“Takaful” is an Arabic word meaning a mutual guarantee. Conceptualised as free from uncertainty and gambling, and designed to sit in harmony alongside Sharia law, the once controversial insurance system is more of a pact among members, and it is going from strength to strength in Sudan and beyond
I N – D E P T H
The takaful industry, the system in which money is pooled and invested in a way that complies with Sharia laws, grew at a dizzying pace over the last 10 to 15 years. While the last five years or so have seen a slowdown, the global Islamic financial market is currently estimated at $2 trillion (US), and if such buoyancy continues the takaful market is estimated to continue its double-digit growth momentum. Indeed, the growth of takaful markets is driven by the prospects of the Islamic banking and finance sector in predominantly Muslim countries.
Over the last decade, the double-digit growth of Islamic banking assets has been accompanied by a similar growth of gross takaful contributions across key Muslim developing markets like Sudan.
In fact, by 2017, the global takaful industry may reach over $20 billion (US). Year-on-year growth has wavered from a high CAGR of 22% (2007-11) to a still-healthy growth rate of 14% over 2012-14 states (Ernst and Young). The Sudanese takaful industry’s gross written premium increased at a review-period (2009–2013) compound annual growth rate (CAGR) of 23.4%. The takaful industry in Sudan is endeavouring to overcome the country’s economic and political challenges by responding innovatively to the community’s needs, all the while respecting the ethical values of the system.
Africa is getting more actively involved in takaful over the last five years. Now more than ever, countries including Sudan are looking at other takaful players and consultants in a quest to build startups and gather advice, so that existing operations function more efficiently. Sudan, compared to other countries is, however, at an advantage in that takaful is nothing new for the country. The very first takaful company was established in 1979 — the Islamic Insurance Company of Sudan. In fact, today the number of takaful companies is higher there than anywhere elsewhere, as all insurance companies in Sudan are obliged to operate in accordance with Islamic Sharia principles. Non-life insurance is the largest segment in the overall takaful insurance industry in terms of gross written premium, accounting for 58% of the industry’s total share in 2013. According to the Sudanese Insurance Supervisory Authority, there are four life-insurers and seven non life-insurers that offer takaful products in Sudan. The minimum capital requirement for insurers in Sudan is 6 million Sudanese pounds, or $1 million (US), and this must be met by all insurers in accordance with Sharia standards.
WHY AND WHERE DID TAKAFUL ORIGINATE?
For generations, Muslims around the world have grown up with a mindset that insurance (especially life insurance) contravenes some of the Islamic tenets. Life insurance, as sold in the conventional way, was declared unacceptable as far back as 1903 by some prominent Islamic scholars in Arab countries. The search was on for an acceptable alternative, but not until the 1970s did the debate gain sufficient momentum to reach a consensus. In 1985, the Grand Counsel of Islamic scholars in Makkah, Saudi Arabia, Majma al-Fiqh, approved the takaful system as the alternative form of insurance, written in compliance with Islamic Sharia.
The Grand Counsel approved this system as a one of cooperation and mutual help, but the exact method and operation was left to Islamic scholars and insurance practitioners to resolve, develop and implement.
The takaful industry is still, however, in some sense in its infancy given that there are many areas left unresolved, especially when it comes to life insurance. These include the global standardisation of takaful terminology, the development of an acceptable form of life insurance (family takaful) that is suited to countries in the Arab regions and a consensus for a system that determines profits or surplus, as easily distributable to participants and shareholders.
For generations, Muslims around the world have grown up with a mindset that insurance contravenes some of the Islamic tenets. Life insurance, as sold in the conventional way, was declared unacceptable in 1903 by some prominent Islamic scholars in Arab countries”
TAKAFUL IN SUDAN: MANY SHAPES AND SIZES
The minimum capital requirement in Sudan is around $1 million (US). Takaful in the country continues to be the most genuine and acceptable Islamic insurance experience consistent with Sharia principles, according to Salah Musa Mohamed, Managing Director of Shiekan Insurance and Reinsurance Co. He said that “total contributions have shown double-digit growth in the past three years and surpluses have been rewarding as well. This shows that takaful is a successful business model that doesn’t jeopardise the ethical values of solidarity and cooperation.” In Sudan, general takaful lines account for about 96% of the market, with motor insurance leading at around 40%.
Although only four operators in Sudan provide family takaful — it accounts for just 4% of the market volume — there are noteworthy initiatives aiming to taking this line to the next level. Shiekan was the first operator to launch agricultural insurance in Sudan in 2002 by covering the country’s largest irrigated agricultural scheme. “Our policies cover crops in irrigated, rain-fed and horticultural schemes. The new policies are designed to cover forestry crops, greenhouses, sugar cane and weather index insurance,” continued Salah Musa Mohamed.
Despite the importance of this line, companies limit their businesses mostly to irrigated schemes in view of the high risks involved in rain-fed agriculture, he added. “The government subsidises the farmers by paying 50% of the insurance premium. And having agriculture insurance in the market has encouraged the government’s Agricultural Bank of Sudan (ABS) to finance farmers and stipulated having an insurance policy when giving loans.”
Agriculture and livestock insurance account for around 6% of Shiekan’s GWP. These lines have large potential and are expected to grow, especially with the government moving seriously through the ABS and Farmers Trade Union, which formed the Agricultural Renaissance initiative to handle planning, facilitation and implementation of government policies.
Costs have been made more affordable and the compensation system has been changed. Previously, financial providers — variously banks or the Ministry of Agriculture — received all the compensation. Now, 50% of this goes to the policyholder.
GROWTH OF TAKAFUL ALMOST A GUARANTEE
The market is generally optimistic about growth prospects, which very much depend on political progress, but players are finding ways to overcome this challenge by making the best of what they have. Around the world, particularly in rapid-growth markets, where critical mass can be prospected with detailed planning, takaful can serve as a Sharia-compliant and ethically based alternative to conventional insurance. With the high potential for internationalisation of takaful, there is urgency to grow regional champions within high-growth and stable regions to realise the market potential for takaful.
Between 2013 and 2016, the global takaful market is expected to grow by 14% (Ernst & Young). In the long term, given the demographics and economic structures integral to Sudan, the country looks well poised to be one of the rapid-growth markets of takaful.
Key Takeaways TAKAFUL industry: Five mega trends
- The global industry continues to gain market share across several high-value, rapid-growth markets which still show significant untapped potential
- Undifferentiated business strategies mean most takaful operators are competing intensely. This is likely to squeeze out the underperformers
- Performance varies significantly for operators. In striving for scale and profitability, operators are looking at structural transformation around risk, pricing and cost efficiencies
- Continuing regulatory reforms have disproportionately increased compliance costs and efforts. And significant regulatory divergences across markets continue to impact adversely the industry’s growth and profitability
- The continued strong growth of the wider Islamic banking sector will help sustain the progress of the takaful industry. Creating strong regional takaful champions will provide the much needed impetus