How to cite this paper: Sa'id Ahmad Khalid & Huzaifa Aliyu Jangebe (2025). Islamic Insurance (Takaful) in Nigeria: The Urgent Need for Legal and Regulatory Reforms. Middle East J Islam Stud Cult., 5(2): 142-155.
ISLAMIC INSURANCE (TAKAFUL) IN NIGERIA: THE URGENT NEED FOR
LEGAL AND REGULATORY REFORMS
By
Dr. Sa'id Ahmad
Khalid
Department of Islamic Studies
Federal University Gusau
Email: abukhadijah07@gmail.com
Phone: 08035995905
And
Dr. Huzaifa
Aliyu Jangebe
Department of Islamic Studies
Federal
University Gusau
Abstract
The concept of insurance originates from mutual assistance in times of need
and distress, rather than as a commercial enterprise for profit-making as
practiced today. In conventional insurance, the relationship between the
insurer and the insured is that of buyer and seller, which differs
fundamentally from Islamic insurance (takaful). Takaful promotes
shared responsibilities, solidarity, mutual assistance, and cooperation to
protect participants (policyholders) against risks and misfortunes in
accordance with the policy terms. Consequently, profit maximization is not takaful's
primary objective. This study examines takaful in Nigeria with emphasis
on the need for an improved legal and regulatory framework. It provides
conceptual clarification of Islamic insurance while addressing common
misconceptions about takaful and explaining why conventional insurance
violates Shariah principles. The research further analyzes the meaning,
essential elements, and distinctive features of takaful; compares the
profit mechanisms of conventional insurers and takaful operators;
highlights key differences between conventional insurance and Islamic takaful;
explores the foundational principles of takaful under Islamic law; and
clarifies the governance and regulatory requirements for takaful
operations.
Keywords: Takaful,
Insurance, Legal, Regulatory, Framework, Nigeria
1.0 Introduction
The concept of insurance evolves from mutual help in times of need and
distress, rather than a business proposition for profit-making as practiced
today. In conventional insurance, the relationship between the insurer and the
insured is that of buyer and seller. This is not the case with Islamic
insurance (takaful). Takaful promotes shared responsibilities,
solidarity, mutual assistance, and cooperation to protect participants
(policyholders) against risks and misfortunes in accordance with the policy.
Hence, profit is not the main objective of takaful. Takaful is an
Arabic word stemming from the verb kafal, meaning “mutual cooperation”
or guaranteeing each other (Stagg-Macy, n.d.). It is both legally and
commercially known and referred to as a system of insurance based on Islamic
principles, regarded as an alternative to commercial insurance. Takaful
is a legally binding agreement between all the participants of the scheme to
pay any of its members who suffer loss as specified in the takaful
policy documents (Vogel & Hayes, 1998).
Following the economic meltdown of 2009, the global financial market was in
turmoil, and takaful has now grown to become a convenient alternative
method of insurance coverage for Muslims and enlightened non-Muslims worldwide.
Takaful has been familiar since the time of the Muhajirun and Ansar
following the prophetic migration from Makkah to Madinah in the 7th century AD
("Muhajirun," n.d.) (for Wikipedia). Social welfare notions are used
as a criterion for business practice and remain one of the innovative elements
of Islamic law developed in response to contemporary financial transactions.
Islamic finance accounts for 1.5% of the total global assets, with a growth
rate of 15–20% annually, reaching $15 billion in 2015 (G20, 2019).
After the economic meltdown of 2009, the capitalist West made a giant
stride to shift its attention to the Islamic Middle East, where non-interest
financial transactions thrive (Muhammad, n.d., p. 13). The G20 countries called
a summit in 2009 in Pittsburgh, whereby certain resolutions and action plans
for financial inclusion were made (Zairi, n.d.) (for the publication on
gpfr.org). It was observed that more than two billion adults continue to lack
access to financial services, the majority of whom were from Muslim countries,
where the population stood at 24% of the global population (Zairi, n.d.) (for
the publication on gpfr.org). Commitments toward improving access to financial
services were made, particularly to liberalize financial products to reach the
segregated, low-income earners, and rural dwellers in order to propel
sustainable growth.
