TAKAFUL INSURANCE IMPLEMENTATION; A DRIVE TOWARDS AN INCLUSIVE INSURANCE SECTOR IN NIGERIA. BY Zubairu Sulaiman Darazo Deputy Head, Takaful Insurance Unit National Insurance Commission of Nigeria (NAICOM) E-mail- [email protected], [email protected] OUTLINE: a) Introduction and Background b) What does Takaful means to NAICOM/ Federal Government of Nigeria? c) Takaful Regulation in Nigeria a. NAICOM‟s Approach to Takaful Regulation b. Overview of Key Features of NAICOM‟s Takaful Operational Guidelines d) Prospects, Challenges and Way forward 1.0 INTRODUCTION AND BACKGROUND Nigeria is considered to be the largest country in Africa with estimated population of 168 million people. Looking at the country‟s abundant human and natural resources, Nigeria is potentially seen as becoming the economic and financial hub of Africa. This can only be realized if the Government of Nigeria can adapt its development strategy for different sectors of the economy in a synchronized manner. The extension and delivery of formal financial services at an affordable cost to all, is generally viewed as a necessary impetus for economic growth of any nation. Similarly, access to financial services amongst the segregated and low income segment of the society is identified as one of the key success factors for achieving this objective. The Federal Government of Nigeria in the year 2000 developed a 20 year Economic Plan entitled “Vision 2020:20”. The core objective of the plan is to consolidate the country‟s leadership role in Africa and establish itself as a 1|Page

significant player in the global politico-economic landscape and also to be amongst the 20 largest economies by the year 2020. Accordingly, the Federal Government in 2012 launched its Financial Inclusion Strategy (FIS) for the country to complement Vision 2020:20. The FIS is set to provide a road map for developing an inclusive financial system in Nigeria by strategically setting-out targets for different sectors of the economy with the objective of reducing the number of Nigerians that are excluded in financial services from 46.3% as at 2012, to at least 20.0% by the year 2020. Currently, only about 31 million adults representing 36.5% of Nigeria‟s population has access to formal financial services; this cut across banking, insurance and other financial services. The target for Insurance sub-sector is to increase insurance penetration to cover at least 40% of the country‟s adult population. Vision 2020 described the Nigerian insurance sector as “a grossly untapped opportunity” with low attendant market penetration; with strong optimism that the sector will witness tremendous growth in the coming few years. However, contrary to this expectation the insurance industry‟s performance despite considerable improvement remains far below acceptable optimum. A report prepared by EFINA in 2012 indicates that only 1.5 - 2% of the total population in Nigeria has some form of insurance and the insurance penetration remains less than 1%; a figure lower than most of the emerging markets even in Africa. For example, South Africa recorded 15% and Kenya 3.5% both in 2012. Several reasons have been adduced by insurance experts for the poor insurance penetration in Nigeria, some of which are corruption, lack of claim settlement, limited public awareness, and negative perception of insurance as well as absence of inclusive financial services. The situation in the northern part of the country is more alarming as compared to its southern counterpart. In addition to the above factors, the low insurance penetration in the north can majorly be attributed to the fact that the inhabitants 2|Page

of Northern Nigeria are predominantly Muslims, majority of whom stay out of insurance for religious consideration because the conventional insurance involves various elements of „Gharar‟ (uncertainty), „Maysir‟ (gambling) and Riba (interest base investments) which are not permissible in Islam. Some Muslims compromise on their religious beliefs in cases where it became extremely necessary to take insurance policies (for example compulsory insurances such as motor third party, building under constructions etc.). The need for an insurance products that resolves the religious objections to conventional insurance can therefore not be over-emphasized. 2.0 WHAT DOES TAKAFUL MEANS TO NAICOM/ FEDERAL GOVERNMENT OF NIGERIA? As part of NAICOM‟s continuous quest to deepen insurance penetration, increase the contribution of insurance to the national GDP and also align with the Federal Government Financial Inclusion Strategy, the need for Takaful Insurance is identified following a detailed research and studies by the Commission. It was established that a good number of Muslims and others that stay out of insurance for religious and other considerations are willing to buy Shariah compliant insurance products and are in fact in dire need of such alternative; and that Takaful Insurance can effectively serve these excluded segment of the population. Takaful Insurance is a Shariah compliant alternative to conventional insurance which combines the principles of ‘Ta’awun’ (mutual assistance), ‘Tabarru’ (voluntary contribution) and risk sharing to provide the benefit of insurance to Muslims and other interested persons. Takaful industry is relatively a new industry compared to its conventional counterpart as it represents just 1% of the global insurance market. The first Takaful Company was set up in the early 80‟s shortly after setting up of the first Islamic Bank. Since then, Takaful business is 3|Page

