Challenges of Takaful and the future of Nigeria’s insurance sector

The introduction of Takaful insurance is gradually changing the landscape of the Nigeria insurance sector in a bid to provide a robust platform for financial inclusion. In this analysis, Business Correspondent, PHILIP CLEMENT,looks at the challenges of Takaful insurance in financial inclusion and the role of National Insurance Commission (NAICOM) in ensuring effective performance.

Following the recapitalization of the insurance sector in 2007 aimed at repositioning the sector for better productivity, the output of the sector and contributions to the economy has to an extent stabilized.

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Consequently, with the issuance of operational guidelines by the National Insurance Commission (NAICOM) to Takaful-Insurance companies 2013 aimed at fast-tracking the development of the Takaful industry and boost financial inclusion, financial inclusion in the sector is still describe as “Struggling.”

 However, despite the wide market and glaring potential, the growth of Takaful operations in Nigeria has not matched the expectations of many stakeholders.

According to the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Takaful otherwise called Islamic insurance is an arrangement whereby a group of persons undertake to manage injuries resulting from a specified to risk to which all members of the group are vulnerable. 

To this end, members of the group donate in form of contribution to establish a common insurance fund as a legal entity with independent financial liability to be utilized in indemnifying participants in the event of injury subject to certain stipulated conditions.

In carrying out this task, the fund is managed by a group of the participants or a joint stock company that manages the fund for a specific fee.Therefore, Takaful serves as a Shariah compliant alternative to conventional insurance just as Islamic banking serves as an alternative to the conventional interest based banking system.

Takaful operation in Nigeria has not grown as much as desired considering the great prospects it holds. Despite the large population, legal provisions for mandatory insurance in several product classes and severe financial exclusion has been one of its hitches.

Also, the viability of Takaful has not translated into practice as the market trend shows a glaring apathy for insurance products as policy holders consisting mainly of corporate clients and few retail customers subscribing to the compulsory insurance products. 

In-spite of the numerous indicators suggesting Nigeria as a good market for insurance business, the huge potentials in the sector remain largely untapped with insurance density (insurance premiums as a percentage of GDP) of only about 0.225% as at 2015.

Similarly, gross written premiums in the country in the year 2015 was worth less than 1% of West region, specifically Lagos state leaving out the northern region with barely any form of insurance services.

Industry players say this ought not be the case almost 15 years after the introduction of Takaful operations in the country in 2004.Stakeholders in the insurance industry believe that Takaful, being an integral part of the Islamic financial system is therefore an important component that needs to be considered in Nigeria’s economic development strides especially in area where financial inclusion is a burning issue.

As such, Deposit Money Banks (DMBs) and Micro-Finance Banks (MFBs) have been drawing up strategies to advance financial inclusion and reduce Nigeria’s financially excluded population to only 20 per cent.

Only recently, the Nigeria Deposit Insurance Corporation (NDIC) says it is targeting a record 80 per cent financial inclusion in the coming year as a means to further broaden the financial services space.

Similarly, the initiation the National Financial Inclusion Strategy to serve as a road map towards significantly increasing the access and use of financial services by the year 2020 due to the realization of severe financial exclusion especially in the northern part of the country.

The task before NAICOMFor effective operation of Takaful and the insurance sector, the National Insurance Commission (NAICOM), statutorily saddled with the responsibility of regulating all insurance companies in Nigeria has some serious task ahead.Although Takaful is just as its cradle stage, more needs to be done in the area of acceptability, so as to tackle the challenge of apathy as well as ensuring competence and readiness by any company that wishes to operate as a Takaful Insurance company.

Also, the aspect of due process and proper accreditation should be an area of focus for the commission to enhance transparency in the system and promote the much needed economic development.

Only recently, NAICOM granted approval In Principle, to Cornerstone Takaful Insurance Company Ltd and Salam Takaful Insurance Company Ltd as Composite Takaful operators to transact both family and general Takaful businesses in Nigeria.

This according to the insurance regulator “Brings the total number of wholly Takaful operators to four (4), having earlier in 2016 granted licence to Noor Takaful and Jaiz Takaful respectively.”

According to NAICOM, the approval in principle to the two new companies aligns with its drive for inclusion towards increasing insurance penetration in the country.

As a criteria for the final approval for final operating license by NAICOM, companies in question must provide evidence of “Conducive business environment at their Head offices, an appropriate IT infrastructure and appointment of a head of IT, appointment of key personnel and submission of first set of products for Commission’s approval”

The Commission also revealed that it is currently processing more applications for possible approvals.If these guidelines for issuance of final approval for operational license are followed duly by NAICOM, industry players, experts and stakeholders believe that it will go a long way in tackling the few hitches experienced in Takaful insurance, and boost the insurance sector’s contribution to Gross Domestic Product which according to National Bureau of Statistics (NBS) currently stands at 6.6 per cent as at the third quarter of 2019.