The Northern Nigerian population is made up of a majority of Muslim
faithful (Sani & Umar, 2018; Shehu & Sani, 2019) who shun conventional
insurance on account of the presence of gambling, high risk, and
interest-taking, which are absolutely prohibited by the religion of Islam. The
existing conventional insurance is largely avoided due to market fraud and
sharp practices, widely believed to be a pastime of its practitioners. Once a
system is in place which, if implemented effectively, will satisfy both Muslims
and non-Muslims alike, thereby enhancing the penetration of insurance in the
otherwise segregated section of the population.
Following the introduction of Islamic insurance, Islamic banking, and the
Islamic capital market in Nigeria, a great deal of hope for the Muslim populace
was raised that an avenue for their economic development (which is
Shariah-compliant) was opened. Before the introduction of takaful, the
existing insurance systems were the conventional (Western type of insurance)
and customary insurance, which was basically a self-help scheme organized in a
traditional way whereby the risk or peril of a particular person is taken care
of and regarded as the problem of the family or the community as a whole.
However, after the introduction of the takaful insurance system, the
customary system faded into oblivion, leaving the space for conventional and
Islamic insurance (takaful).
2.0 Statement of Research Problem
The noble intention of NAICOM to reduce the endemic gap in insurance
penetration, the efforts to subsume the Muslim population of Nigeria into
financial inclusion, as well as the willingness to pursue a Shariah-compliant
financial alternative in Nigeria, will not happen in the absence of adequate,
clear, and consistent legal and regulatory backing in the legal regime of
Nigeria. The intention of NAICOM derives from the financial inclusion strategy
adopted by the Central Bank of Nigeria (Central Bank of Nigeria [CBN], 2018).
Several researchers have exposed the inadequacy of NAICOM’s legal powers to
regulate Takaful in a way that realizes financial inclusion, investor
confidence, and Shariah compliance toward achieving Islamic Law objectives
(Maqasid al-Shariah).
In Nigeria, Islamic personal law is applicable only at the Shariah State
court level in the northern parts of Nigeria. These courts lack jurisdiction to
adjudicate on insurance, as it falls under the Federal Exclusive Legislative
List. The courts with jurisdiction to adjudicate insurance matters are the
Federal High Court and State High Court (Constitution of the Federal Republic
of Nigeria, 1999, s. 250(2)). On the other hand, Takaful insurance is
derived from Shariah, the source of which is the Al-Qur’an and the authentic
traditions of the Prophet Muhammad (SAW). Despite the stated commitment to
boost insurance coverage by the authorities, the legal and regulatory
contradictions, inadequacies, and potential conflicts have neither been
addressed nor has any attempt been made to acknowledge the existence of such
huge obstacles.
3.0 Methodology
This research is an attempt to analyze the legal framework of Islamic
insurance vis-Ã -vis conventional insurance. The research will be conducted in
the context of the Nigerian legal and regulatory setting. The method adopted is
an armchair research approach, otherwise known as doctrinal research. Being a
legal research, this work is confined to analysis of legal literature vis-Ã -vis
the intendment of legislators and regulators. This research depends mainly on
primary and secondary sources of law, both in English and Arabic, such as the
Holy Qur'an, Hadith, Fiqh books, statutory instruments, textbooks, research
papers, reports, and other reliable sources including articles, seminar papers,
periodicals/journals, and web sources.
3.1 Conventional
Insurance in Nigeria
Insurance is one of the means aimed at alleviating the burden of individual
victims of loss or risk, given its fundamental role in spreading risk, embodied
in human instinct. Insurance was introduced to Nigeria at the advent of
colonial rule through what is known and referred to as "Received English
Law" (Interpretation Act, Cap. 192, LFN 1990, s. 32(1)).
The concept of insurance is incapable of being universally defined. This
assertion was given judicial support by Templeman in the case of Department of
Trade and Industry v. St Christopher Motorist Association Ltd (All England Law
Reports, 1974, p. 395), where he said: "It was undesirable that there
should be an all-embracing definition because of the tendency to obscure and
occasionally exclude that which ought to be included." Insurance is an
English word which literally connotes guarantee, security, or pledge (Oxford
English Dictionary, n.d.). Whereas in its legal and economic sense, it refers
to "an agreement in which a person makes regular payments to a company and
the company promises to pay money to the person insured, or to pay money equal
to the value of something (such as a house or car) which is damaged or
stolen" (Merriam-Webster, n.d.). In the economic sense, it means the act
of insuring or assuring against loss or damage by a contingent event; a
contract whereby, for a stipulated consideration called premium, one party
undertakes to indemnify or guarantee another against loss or damage by certain
specified risks (Oxford English Dictionary, n.d.).