growing in prominence and is getting more and more known and understood in many parts of the world. Today there are over 150 Takaful companies operating in over 40 countries around the globe, and Takaful operators have emerged to be important financial players globally. The total annual takaful contribution stand at $12.4 billion in 2012 and it remains on-course to reach $15billion by the year 2015. It is currently the fastest growing sector of insurance growing at around 15% per annum in Africa and the Middle East and in excess of 20% per annum in the Far East (E&Y, WTR 2012). However, while the low patronage of conventional insurance can be explained, the near absence of Takaful business in Nigeria is hard to explain considering the fact that Nigeria has the second largest Muslim population in African and the rapid expansion of Islamic insurance business around the globe. This includes countries with lower wealth indicators and Muslim population compared to Nigeria. In Africa, Takaful has already been established in countries like Sudan, South Africa, Gambia, and Kenya. Currently, 27 out of the 150 Takaful companies reside in Africa. To reverse this trend and put the country back to its rightful position, the National Insurance Commission of Nigeria (NAICOM) introduced into the market the Takaful Insurance Regulatory Framework in March, 2013. The Guidelines provides a framework that regulates the conduct of Takaful Insurance business in Nigeria. This will provide a platform within which the intending Takaful companies can operate. The objective is to set-out requirements and minimum standards for operations and disclosure that aims to protect the interests of consumers/participants. It is also aimed at providing a framework for the establishment and growth of Takaful-Insurance business that is efficient and leads to financially sound and sustainable Takaful-Insurance funds.

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The National Insurance Commission/Federal Government of Nigeria viewed Takaful as: a. A vehicle to drive financial inclusion in the Insurance market – to cater for Muslims, some Orthodox Christians and those with ethical inclinations. b. A path to deepen insurance penetration c. A means to improve insurance contribution to the Nation‟s Gross Domestic Product (GDP). 3.0 TAKAFUL REGULATION IN NIGERIA 3.1 NAICOM’s Approach From Reactive in 2007 >>>>>>> to >>>>>> Pragmatic in 2013 Reactive – At this stage the Commission reacted to market demands by approving Takaful products to 3 Insurance Companies (Niger Insurance, Cornerstone Insurance and African Alliance Insurance). Takaful being a completely new proposition in the Nigerian insurance market, the Commission deemed it necessary to leverage on the existing conventional insurance infrastructure to mid-wife the concept for the first five years of operations. This is to allow both the Commission and the Operators to build reasonable capacity and experience for effective operation, management and supervision of standalone Takaful companies. Pragmatic – The Commission issued a robust guideline in March 2013 to facilitate transition to full-fledge operation and also to provide a level playing field for all operators in the Nigerian insurance market. A dedicated Takaful Unit was set-up in the Commission to take care of all Takaful related issue. Similarly, the Commission is also in the process of setting-up its own Takaful advisory Council (TAC) as a requirement of the Guidelines to help advise the 5|Page

Management on all matters relating to Shariah compliance of product and services offered by Takaful Operators. 3.2 Overview of Key Features of NAICOM’s Takaful Operational Guidelines a. Takaful Advisory Council (TAC) – TAC resides with the regulator (NAICOM) and consists of experts knowledgeable in Islamic jurisprudence, finance and insurance. Takaful Advisory Council members are to provide NAICOM with the necessary Shari‟ah guidance to ensure the effective regulation of Takaful-Insurance operations. The Takaful Advisory Council will have such oversight role over the TakafulInsurance Operators‟ Advisory Council of Experts (ACE) as may be assigned by the Commission. The Commission as it deems appropriate will forward to the Takaful Advisory Council (TAC) activities such as approval of Products, operational models, Conflicts of interest disclosed by members of ACE, resignations from a Takaful-Insurance Operators ACE etc. b. Shariah Governance/Advisory Council of Experts (ACE) – The Guidelines requires all Takaful Operators before commencing business to set-up Shariah Advisory Council of Experts who will be reporting directly to BOD of the Company. ACE are charge with the responsibility of approving and certifying all shariah related issues e.g. products, operational models, surplus distribution etc. The Guidelines provides guidance on the ACE members competency requirements, appointment and cessation, Duties and responsibility, ACE Members Code of Conduct, Internal Shariah Compliance Unit, Independent Access and Sign-off by ACE members, ACE Opinion in Annual Reports etc.

