Rekindling the Growth of Islamic Insurance

Globally, Takaful – a Sharia-adherent insurance scheme – is registering unparalleled development. The product is being offered in the form of either family or general Takaful to cater to the need for protection and cooperation at times of risk. Takaful insurance became effective in Ethiopia on the 15th day of June 2020 with the issuance of the National Bank of Ethiopia’s (NBE) Directive No. STB/1/2020, a Directive to license a takaful operator or a takaful window operator. Conversely, the product is at the early introduction and premature stage, while a massive potential exists. Records in Ethiopia demonstrate that the expanding Muslim population is anticipated to be a driving force for the takaful market. However, the question lies with the availability of innovative and value-adding products apart from simply naming the existing conventional insurance products under the guise of Islamic insurance.

The current trend shows that the Takaful insurance market in Ethiopia is promising, provided that the product is offered in combination with other financial services. As of 2024, five insurance companies are licensed to provide Takaful insurance service in Ethiopia as a window operator, and a few others, including a full-fledged Takaful operator, are in the process of market studies and product development. When we see the contribution of the Takaful insurance market to the overall Gross written premium (GWP) of the Ethiopian insurance industry as of December 2023, it accounts for less than one per cent. Hence, this article intends to discuss the current trend, potential, and challenges and pinpoint the remedies necessary to improve the takeout of takaful insurance in Ethiopia.

According to the Directive set by NBE, “Takaful” means cooperation between community members whereby each member contributes a certain sum of money to a fund, which will be used mutually to assist the members against a defined loss or damage”. Takaful is the Islamic norm that Islamic shari’ah consents to, and its primary competitor is conventional insurance.

Here, it must be understood that faith is not in contradiction with the notion of insurance itself but against some of the approaches and principles presently used in conventional insurance products. To put it in clear terms, Islam welcomes Takaful since it is free from any component that it forbids, such as the features of riba (interest), Maisir (gambling), and gharar (uncertainty), among others.

When we see the predictions in the global takaful market size show that the product has shown growth from $29.54 billion in 2023 to $33.14 billion in 2024 at a compound annual growth rate (CAGR) of 12.2%. The advancements in these periods are attributed to the development of Islamic finance in general, snowballing awareness campaigns of Takaful, government patronage and creation of enabling legal and regulatory framework, principle-based social responsibility, and bundling of the service with other financial services, including partnerships with  Islamic banking, micro-finance and Islamic micro insurance providers.

Most importantly, the growth and takeout of the Takaful Insurance industry and the market size are projected to show massive growth, even with a growth rate of more than conventional insurance, and reach up to $51.75 billion in 2028 at a compound annual growth rate of 11.8%. The growth being propelled by numerous dynamics, comprising the uninterrupted development of the international Islamic finance industry, the expansion of takaful services, the amalgamation of Takaful into the country’s financial inclusion planning strategies, the upsurge in the prosperous Muslim populace, and worldwide cooperation and standardization efforts, can be mentioned, among others.

The potential for Takaful in Ethiopia is beyond question. Here, it is essential to put the significance of Ethiopia’s Muslim population into perspective. To put it in comparable figures, estimates place the total number of Muslims in Ethiopia more than the number of Muslims in Saudi Arabia, Syria, or Yemen and almost as many as those in Sudan. Hence, all these provide the potential to broaden Islamic finance in general and insurance coverage using Takaful in particular.

Islam is one of the most widely practised religions in Ethiopia. It is the religion of the overwhelming majority of the Somali, Afar, Argobba, Harari, Berta, Alaba, and Silt’eSilt’e and has many adherents among the Gurage, the Amhara, and the Oromos.

On the other hand, although the potential exists, there are many hurdles to overcome if this market is to realize its scale of growth. When we dig deeper into the industry, we come across challenges and issues that mainly face the Takaful industry, especially with the insurers operating within the Takaful window framework.

Ethiopia’s first and foremost challenge is understanding the difference between conventional insurance services and Takaful and the associated misconceptions. Here, it has to be underlined that Takaful operators should come with a different set of guidelines and transparency of their products underpin their offering appeal to both the Muslims and, more importantly, the larger non-Muslim communities as well. The product should be supported with an awareness creation and promotion campaign to inform, educate, and enable the public to understand the basic tenets of Takaful insurance products. Takaful is a viable alternative to conventional insurance for those customers who value ethical practices.