According to one definition, insurance is: "an agreement whereby an
insurer undertakes (in return for the agreed premium) to pay a policyholder a
sum of money (or its equivalent) on the occurrence of a specified event"
(Khan, 2008). The specified event must have some element of uncertainty about
it; the uncertainty may be either the fact that although the event is bound to
happen in the ordinary course of nature, the timing of its occurrence is
uncertain, or the fact that the occurrence of the event depends upon accidental
causes and the event therefore may never happen at all (Khan, 2008).
Judicially, the meaning of conventional insurance was provided in the locus
classicus case of Lucena v. Crawford (1806) (Bos. & P.N.R., n.d., p. 269)
to mean: "a contract by which one party, in consideration of a price paid
to him adequate to the risk, becomes security to the other that he shall not
suffer loss, damage, or prejudice by the happening of the perils specified to
certain things which may be exposed to them."
From the foregoing, insurance arises from a contract between an insurer and
an insured whereby the former undertakes to provide against a risk apprehended
by the assured. In other words, it arises where a person, in consideration of
the payment of money, agrees to pay a certain sum of money to another person
upon the happening of an uncertain event or upon the happening of an uncertain
event as to time (Okany, 2001, as cited in Shamsi, Ishaq, & Abdulkarim,
2018, p. 29).
3.1.1 Functions
of Insurance
Insurance is an economic activity closely linked to banking and securities
markets, although performing different functions. As seen above, what insurance
does and how it works can be said to be the function of insurance. The primary
functions include the provision of a degree of certainty. Insurance provides
certainty of payment at the occurrence of loss. It reduces uncertainty of loss
through better planning and by its administrative application of the concept of
probability (Okany, 2001, as cited in Shamsi, Ishaq, & Abdulkarim, 2018, p.
29). It offers protection against probable chances of loss when both the timing
and extent of loss are unknown before the calamity occurs. This is usually done
through loss control practices designed to reduce the likelihood of claims
being made against an insurance company (Investopedia, n.d.).
Risk sharing is also a primary function. Since both the risk and the loss
are uncertain, in case of any catastrophe befalling any member of a group, the
risk is shared among all members who are exposed to the same risk. There are
other functions of insurance regarded as secondary functions, such as
prevention of loss. In this regard, insurance companies take measures in
collaboration with other institutions to prevent or reduce the chance of
occurrence of a calamity in a particular area. This can be seen when an
insurance company collaborates with fire departments, health organizations, and
educational institutions to prevent losses to society generally (Institute of
Chartered Accountants of India [ICAI], 2008).
Provision of capital occurs as payment of premiums accumulates with
insurance providers; the funds are then invested in productive ventures. The
scarcity of capital is reduced to a bare minimum or even eliminated. Economic
development results from the combined effects of primary and secondary
functions of insurance, as insurance companies provide incentives to
individuals and organizations through their efforts to work hard while being
protected from loss, damage, destruction, etc. Capital efficiency, protection
of labor, and protection of assets are the pillars of economic development
guaranteed by insurance providers.
3.2 Legal Framework of Insurance in Nigeria
Nigeria is a former British colony and as such shares almost all political
and economic heritages with its former colonial master (Taiwo, 2014, p. 21).
Discussing the legal framework of insurance business in Nigeria entails the
discussion of Nigeria's colonial history. The emergence and existence of
commercial insurance practice is relatively recent. It is traceable to the
British pattern which was introduced into Nigeria during British colonial rule.
English law and practice that were obtainable in England comprised mainly of
the English Common Law, Doctrines of Equity, and the Statutes of General
Application that were in force in England as of 1st January 1900.
Other components of Nigerian corpus juris include the various customary laws
(which do not offend natural justice, equity, and good conscience), Islamic
law, and case law.
