Time for Takaful Shariah Compliant Insurance for Ethiopia

Facts and figures show that the insurance density-cum-penetration level in Ethiopia is at the lowest point. While there are scores of factors, both from the supply and demand sides, one possible reason is dearth of research based insurance products and solutions that could meet the needs and socio cultural make up and religious standards of the society. The industry is highly dependent on conventional insurance products such as “motor” which constitutes the largest portfolio.Though the sector is witnessing many changes in the portfolio mix, the Motor insurance still takes 52Pct of the pie, whilst life insurance constitutes merely 5Pct until March 2017, according to information obtained from National Bank of Ethiopia.
The insurers focus on milking short-term products and fail to provide due attention to other products that have sustainable competitive advantages and generate positive underwriting results. Registering growth in revenue and profit is fine, but evolving in to better company and product portfolio is a more desirable goal. However, the current growth in the insurance industry is derisory considering unbalanced portfolio mix and inadequate coverage.
The ‘not good’ part is that it does not make the insurance services readily accessible for majority of Ethiopians. To achieve sustainable growth and widen insurance coverage companies must come up with alternative insurance products such as “TAKAFUL” to address unique needs of customers, predominantly targeting the Muslim community. Scholars argue that while Muslims make up over one billion of the World’s population, relatively little has been done to harness the economic potential of this section. The case is similar in Ethiopia. Takaful, the Islamic equivalent to conventional insurance has developed rapidly in recent years. However Ethiopian insurers have not yet realized its potential.

What is Takaful?
Takaful originates from the Arabic word Kafalah, which means “guaranteeing each other” or “joint guarantee”. The concept is in line with the principles of compensation and shared responsibilities among the community.
In Takaful, the policyholders are joint investors with the insurance vendor (the Takaful operator), who acts as a Mudarib – a manager or an entrepreneurial agent for the policyholders. The policyholders share in the investment pool’s profits as well as its losses. A positive return on policies is not legally guaranteed, as any fixed profit guarantee would be akin to receiving interest and offend the prohibition against interest. For some time conventional insurance was considered to be incompatible with the Shari’ah that prohibit excessive uncertainty in dealings and investment in interest-bearing assets; both are inherent factors in conventional insurance business.
Takaful has emerged as a complementary and supportive system of Islamic Banking, known widely in Ethiopia as interest free banking, movement throughout the world. It is believed that due to inherent Shariah principles which are universal in character, the Takaful business would be more appealing in the coming years both for the Muslim and non-Muslim communities. Most of the Muslim countries having Islamic Banks have established Islamic Insurance companies as necessary complements to Islamic Banking.
However, Takaful complies with the Shari’ah, which outlines the principles of compensation and shared responsibilities among the community, and has been approved by Muslim scholars. Now, there is a general, health and family/life Takaful plan available for the Muslim communities. Conventional Insurance do not adhere to principles of Islamic faith or the Shariah which prohibits Maysir (Gambling), Gharar (Risk & Uncertainty), Riba (Interest), Haram (Forbidden/unlawful). This has created demand for Takaful to attract the Muslim population and individuals who have reservations with regard to conventional insurance, and would not insure otherwise.

Target market
There is potential market in Ethiopia. The major factor that could contribute to that is the presence and size of the Muslim population in the country. Figures show that Islam in Ethiopia is the second-most widely practiced religion with over 35 million or 34Pct Ethiopians practicing the religion; while roughly 45 million Ethiopians or 43.5Pct practice, the Ethiopian Orthodox Christianity. Islam is the religion of the overwhelming majority of the Somali, Afar, Argobba, Harari, Berta, Alaba, and Silt’e and also has many adherents among the Gurage, and the Oromo, the largest ethnic group in Ethiopia.

The way out
Takaful, over the years, has grown leaps and bounds to develop into sound financial service it is today. With its steadiness and socially reliable elements, an increasing number of Muslim or otherwise, are subscribing it as a financial instrument to be a foil for their portfolio and administer their risks.
Ethiopian insurers can intimately monitor the prospects of Takaful business and introduce the product. Now is the right time for insurers to explore the market and review all the enabling insurance instruments to the application of Takaful.
There should also be a strong regulatory support to create enabling environment for the business. The regulator should open Takaful market to conventional insurers enabling firms to offer shariah-compliant and conventional products side by side. The insurers should also work on awareness creation since insurance is perceived as unlawful among many Muslim communities. By developing awareness and understanding of the Takaful operations and products, most people can embrace the concept leading to increased uptake of the products.
The reinsurance coverage, Retakaful should also be considered to supplement the primary market. Insurance is the most preferred and economical instrument of managing risks. However, to get the preference of people from all directions, it should evolve itself to suit to the tastes and preferences of customers. If insurers come up with the right product, with the right premium and delivery channel, consumers would definitely buy the coverage.
The other option to make the product more suitable for majority of Ethiopians is developing “Micro-Takaful” products. The “Micro-Takaful” is the protection scheme of low-income people. Most of the Takaful products can be delivered to the poor with some modification, such as small Takaful amount (sum), short duration, small contribution (premium) and low cost method of payments to insure smooth cash flow in/out the Takaful fund. Alternatively, “bancatakaful” can also be used. This approach has proven to be one of the efficient channels through which the Islamic insurance products could be distributed along with conventional banking centers and service. The marketing strategy and good relationship between banks and customers are the two factors largely responsible for the promotion and marketability of the Takaful products.
Investment options in accordance with Shariah principles are limited. As far as human resource is concerned, delivering Takaful products should be backed by the required technically skilled Human Resource.
Finding new ways of serving the insured can clearly increase the market coverage of the Ethiopian insurance industry. Finding alternative products, on the other hand, can turn unsuccessful companies in to a champion. TAKAFUL can be a way towards that.

5th Year • July 2017 • No. 52

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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