Takaful: Tackling poverty with Islamic insurance

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Earlier in the year, precisely in February, another opportunity presented itself for more Nigerians, especially Christians and those of other faith, excluding Islam, to understand the concept of Islamic insurance, otherwise known as Takaful, better.

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In a brief message announcing its Takaful programme in Nigeria, the Chief Executive Officer, AlHuda Centre of Islamic Banking and Economics (CIBE), Muhammad Zubair Mughal, motivated industry players to play their roles in the development of Takaful in African region especially in Nigeria as the insurance model can, to a large extent, tackle poverty in the region.

While most people have continued to see it as a financial tool exclusively meant for the Muslims, Takaful, over the years, has evolved to be an all-embracing insurance model aimed principally to benefit whoever is involved, whether a Christian, Muslim or traditional worshipper.

Regulator’s campaign
It is based on this concept that the National Insurance Commission (NAICOM) has consistently encourage Nigerians irrespective of their faith to key into the model as a way of tackling poverty, especially among the poor.

According to However, the Head, Corporate Affairs, NAICOM, Mr Rasaaq Salami, the commission will continue working at ensuring more awareness on Takaful to increase people’s participation not just to boost financial inclusion but also to curtail spiraling poverty among struggling Nigerians.

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The Commissioner for Insurance, Mohammed Kari, had promised at the launch of Jaiz Takaful in Kano last year that more of the operators would soon be unleashed in order to extend the benefit to all Nigerians beyond Islamic faithful.

He said the commission introduced Takaful and Microinsurance products in the country as an attempt to reach the segment of the market that is either hitherto reached or not comfortable with the conventional insurance products, stressing that so far, two wholly Takaful companies have been licensed to operate by the Commission while the processing of other applications is on-going.
Understanding the difference
The difference between Takaful and conventional insurance is so clear and goes beyond the religious perspective from which most people see it.
In the case of the conventional insurance, it is a risk transfer mechanism, whereby risk is transferred from the policyholder (the insured) to the insurance company (the insurer) in consideration of premium paid by the insured.

In this regard, if the insured suffers any loss, the insurance company is expected to compensate the the policyholders in the form of claims payment of the sum stipulated in the policy document.

However, assuming there is no loss suffered whatever surplus or profit made by the insurer would all go to the firms’ shareholders as the insured is covered during the policy period but not entitled to any return at the end of such period.
On the other hand, Islamic insurance is based on mutuality; hence the risk is not transferred but shared by the participants who form a common pool. The insurance company only acts as the manager of the pool.
Unlike the conventional insurance, the surplus belongs to the participants and is accordingly returned to them (in proportion to their respective shares of contributions) at the end of the accounting period.

While the conventional insurance has some elements of gambling attached to it, Takaful is operated on the basis of brotherhood where no one is left out at the end of the whether there is a loss or not.

Global spread
According to records, Takaful is one of the fastest growing segments of insurance at around 20 per cent per annum on average with its contributions conservatively estimated at around $3billion, comprising 60 per cent General Takaful, and 40 per cent Family Takaful.

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The number of Takaful operators worldwide is estimated at 200 companies operating in more than 40 countries, with more than 10 Retakaful and more than 23 Islamic windows by conventional Reinsurance companies.

With two companies now wholly licensed by NAICOM and others promoting through smaller windows in Nigeria, there is no doubt that Nigerians of all religious belief now have the opportunity to embrace the insurance model.

Financial inclusion
Kari said the commission introduced Takaful and microinsurance products as an attempt to reach the segment of the market that is either, hitherto, unreached or not comfortable with the conventional insurance products.
Advising Nigerians to embrace Takaful for their protection against risks and wealth creation, he said the insurance model was both ethical financing and cooperative risk protection methods that are superior alternatives as they reinvigorate human capital, human solidarity, emphasise dignity, community self-help and economic self-development, generating manifold benefits, which appeal not only to Muslims but all.
“The commission is elated at this positive development, which is a bold step towards the growth and development of the Takaful market in Nigeria. As we all may already be aware, Kano is the commercial hub of northern Nigeria with a massive population that is financially excluded and in particular, largely uninsured. Your choice of Kano for a branch office is therefore not a mistake but a good business decision that must be applauded,” he said.

Experts’ views
Speaking in support of the model, a university lecturer, Mr. Yekeen Abdul-Maliq, said Takaful had nothing to do with Islam, except that it is based on Islamic injunction.

According to him, “Islamic injunction is essentially the Law of Moses, and then when you talk about Sharia you are talking about the Law of Moses. When we hear Islamic banking or Islamic insurance we believe it must be Islamic, even Muslims believe so, Christians too believe so. But that is as a result of misinformation and most of us are not willing to read.
“Both northerners and southerners will accept Islamic insurance. There are a lot of Muslims in the south as a result of that they will even buy into the insurance business.”

He reiterated the fact that Islamic banking prohibits charging of interest, which is the core of modern banking, stressing that in the case of Takaful, no stakeholder is supposed to benefit beyond a certain level by way of profit apart from insuring yourself.
“Insurance in Islam is to make provisions for essentials either while you are alive or while you are no longer there. Insurance itself has an Islamic origin, when one suffers a loss, then people come together and uplift him out of the predicament.
“That is the essence of insurance and as a result of that you make premium payment with a group of people so that they could share or participate in the loss of other people or benefit from that contribution when they incur loss. By so doing you are not supposed to make profit either as the insurance company or as the insured from that transaction. It is not supposed to be a buy and sell activity,” he noted.
He, however, clarified that the transaction did not stop the person from investing the premium so received in lawful businesses.

“In Takaful, it must not be on interest basis. If you are insuring property, you do not insure with a view to make profit either as the insured or as the insurer, he added.
This was also highlighted by the Chief Executive Officer, Metropolitan Skills, a capacity building institution, Hajiya Ummuhani Amin, who said that the prevalence of unbanked population in the northern part of the country is because there were no institutions to meet their investment belief.
She said: “In the north everybody is looking forward to a financial institution where you can invest funds otherwise they will not take it to any bank or insurance company because the conventional financial institutions have elements of uncertainty, which is against Islamic principles.
“It is only Takaful that can meet the expectations of the people. It will be excellent for us. For example, I am from Maiduguri. Over there, nobody is willing to insure what he has with conventional insurer but when you say it is Islamic and Sharia compliant they will key into it. I believe Takaful will mop up funds from the grassroots.”

Foreseeable Challenges
However, as good as the financial model appears, a report on the road to the expected mass market by the Malaysia International Islamic Financial Centre (MIFC) states that the Takaful industry growth also brings with it challenges in many aspects including low penetration rate, shortage of human capital, inadequate technology capabilities, ineffective governance practices and lack of innovation in business model for new market niches.
As it is, while NAICOM is making effort to spread the message, it should also encourage operators that are interested in the channel of insurance distribution to ensure adequate human capacity and technological enhancement.

Last line
No doubt, despite the predictable challenges surrounding Takaful operation for a secular country like Nigeria, since the benefits appear to have an overriding potential, the Federal Government, through the industry regulator, should provide an enhanced opportunity for Nigerians to key into the system as a way of tackling poverty extensively.

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