The historical link between the federating units of Nigeria began from
1903-1960, that is, from colonization to independence. There were series of
enactments in the form of ordinances introduced to the territory known and
referred to as Nigeria, made by the colonialists for easy administration of the
territory. Those English laws imported into Nigeria include the Interpretation
Act section 32(1) (Interpretation Act, Cap. 192, LFN 1990). Furthermore,
identical provisions can be seen in different regional High Court Laws and
Miscellaneous Provisions Laws, etc. For example: Section 2 (Miscellaneous
Provisions) Law 98.
By virtue of this provision, the common law and equitable principles
enshrined in case law and statutes are now part of Nigerian laws. The insurance
principles of England are now the insurance law in Nigeria. The Constitution of
the Federal Republic of Nigeria 1999 included insurance under the Exclusive
Legislative List (Constitution of the Federal Republic of Nigeria, 1999, Second
Schedule [Legislative Powers]). Nigeria has gone through different phases of
insurance legislative history, from colonial ordinances, civilian legislations
in the form of Acts, and military Decrees, etc. The Life Assurance Act 1774,
The Fire Prevention (Metropolis) Act 1774, The Policies of Assurance Act 1882
culminating into what came to be known as the Insurance (Special Provision)
Decree 1988 (Omo-Eboh, 1990, p. 45). The Insurance Act 2003 is the evolution of
Decree No. 59 of 1976, which constituted the first all-embracing insurance
legislation in Nigeria by putting together the provisions of the various
previous laws. "The Act covers a great deal of details from specific
licensing requirements such as minimum capital, to supervisory reporting and
corrective measures. By establishing such requirements in law, it gives little
flexibility for National Insurance Commission (NAICOM) to create supplementary
legislation" (Omo-Eboh, 1990, p. 45).
The Nigerian insurance industry can be divided into four groups: those
regulated by the National Insurance Commission (NAICOM), forming the largest
group which is the main subject matter of the Insurance Act 2003 as stated
above. The Insurance Act is an all-embracing enactment combining the previous
legislations on the subject. It is a federal law that covers the entire
Nigeria. The subject of insurance in Nigeria falls within the Exclusive
Legislative List reserved by the Nigerian Constitution for the federal
legislature (Constitution of the Federal Republic of Nigeria, 1999, Second
Schedule [Legislative Powers]). This means that no state or local government
legislature can make valid law on the subject.
3.2.1 Conceptual
Clarification of Islamic Insurance (Takaful)
Takaful is a noun which stems from the word "kafalah," an Arabic
word meaning "guarantee." Takaful means "guaranteeing
each other." The main and original concept as practiced during the time of
Prophet Muhammad (SAW) was to pool resources to pay for events/losses that
individually none of the members of the pool could afford (Khan, n.d.). The
word Takaful stands for shared responsibility, the characteristic of
which is al-musharakah, meaning sharing. It is often expressed as shared
responsibility, shared guarantee, collective assurance, and mutual undertakings
(Billah, n.d.).
Takaful has been technically and economically defined in two ways. It is defined
as a scheme thus: The concept started and continued as a cooperative system and
developed into the present commercial ventures on the principles of mutual
cooperation rooted within the parlance of Islamic economic/commercial
jurisprudence based on the Qur’an and the Traditions of Prophet Muhammad (SAW).
Allah (SWT) says in the Holy Qur’an: "Cooperate in good and pious deeds
and do not cooperate in evil and aggression." In another verse, He also
says: "Do good deeds so that you may succeed."
In the Hadith we read: "Believers, in their mutual love and empathy
towards each other, are like one body; if one member suffers, the rest of the
members will look after it and protect it." Also: "Anyone who
relieves the anguish of a believer, God will relieve his anguish on the Day of
Resurrection. Whoever helps a person in difficulty, God will help him in this
life and the afterlife. Whoever gives shelter to a Muslim, God will shelter him
in this life and in the afterlife. God will help a worshipper when the
worshipper helps his brother." Another Hadith says: "If the
Ash'ariyyin lacked supplies during a raid or their families lacked food in the
city, they gathered what they had in one garment and divided it among
themselves equally; then they are part of me and I am part of them."
