Takaful is a form of Islamic insurance based on the principle of mutual assistance. It provides mutual protection over assets and property and offers joint risk sharing in the event of loss incurred by one of its members.
According to the Ernst & Young World Takaful Report 2011, the global Takaful industry is estimated to reach premiums of US$12 billion in 2011, an increase of 30% from premiums of US$9.15 billion in 2010. This explains why many local financial institutions in Nigeria are building systems to support the introduction of Takaful subsidiaries or stand-alone companies.
With an estimated population of 75 million Muslims (about 50% of the country’s population), the Islamic finance industry in Takaful in Nigeria is still in its infancy and there are very few companies which are testing the waters. The conventional Nigerian insurance industry has low market penetration of less than 1%, and the Takaful business, which is nascent, is below the radar of many international analysts.
Takaful would provide insurance companies with the opportunity to gain access to an untapped market currently not served with the products currently available in the Takaful industry. This market spans the entire country with greater concentration in the northern and south-western states of Nigeria.
Halal Takaful Nigeria, African Alliance Insurance Company and Niger Insurance are a few of the Takaful firms in the country that are registered with the National Insurance Commission (NAICOM). Several other companies are also planning to introduce dedicated Takaful units this year. There are two broad groups of Takaful products available to customers in Nigeria namely Family Takaful and General Takaful.
For any Takaful and re-Takaful (equivalent to re-insurance) industry to thrive, the Islamic finance industry in general must possess adequate investment outlets which will act as a growth mechanism for the Takaful pool of funds. The introduction of Sukuk is one such necessary innovation to support the industry.
‘The emergence of Takaful in the wake of globalization’, was the topic of discussion at the annual convention of ‘Developing-8 nations’ in Kuala Lumpur, Malaysia in November 2002. It was agreed, at the convention, that there will be an alliance involving member countries such as Nigeria in developing the legal and structural framework in their various Takaful industries.
The governments were also tasked with the responsibility of providing a framework that will assist in the development of ancillary services that are required to maintain the products offered.
NAICOM plans to release guidelines on Takaful and provide relevant training to institutions and industry professionals. Some insurance companies have also taken proactive measures to expand into the Takaful market.
Although there is a huge market, there are many barriers which may hinder the progress of the industry. The main challenge of Takaful in Nigeria is the absence of a regulatory framework or guideline from the insurance regulator, NAICOM.
The driving factors that could contribute to developing the industry include improving the level of awareness of Takaful and the creation of Shariah compliant investment instruments. Lotus Capital is currently the only Nigerian asset manager offering Shariah compliant investment products.
Market penetration is also a major challenge faced by the insurance industry in general. The mindset of an average Muslim is that taking out any form of insurance is haram (prohibited) and this highlights the importance of creating awareness for Takaful as an ethical alternative.
On the other hand, the Takaful operators also face stiff competition from conventional insurance operators who already have a customer base and are looking to expand their market share.
Building consumers’ belief in conventional insurance is still an on-going task and Takaful will be no different. There would have to be a two-pronged effort in convincing insurance companies on the feasibility of Shariah compliant insurance as well as convincing both Muslims and non-Muslims about the benefits of Takaful, thereby encouraging patronage.
In any developing industry there is usually a shortage of expertise, and this industry is no different. It is hoped that the proposed regional network for capital market research and training by the ‘Developing-8’ member countries will lend a hand in alleviating this shortcoming within the industry.
Furthermore, global competition is being created as more countries become enlightened on the potential of the sector which means that new entrants and product offerings are being continuously introduced, creating new challenges and opportunities.
The dearth of established re-Takaful companies is also a major issue in the country as Takaful companies are forming partnerships with foreign re-Takaful companies or making use of conventional reinsurance so as to cater to the needs of their customers.
There are some major reinsurance companies in the market such as Nigeria Re and Globe Re Continental Re, but there are presently no prominent re-Takaful companies. Although there is consideration given to Islamic financial institutions working with conventional methods in the absence of ethical alternatives; it is still important for there to be a network of Takaful and re-Takaful companies in the near future.
With all the challenges mentioned above, it is important to highlight actions that have to be taken to overcome these obstacles. For an Islamic financial institution to achieve the complete Shariah identity, it must use Takaful in its risk management strategy and there are huge opportunities available in the market.
However, the regulators, with further pressure from the industry players, must make a conscious effort to develop a legal and regulatory framework for Takaful.
Without this key structural foundation in place, the Nigerian Takaful industry will be behind in its quest for market dominance within the region.
The Nigerian Islamic banking system is making a slow but steady progress. With the release of non-interest guidelines in 2011 by the Central Bank of Nigeria and the release of the Rules on Islamic Fund Management by the Securities and Exchange Commission of Nigeria in support of Islamic finance, it appears that the country is definitely moving into the right direction.
There is a huge market to be tapped globally and for Nigeria to act as a trailblazer in west Africa and beyond, relevant laws and a human talent pool have to be developed.
On the whole the misconception of insurance as being prohibited and not Shariah compliant has to be altered if any further progress is to be made in the market. Creating awareness for Takaful apart from conventional insurance is also critical if any headway is to be made in developing a competitive industry in Nigeria.
Kafilat Oluwasola is an analyst at Lotus Capital and she can be contacted at