study's primary objective is to evaluate how these variables shape individuals' awareness of, and willingness to adopt, Takaful as a viable alternative to conventional insurance. Grounded in the hypothesis that Islamic financial literacy plays a critical role in promoting Takaful adoption, the study also considers the moderating effects of demographic factors (such as age, income, education, and religious knowledge) and contextual factors (including access to information and marketing efforts) on this relationship. A quantitative research design was employed, utilizing a survey methodology to collect data from individuals with varying levels of exposure to Islamic finance and Takaful. The survey instrument included carefully designed questions to measure Islamic financial literacy, Takaful awareness, contextual factors, and demographic characteristics, with responses analyzed on a Likert scale. A total of 132 respondents participated in the study, and the data were analyzed using regression analysis to identify significant predictors of Takaful adoption. Reliability tests (Cronbach's Alpha) were conducted to assess the internal consistency of the measurement scales, and correlation tests were performed to evaluate the relationships between the variables. The conclusion drawn from the study is that enhanced Islamic financial knowledge is positively correlated to Takaful uptake. In particular, the result showed that respondents with higher level of Islamic financial literacy were more likely to be aware and have a higher intention to patronize Takaful. These results support the need for improving the level of awareness about Islamic finance concepts like riba, mudarabah, musharakah, and the like, as the crucial factor in the recognition of the Takaful as the Islamic finance product not affiliated with the receiving and paying of riba. Moreover, the available marketing influences, information awareness, and regulations were seen promote the use of Takaful. These contextual influences were still less compared to effects of Islamic financial literacy which mean marketing and awareness are less without enough intensification of financial literacy. However, demographic factors such as age, income and education level, as explained below, had a relatively smaller impact on Takaful uptake. While correlation was established between these factors and adoption, the research did not yield strong numerical correlations and thus it can be inferred that financial literacy is much more relevant to adoption than the characteristics outlined. This insight reveals that education and financial literacy should be maintained and enhancedthrough focused attempts in the deployment and enhancement of the understanding of Islamic finance and Takaful by various clients of different groups. The analysis presented in this study is a rich source of practical recommendations for policymakers, banking and financial institutions, as well as Takaful players. Therefore, there are general recommendations related to the application of the financial literacy in the sphere of Islamic finance: the Iranian policymakers are recommended to include the information concerning Islamic financial literacy within the framework of the educational programs at all grades along with providing the regular adult education programs related to financial literacy. In addition, authorities carrying out supervisory functions should encourage Takaful providers to spend money on public awareness and to ensure more conditions favorable to Takaful products are in place. To Takaful providers, the study reveals that it is critical not only to promote Takaful but also to create awareness of the Islamic values and religious imperatives for the concept through sensitization, social mobilization and targeted information dissemination and communication. Scholars, this research adds to the literature of Islamic finance especially in establishing the centrality of financial literacy to the uptake of Takaful products. Based on this, it discusses how Islamic financial literacy can be used as an antecedent in the process of moving from awareness to adoption within the context of a Muslim country such as Pakistan where Takaful is anchored on the tenets of Islam. The results of the study therefore suggest that further examination of more factors like trust in Takaful’s financial institutions, religious beliefs, and perceptive of Takaful risks will help to improve knowledge of the usage phenomena in future studies.