Muslim jurists made immense contributions towards developing legal
literature with different approaches and opinions based on different principles
found in the works of schools of thought, especially the orthodox schools.
Modern Islamic scholars developed different ways and drew up new broad
perspectives for its practical application within the conventional insurance
market. Accordingly, the distinct character of this form of mutual financial
scheme is that the contract is based on the divine virtues of cooperation,
mutual help, shared responsibility and benefit, brotherhood, and solidarity. In
addition, all aspects of the contract should be transparent to all parties
involved. Another distinct characteristic is the fact that in Takaful,
the participants are both the insurers and the insured. The concept and usage
of the word Takaful in the current commercial setting is to be more
understood as a hybrid of mutual and commercial insurance under conventional
insurance.
To this end, the Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) explained the concept of Takaful as follows:
"Islamic insurance is an agreement between persons who are exposed to
risks to protect themselves against harm arising from the risk by paying
contributions on the basis of 'commitment to donate.' Following from that, the
insurance fund is established and it is treated as a separate legal entity
which has independent financial liability. The fund will cover compensation
against harm that befalls any of the participants due to the occurrence of the
insured risk (perils) in accordance with the terms of the policy" (AAOIFI,
2007, Shariah Standard No. 26[2]).
3.2.2 The Basic
Principles of Takaful under Islamic Law
It is important at this juncture to note primarily that Takaful,
according to Islamic values, has the following as its basic principles:
Policyholders cooperate among themselves for the common good. Every
policyholder pays his/her subscription to help those who need assistance.
Losses are divided and liabilities spread according to the community pooling
system. Uncertainty (gharar) is eliminated in respect of subscription
and compensation. No one member of the scheme derives advantage at the cost of
others (El-Qora Daghi, 2006; Alsalih, 2004; Alzarqa, 1964).
3.3 Forms of Takaful
Takaful insurance has two applicable forms. The first form is based on the
participation of persons who are exposed to similar risks and form a society
with the aim of helping each other in distributing the financial loss which any
of them may incur during the period of the agreement. In this case, members who
have subscribed to this insurance do not pay any premium or monetary amounts
except for expenses required to establish the society. These expenses are paid
in the form of membership dues (Ahmed, 2012).
The second form of Takaful insurance involves the payment of
premiums in advance. Each member in this insurance pays a premium when joining.
Paying a premium in advance enables subscribers to compensate affected members
immediately when an incident occurs and the loss is validated (Ahmed, 2012).
As shown above, the Takaful insurance system includes a number of
contractual arrangements that intertwine in a complementary way to legitimize
modern commercial Takaful. These are the principles of musharakah,
mudarabah, Wakalah, waqf, etc., which were originally
separate and independent contractual arrangements under Islamic commercial
jurisprudence. Modern scholars have developed ways to integrate these known
contracts to establish the legitimacy of Islamic insurance (AIMS Education,
n.d.).
When the Grand Council of Islamic Scholars approved the Takaful
system as Sharia-compliant insurance, no specific structures were mentioned. It
is therefore legitimate for intending Takaful operators to adopt any
applicable model, provided it complies with Shariah principles (Khan, 2008).
The models currently used by different operators (adapted to suit their
business objectives without contradicting essential religious tenets) are
itemized below (Rosely, 2010).
3.4 Mudarabah
Mode
This is a principal-agent contract, where the owner of the capital
(investor/depositor) enters into a partnership with the owner of a specialized
skill (professional manager, or Takaful operator) to invest capital and
share the profits and losses of the investment. This model is so called because
the contract is utilized on each side of the Takaful operator’s balance
sheet, integrating both assets and liabilities. It envisages depositors
entering into a contract with a Takaful operator to share the profits accruing
from the Takaful business.
The basic concept is that both the mobilization and utilization of funds
are conducted on the basis of profit-sharing among the investor (depositor) and
the Takaful company. In this model, the shareholders are paid a
pre-agreed proportion of any surplus generated by the policyholder’s fund in
return for running the insurance operation for Takaful business (Rosely,
2010, p. 133). However, any loss in this type of contract is borne by the
capital provider, except where fraud or willful negligence is established
against the mudarib. In the case of losses or a zero result, the
operator will not be paid for the work done (Billah, GhlamAllah, &
Alexakis, n.d.).
