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Saturday, 19 July 2014

Takaful: Towards Deepening Insurance Penetration

The universal objective of financial inclusion is to facilitate the establishment and delivery of suitable and affordable financial services for the underserved or disadvantaged segments of all human population regardless of race or religion.
Addressing the constraints for building inclusive financial sectors is, therefore, paramount in helping to improve the lives of people through the creation of sustainable financial services in the society.
Therefore, considering the significant number of the financially excluded segment of the population in the world today, which constitutes more than 2.5 billion working age adults, it is remarkable to indicate that non interest finance can be a very important tool for the promotion of financial inclusion, not only in Nigeria, but the whole world.
One of the major obstacles identified in the universal fight against the prevalence of financial exclusion is the lack of financial literacy among the populace. The observed gap in financial literacy is especially wide among women and of course the less educated segment of the society. Therefore, it is evident that people often lack the ability to save and manage their little earnings for effective personal financial decisions.
For instance, lack of financial education leads many people to erroneously understand insurance as something that can only be done when there is disposable income. This idea forms the basic understanding on risk and the need for mitigating against it among many people.
Perhaps, in order to improve on the issue of financial literacy, the Organisation for Economic Co-operation and Development (OECD) initiated a project in 2003 to develop common financial literacy principles that will serve the needs for global financial education.
Many other countries have also identified their various financial educations needs and have developed strategies towards closing these gaps. The key important areas that require proficiency in personal finance include saving, investment, tax, insurance and retirement among others.
Additionally, the drive towards non interest finance can never be comprehensive without establishing the necessary regulatory framework for non interest mechanism of risk mitigation like the Takaful insurance.
This was the main reason at the completion of its assignment in 1983, the Malaysian Committee on Islamic banking framework, recommended that a special task force be established to study the practicability of islamic insurance (the Takaful).
This was suggested in order to draw up an appropriate legal framework which is feasible for complementing risk management in all non interest banking operations.
It was this process that later heralded the evolution of the pioneering 1984 Malaysian Takaful Act. Prior to that, Takaful as an alternative to conventional insurance was first practiced in Sudan in 1979.
The application of risk management mechanism in Islamic history can be traced to the practice of paying blood money (Diyyah) for manslaughter by members of the Arab clan and that of mutual indemnification among co-workers (Dawaniyya) during the reign (634-644 CE) of Caliph Umar al-Khattab (ra).
These early Arabian risk mitigation practices are today recognised as insurance products. Indisputably, these traditions inculcate and connotes that a Muslim is expected to have an appetite for risk management. Risk and uncertainty are part and parcel of every human endeavour; therefore, it is innate for people to prepare themselves against unforeseen financial or physical loss.
For that reason, one can declare without fear of contradiction that Islam not merely recognises insurance but encourages the practice of insurance as a lawful method for risk management. However, the question that always springs to mind is that if insurance is not prohibited in Islam why then do a majority of Muslims exhibit their overt repugnance over insurance issues?
Many Muslims miscomprehend the role of insurance in Islam and argue that it is forbidden and goes against the belief in the will of Allah whereas the World Fiqhi bodies have collectively issued a favourable ruling for practicing “Takaful” as the Islamic substitute for conventional insurance.
Therefore, allegations on the position of insurance in Islam are all based on sheer misconceptions caused by unawareness or lack of interest on the subject matter because Islam as a way of life sets standards for the conduct of all aspects of human existence.
There are some fundamental elements which made it necessary for Islamic law (Shari’ah) to negate the practice of conventional insurance business. Islamic law explicitly forbids the involvement in any form of any action that is associated with excessive uncertainty (Gharar), gambling (Maisir), and interest (Riba).
Moreover, we can safely infer that the Takaful is not a new phenomenon for some countries in Asia, Middle East, Europe and America because long before the dawn of the 21st century, many countries have realised the need for the development and implementation of inclusive financial products.
In the same vein, the United Kingdom Department for International Development and many international NGOs have since taken the lead in aiding the research and promotional development on financial inclusion in many parts of Asia and Africa.
This has given much impetus for the development of suitable financial products, to those with ethical and faith related reservations towards the practice of conventional finance.
Against this backdrop, the National Insurance Commission NAICOM initiated and and and crafted market development strategies for the industry under the MDRI project. The development of the Takaful Insurance operational framework happens be one of those strategies targeted for accomplishment by the commission as the Nigerian insurance regulatory authority.
Remarkably, the implementation of the Takaful Insurance framework was launched by the NAICOM in November 2013, after the unveiling of the Takaful Insurance Guideline ceremony performed by the then minister of state for finance, Mr Yerima Lawal Ngama, in Lagos.
This landmark achievement clearly indicates that the Nigerian insurance regulator has tremendously given the Takaful Insurance all the attention and supports it required without any prejudice.
The Nigerian insurance industry and all interested stakeholders are expected to take the full advantage of this remarkable initiative towards the expansion of a new business frontier for the betterment of the economy.
Interestingly, the target market for the Takaful in Nigeria is large and recent reports from the few existing window operations indicate the attainment of 70 per cent penetration.
Based on the Financial Services Access survey 2012 conducted by a non-governmental organisation (NGO), Enhancing Financial Innovation and Access (EFInA), there are strong indications that with suitable operational framework like that of the Takaful, proper public education and awareness on the benefits of insurance and how it works, 35.9 million adults who constitute 41.4 per cent of those without insurance in Nigeria could be included in the insurance market.
The experience in other jurisdictions like Asia and Middle-East also depicts the prospects of healthy and viable business conditions.
According to the 2012 World Takaful Report prepared by Ernst & Young, United Kingdom (UK), global Takaful contributions rose from 19 per cent in 2010 which amounts to $8.3 billion to $12 billion in 2013. With this exponential growth trend, the Takaful contribution is, therefore, expected to reach $25 billion by the end of 2015. No doubt, the implementation of the Takaful Insurance will open up another exciting opportunity for the development and growth of the Non-interest Financial Institutions (NIFIs) in Nigeria.
Therefore, one may infer without fear of contradiction that the success of the Takaful operations is certainly going to secure the needed business environment for the operations and the stability of all other non interest financial institutions in the country.
The prospective Takaful insurance operators may have to look beyond these perspectives by coming up with innovative Takaful insurance products that shall suit the specific needs of its potential market in Nigeria.
However, the predictable emerging challenge for the Takaful Insurance business can be observed in the following important areas: consumer awareness, investment restrictions, liquidity management, re-takaful arrangement, market development, capacity building, availability of Advisory Council of Experts (ACE) and the continuous professional development for the ACE.
These challenges must be seen as very imminent and requires urgent strategic plans for the smooth take off by the new Takaful operators.
(Leadership Newspapaer / 18 July 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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