Awareness creation efforts should also work to iron out the Misconception since Takaful is not exclusively for Muslims. In addition to offering the assurance and protection that conventional insurance does, Takaful includes additional attractive features. As a result, Takaful is accepted and introduced into the markets, with ethics being a central part of the product. Hence, in countries like Ethiopia, where Muslims, Christians, and other religions live peacefully, offering Takaful can be successful if the right product, distribution channel, fair price and value-adding services, and adequate promotion and awareness creation support the services.

The other challenge associated with operating takaful insurance in Ethiopia and mainly impeding its growth is the need for a more skilled and qualified workforce, both at the industry level and in the regulatory house. To make matters worse, there is no training institution or academic body that works on developing the required manpower for the industry.

The third roadblock is the need for an enabling legal and regulatory framework for cultivating takaful services. Currently, the regulator has developed a guideline that needs to address the necessary infrastructures, which calls for improved regulations that could spur the development and growth of the Takaful business. Hence, the regulator must prepare and implement clear policies and strategies concerning the insurance sector in general and that of the Takaful business. It should address the challenges related to infrastructural, technology, consumer protection, agents model, and business drivers affecting the product bundling, including Bancatacaful, micro-takaful and working with other technology operators.

Improvements in the existing guidelines are needed to accommodate Retakaful, Relationship, manner, and terms with reinsurers, Re-takaful contributions, the modalities of operations, and high authority given to the Sharia Advisory Council (SAC). The Directive should also come up with improved versions to provide adequate room for sharia compliant investment and a list of Sharia-compliant investment areas, approved investment options, and standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) to be in line with the internationally accepted standards.

Moreover, the role of BancaTakaful, banks acting as agents for Takaful operators,as an alternative omnichannel of customer engagement has to be emphasized since banks can become a “one-stop” Financial supermarket” to offer bundles of banking and Takaful services efficiently and effectively by utilizing their existing branch network, human resources, and technology.

At the moment, there are over 12,000 bank branches. These branches should be enabled to provide the services. Banks should blend traditional services and offer new products in bundles to maximize customer service quality and efficiency. They should also work to develop generalist professionals with multi-tasking roles and make Bancassurance part and parcel of their customer service strategy. Hence, the role of regulators is huge in addressing the regulatory gaps and becoming supportive in all aspects by setting the necessary enabling regulations, issuing directives, and levelling the playing field. In this regard, Ethiopia needs a comprehensive Takaful Insurance Act to address all legal and regulatory issues concerning takaful operations.

In fact, the digital boom in financial services, which will soon make the outdated brick-and-mortar model of banking obsolete, could make maintaining branches very expensive for banks. As a result, the option of using them as one service centre for Takaful and other commercial insurance services could allow them to share their operating expenses.

The Government’sGovernment’s political will is critical for the practical introduction and development of Islamic insurance or Takaful. Genuine government support should be followed by broad publicity of the newly introduced industry, an amendment of the laws, and the development of the necessary infrastructures to facilitate effective collaboration with international organizations.

A clear marketing strategy and promotion are also needed to improve the growth of Takaful in Ethiopia. Those who are entrusted with the marketing efforts, including the marketing and salespeople and sharia / religious scholars (Ulama) scholars, should work together to educate the potential and existing customers properly. There has to be a blended effort to enable the public to understand the ‘’what and why’’, the operating models, and the economic and spiritual benefits of Takaful. Companies should have a dedicated marketing wing to expedite the business and focus on takaful marketing and branding efforts. Here, the role of Media in the promotion and public education is paramount, especially in removing the myth that Takaful insurance belongs to the Muslim community only. Hence, the operators in Ethiopia should understand that with a solid new product introduction process and marketing strategy in place, they can retain market share and get the Takaful product concept off the ground.

The industry should also work in ICT development to introduce modern services, avoid the lack of standardization, and hence improve technical and operating efficiency. The ultimate aim is customer satisfaction and ease of service delivery.

Most importantly, the future of Takaful requires a concerted effort from all. To tap the untapped potential, the regulator, policymakers, and the insurance industry should adequately understand the potential of Islamic finance in general and Takaful insurance, in particular, to create alternative services, increase financial inclusion, insurance penetration, and density, and finally, meaningfully improve the contribution of insurance to the nation’s GDP.


12th Year • April 2024 • No. 128

Fikru Tsegaye

Author of the award winning book TAKAFUL Insurance in Ethiopia (AOI 2023), is a senior insurance expert. He is also a regular contributor at EBR. He can be reached at fikru.tsegayee@gmail.com


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