IFN Monthly Article on Nigeria
Breaking in – Nigeria’s Takaful Story
Just as things were getting quiet, Nigeria’s Islamic financing Industry got a buzz with the licensing of two new takaful operators by the National Insurance Commission (NAICOM) in September 2019. The two operators, Cornerstone Takaful Insurance Company Ltd and Salam Takaful Insurance Company Ltd, were granted approvals in principle (AIP) to operate family and general takaful across the country. The new operators will join two existing full-fledged takaful companies, Jaiz Takaful and Noor Takaful, effectively doubling the number of fully fledged takaful operators in the country. Cornerstone Takaful Insurance Company is a subsidiary of a conventional insurer and the takaful business had erstwhile operated as a window. The new entrants will still have to meet other NAICOM requirements to obtain full operating licenses such as the appointment of key personnel and a submission of their intended takaful products.
Takaful could help to break the cultural stigma that has weighed on insurance penetration in Muslim-majority areas and conservative communities. NAICOM has reiterated its strong desire to improve insurance penetration in a country where annual gross premiums are at circa 0.31% of GDP – one of the lowest in developing markets. Among the factors beleaguering insurance is the culture of the average Nigerian who still views insurance as a lack of faith in God, portending evil, gambling or quite simply a waste of money. In principle, Takaful goes to the heart of these issues as it demonstrates principles of cooperation and fairness that aligns with the concerns of the most devout devotee. However, in practice, the takaful market has been a slow-starter partly due to the high cost of consumer education and re-orientation, making the Nigerian insurance market a tough nut to crack.
The Nigerian market is dominated by conventional insurers and an expansive network of insurance brokers. Copycat insurers are also prevalent, effectively creating a fiercely competitive space in a market where consumers typically only subscribe to statutory insurance policies. Takaful operators, although niche, must therefore wrestle business from conventional insurers during this market development stage while the client pool is expanded through education and new product development. In the long run, Takaful could offer a significant commercial advantage to clients through profit distributions.
One of the key challenges takaful operators contend with is a limited range of investible assets, which increases asset concentration and often reduces their flexibility to pursue high rates of return. Furthermore, their drive to win new business makes premiums sticky, thereby compressing margins. Without compelling returns, the commercial advantage to new clients hoping to receive profit distributions could become benign.
These challenges notwithstanding, takaful operators still appear to be positioning for the long haul. The industry undoubtedly has good potential considering the sizeable Muslim population and gradual growth in Islamic banking assets. Furthermore, the entry of more Islamic finance participants should drive product innovation and allow institutions to become more competitive. According to NAICOM, it has received additional applications for takaful licenses which implies that the industry may witness significant growth in the coming months. The entry of more Islamic banks and takaful companies implies more mutually beneficial business opportunities. As the Islamic financial industry matures and evolves with more players, the impediments to growth will gradually be eroded.