Furthermore, the capital provider (rab al-mal) does not perform any
executive functions in this arrangement (Bambale, n.d., p. 195). Unlike in the Wakalah
model, compensation cannot be tied to the actual performance of the joint
venture (Bambale, n.d., p. 195).
3.4.1 Wakalah
Wakalah is another contractual concept employed in modern Takaful
undertakings. It is a situation in which an agent (wakeel) is authorized to act
on behalf of a principal to carry out a predefined task in return for
remuneration (ujrah). A service charge may be fixed prior to the
commencement of business, either as an absolute figure or as a percentage of
the turnover. Such fees (Wakalah fees) are the sole entitlement of the
operator, without any share in the profits (Saleh, n.d.). As with the Mudarabah
model, the wakil does not share in the losses if the policyholders' fund
incurs a deficit, although it may provide qard hasan (an
interest-free loan) to cover such losses (Khan, 2008, p. 135).
3.4.2 Hybrid (Mudarabah
and Wakalah) Model
A combination of Mudarabah and Wakalah is commonly used by
some Takaful set-ups. In this arrangement, Wakalah is employed
for underwriting functions, while Mudarabah governs the investment fund
(Saleh, n.d., p. 168). The Takaful operator receives Wakalah fees
from participant contributions, and any underwriting profit is distributed
among participants. Meanwhile, profits from the investment fund are shared
between the operator and participants according to a pre-agreed ratio (Saleh,
n.d., p. 168). This hybrid model has gained rapid popularity due to its
potential for high profit returns and strict Shariah compliance.
3.4.3 Waqf Model
Following a series of debates among scholars, particularly in Pakistan, the
concept of the Waqf model was introduced (Khan, 2008, p. 135). This
model operates as a non-profit venture rooted in charitable principles. Under
this scheme, operators establish a charity fund to assist participants in need
by collecting donations from willing subscribers (Tobias & Younes, 2010).
To avoid gharar (uncertainty) and maysir (gambling), prohibited
by Shariah, the concepts of Waqf (endowment) and tabarru’
(donation) were adopted as alternative solutions (Tobias & Younes, 2010).
Under this model, participant contributions create a charitable trust fund,
from which financial assistance is provided to members facing catastrophic
losses. The Waqf model aims to:
a.
Provide aid to
subscribers when losses occur;
b.
Distribute
benefits to participants per pre-agreed terms; and
c.
Donate to
charitable causes with approval from the Shariah board.
Primarily adopted by charitable organizations and governments, this model
is most prevalent in Pakistan and South Africa (Khan, 2008, p. 129).
3.5 Wadi’ah Model
This is a special scheme proposed by Islamic commercial jurists to address
the lingering challenge of retakaful (Islamic reinsurance). Based on the
Islamic principle of Wadi'ah (safekeeping contract), this model integrates Takaful
practices rooted in Mudarabah (profit-sharing), Wakalah (agency),
tabarru' (donation), and Wadi'ah (custody) (Billah, n.d.).
Islamic jurisprudence offers multiple Shariah-compliant contractual
arrangements suitable for Takaful operations. Modern scholars have
identified these through Qiyas (analogical reasoning) applied to other Islamic
contracts ('Uqud), such as 'Aqilah (tribal solidarity), Muamalat
(commercial transactions), Kafalah (guarantee), and al-Wa'dul
Muslim (binding promise) (Billah, n.d.).
The 20th century witnessed gradual growth in Shariah-based insurance
practices across Muslim and non-Muslim countries. While progress is
commendable, further development is needed to meet modern societal demands.
Although certain conventional insurance practices remain incompatible with
Shariah prohibitions (e.g., gharar, riba), contemporary Islamic scholars
must innovate alternative models that eliminate prohibited elements entirely.
The Organization of Islamic Cooperation (OIC) has initiated steps to
establish an International Re-Insurance Corporation (Billah, n.d.). Today,
global research on Shariah-compatible insurance aims to refine theoretical
frameworks and practical applications, ensuring the Muslim Ummah (community)
can fully benefit from ethical insurance solutions.
