Takaful: The Next Big Thing | Bashir Arowojobe

What is Takaful (تكافَل)?

Takaful is a type of ‘Islamic’ insurance wherein members contribute money into a pool system to guarantee each other against loss or damage.

Takaful insurance is based on Sharia (Islamic law), which explains responsibilities of individuals to cooperate with each other and protect one another.

A Brief History of ‘Takaful’

The earliest Takaful schemes began in the 7th century (CE) with the Muslim communities of Mecca and Medina. Pooled liability for the ancient Arab tribes was arranged as a means of compensating the victims of tribal disputes by sharing responsibility for ‘Aqila’-عاقل- (blood money).

In the 8th century (CE), this was extended to sea voyages as Arab trade expanded. Muslim traders contributed to mutual funds to cover themselves if they suffered losses on voyages (marine insurance).

In the 1970s, Sudanese Sharia scholars developed a theoretical basis for reconciling insurance with sharia through tabarru (donations) paid to a mutual fund.

Subsequently, in 1979, the Islamic Insurance Company of Sudan was established as the first modern takaful scheme based on a wakala model.

The 1980s and 1990s saw takaful established in the ASEAN countries, primarily on a mudhorobah basis, starting with Malaysia in 1984. This was followed by the Gulf Cooperation Council (GCC) using hybrid wakala/mudhorobah models. Though still in its infancy, the takaful insurance sector is now able to service groups that conventional insurance could never penetrate for cultural and religious reasons.

Takaful In Nigeria

The history of Takaful in Nigeria began in 2004 when African Alliance Insurance Company Limited introduced Takaful services to the public in addition to its conventional insurance services.

Like CBN to Islamic banks, The National Insurance Commission of Nigeria (NAICOM) is the regulatory body for Takaful and conventional insurance. In 2013, NAICOM launched the “2013 Takaful-Insurance Operational Guidelines”. This serves as the first national guideline for the operation of Takaful in the country.

It clearly spells out prudential, operational, governance and basic Shariah standards to be adopted by all operators.

As at May 2022, the four operators that have been licensed by NAICOM to operate Takaful in Nigeria are:
-Jaiz Takaful Insurance Plc
-Noor Takaful Insurance Plc
-Salam Takaful Insurance Ltd
-Cornerstone Takaful Insurance

-Islamic Insurance is a risk sharing mechanism among the participants, unlike conventional insurance; it is a risk transfer mechanism from the insured to the insurance company.

-Takaful is based on solidarity and risk-sharing principles; it is an Islamic form of financial protection.

-The operators of Islamic insurance scheme do not own the Takaful fund, the contributions (premium to cover the risk) paid by participants belongs to them.

-Takaful companies have to follow Islamic finance principles, such as producing Shariah-compliant contracts for clients and appointing a board of Shariah scholars to ensure that both the products and the operations of the company comply with Shariah.

-It is fundamentally different from conventional insurance because The Takaful operator only manages the fund for a fee or share of the profit from the fund.

Market potential

According to IMARC GROUP (a leading market research company), the global Takaful market reached a value of US$ 27.6 Billion in 2021.

Looking forward, IMARC Group expects the market to reach US$ 49.8 Billion by 2027, exhibiting at a CAGR (Compound annual growth rate) of 10.5% during 2022-2027.
In some countries with majority Muslim populations, such as Nigeria, Pakistan, Egypt and Bangladesh, the Takaful market can be considered very much in the embryonic stage.

These are almost totally untapped markets, in which insurance penetration hovers somewhere below 2% of GDP.

The world’s 1.5 billion Muslims represent a potential customer base that no insurer can afford to ignore.

Challenges for Takaful operators

The potential for Takaful is beyond question. But there are many hurdles to overcome if this market is to realize its potential.

Human Capital Deficit

Human resources pose a major obstacle to growth, as the market is facing a severe shortage of qualified Sharia-finance cross-disciplinary expertise that understand both technical insurance principles and have an adequate awareness of Shariah finance.

Inadequate Awareness and Misconception

One of the biggest challenges is creating customer awareness. Many Muslims live under the misconception that insurance is contrary to the principles of Islam, particularly with regard to life insurance.

People have to be made aware that Takaful provides an acceptable religiously validated solution.

Other challenges include:

– Issue of specialization requirements of members of Sharia supervisory board

– Small penetration rate

– Low income level of participants. Among others.

The Future

The Takaful sector promises to continue its rapid expansion.

However the sector should not ignore the dangers this growth presents. It is therefore vital that legal and regulatory mechanisms are improved in support of corporate governance, policyholder rights, and the management of investment risks.

Funds must also expand their size and capital base, develop their human resources and expand distribution networks if they are to facilitate continued sustainable growth.

Takaful providers must enhance their product innovation and continue to offer a high level of customer service.

They must be able to understand evolving customer and market-specific needs and be willing to renew or re-engineer product design and consumer benefit packages, as well as expand customer reach across various distribution channels.

-Maryam Sa’eed, COMSATS Journal of Islamic Finance, 2019. Challenges of Islamic insurance (Takaful) Globally

-Abubakar Aliyu Ardo: Takaful practice in Nigeria: History, present and futures

-PRICEWATERHOUSECOOPERS. Takaful: Growth opportunity in a dynamic market.

-Simon Whittaker: A Brief Introduction to Takaful


Mallam Bashir Arowojobe is the founder of iSTUDYISLAM. He writes from Ibadan, Nigeria.

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