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c. Fiduciary Duties imposed on Takaful Operators - Funds Segregation, surplus

distribution,

Financial

Reporting,

Expenses,

Minimum

Disclosures and Auditor‟s Report d. Corporate Governance – Takaful Operators (TO) are required to comply with

normal

Corporate

Governance requirements

obtainable in

conventional insurance regulations. These includes: - Requirements for appointment of Board of Directors, CEO/Key Persons (Fit & Proper), Auditors, Appointed Actuary, etc. 3.3Protection and Trust in the NAICOM’s Takaful Operational Guidelines 2013 a. Qard al‟ Hassan (Benevolent Loan) – This is imposed as a mechanism to align the interest of Operators and Participants. Takaful Operators are required to provide Qard Hasan or interest free loan in case of deficit in the underwriting fund which should be repaid out of future surpluses. b. Minimum Deposit and Risk-based Capital Requirements –Takaful Operators are required to keep a minimum deposit with the Central Bank of Nigeria at all times. The deposit will serve as a provision that can be utilized as Qard al’ Hasan in case of deficit in the underwriting fund. As the Takaful funds build-up and the risk accumulate, TOs would be required from time to time to increase this deposit depending on the volume of risk a company is carrying. c. Segregation of Funds – TOs should maintain separate funds reflecting the various differing ownership and nature of risks. d. General

Regulatory

Requirements/Prudential

Standards

–

Assets/investments, solvency, Restriction of Ex-gratia payments, Correct market imperfections, etc. Management of Participants – The Guidelines also take care of issues of market conduct Rights and Obligations, Claims Settlement, Surplus Distribution etc. 7|Page

4.0PROSPECTS, CHALLENGES AND WAY FORWARD 4.1 Prospect:  Large Muslim population coupled with the country‟s consistent growth rate (averagely 7% annually for the past 8 years) and low insurance penetration means huge potential for Takaful insurance  Takaful Insurance is expected to enjoy automatic customer patronage amongst the Muslim faithful's driven by the Growing desire for shariah compliant products  The Takaful Concepts of Mutuality, joint help and brotherhood fits well with African culture in general and Nigeria in particular, if properly presented, it can be the best tool to deepen insurance penetration 

The concept of surplus participation is seen as transparent and particularly appealing to all.

 Establishment of other Non-interest financial institutions provide huge potentials for Takaful business  Forecasted annual growth rate of over 20%  NAICOM‟s on-going developmental Regulatory approach – The Commission recently admitted as a full member of IFSB and is also collaborating with regulators and institution in other jurisdictions to ensure successful Takaful industry in the country. 4.2 Challenges and Way forward SN

Challenges

Way Forward

1

Lack of proper awareness

There should be concerted effort from all stakeholders, Regulators, Operators etc, as this can be very expensive.

2

Competition/Sustainability-

TO should avoid “Takafulisation” of

premium might be higher in the conventional products but should rather 8|Page

short-run

compare

conventional insurance

to invest more on research & developing new products that can impact positively on the people.

3

Shortage of skill personnel

Human resources pool needs to be developed for long term efficiency. Both stakeholders are required to invest a reasonable amount of resources in that respect.

The

Commissions

is

collaborating with institution like the IFC UK, IBFIM, IFSB, and IFISA in that regard.

4

Limited

Shariah

compliant Instruments such as Sukuk and Ethical

Investment alternatives

Investment funds need to be properly developed. SEC has also issue a guideline for sukuk issuance in Nigeria and the Osun State Government has successfully completed the first Sukuk issuance in Nigeria and sub-Saharan Africa. The N11.4 billion Sukuk was oversubscribed by 20%

5

Limited number of Retakaful There is the need for establishment of companies

additional Retakaful operators.

Africa

Retakaful needs to expand its branch network to other parts of Africa

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6

Possibility of Religious bias, There is the need to reach out to nondistrust, Islamophobia etc.

Muslims emphasizing the fact that Takaful is about addressing the issue of protection in a fair and ethical manner and is open to all regardless of faith or believe

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BIBLIOGRAPHY 1. CBN Nigerian Financial Inclusion Strategy Document 2. EFiNA, (2012): Corporate Profile 3. Ernst & Young (2012),The World Takaful Report 4. GIZ, (2012). Micro-Insurance Nigerian Country Diagnosis 5. Jankara, I U (2013). Regulation of Takaful-Insurance in Nigeria, a paper presented

at

the

NAICOM/GIZ

International

Micro-Insurance

Conference, Held on the 9th and 10th of September, 2013,

at the

Transcorp Hilton Hotel, Abuja, Nigeria 6. NAICOM Takaful Operational Guidelines 2013 7. Sulaiman, Z D (2011). Factors Responsible for the Absence of Takaful and the Prospect for its Establishment in Nigerian Economy: University of Gloucestershire, UK.

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