3.6 General Principles of Conventional and Islamic Insurance: A
Comparison
The preceding analysis was conducted to establish a foundation for
examining the legal, structural, and operational differences between the two
insurance systems. Insurance is fundamentally a financial arrangement that
redistributes the costs of unexpected losses through a risk-sharing mechanism
between two parties (Seyed & Asmak, 2017, p. 482). While both systems share
similar objectives in risk-sharing and loss mitigation strategies, their
jurisprudential foundations differ significantly.
At this critical juncture, it is essential to analyze these systems across
several key dimensions:
1.
Jurisprudential
Foundations: The legal sources and principles governing each system;
2.
Contractual
Elements: Essential components of insurance contracts in both frameworks;
3.
Shariah
Compliance: Requirements for Islamic insurance (Takaful);
4.
Governance and
Regulation: Comparative regulatory frameworks;
5.
Risk Management:
Approaches to risk assessment and mitigation;
6.
Participant
Responsibilities: Obligations of policyholders/participants; and
7.
Reinsurance
Mechanisms: Conventional reinsurance versus Retakaful.
This comprehensive comparison will critically evaluate the compatibility
(or incompatibility) of these systems, ultimately demonstrating whether Takaful
can be successfully implemented within Nigeria's insurance industry while
achieving its desired objectives.
3.6.1 Jurisprudential Basis
Jurisprudentially, the basis
of law in the Western parlance is human action. This perception made English
jurists express different and conflicting views about what law is. On one hand,
law was viewed from a natural point of view. These groups of jurists were
branded as naturalist lawyers. They deemed law to be divine and therefore
dealing with natural cause and effect (Friedman, 1953, p. 211). Disagreeing
sharply with the naturalist scholars, the positivist scholars viewed law from
the practical application of law. In its strict sense, law is the command of
the sovereign backed up by sanctions (Hart, 1994). Like the naturalist
scholars, the positivist view of law was also challenged assiduously on many
points (Hart, 1994, p. 71). The sovereign contemplated by the positivists is
located in man, and this reflects the stance of conventional insurance. On the
other hand, the utilitarian scholars view law as the greatest happiness or good
of the greatest number of members of society. According to Jeremy Bentham, law
is law if it serves the interest of the greatest number of people the law is
intended to serve. Since this law is not divine, what serves the purpose of the
greater majority today may not do so tomorrow. Thus, Islamic insurance, though
it only serves the interest of Muslims and is accepted by Muslims while still
at an infancy stage, may not be good law in Bentham’s view (Bentham, 1931, p.
3). In another view, the sociologist scholars viewed law as the need of
society. Thus, according to this school of thought, law is only law if it
satisfies and accords with the needs of society (Muslehuddia, 2012, p. 3).
Therefore, if society prides itself on social vices, approves the granting and
taking of 'riba' (interest) or gambling or games of chance, the law that
approves of these is good law. The spirit of conventional insurance aligns with
this. Islamic law, being divine, knows what is good and bad for society, and
this is what it sanctions. Therefore, Islamic insurance is not out to satisfy
the whims and caprices of man or society but those of the divine. Similarly,
Savigny of the historical school viewed law as the custom that lies deeply in
the minds of men. To know what law is, one needs to know the history and/or
customs of a particular group or society (Muslehuddia, 2012, p. 3). Thus,
whether the customs or history of a people negate common sense or conflict with
divine rules, that will be the law according to this school of thought. If this
is the case, conventional insurance, which is the product of English customs,
is alien to Nigerian customs and practices. The importation of English law
through colonization brought this to Nigeria. This is why conventional
insurance is totally a reflection of English customs incompatible with Islamic
law. Invariably, therefore, conventional insurance will differ significantly
from Islamic insurance.
To this end, Islamic law
jurisprudence generally views law as divine and holds that nothing qualifies to
be law unless it has divine character. Thus, Islamic law is an ideal code of
behavior ordained by Almighty Allah (SWT). This fact was amply captured by
Anderson when he opined: "To the Muslim, there is indeed an ethical
quality in every human action, characterized by Qubh (ugliness,
unsuitability) on the one hand or Husn (beauty, suitability) on the
other. But this ethical quality is not such as can be perceived by human
reason; instead, man is completely dependent in this matter on divine
revelation. Thus, all human actions are subsumed, according to a widely
accepted classification, under five categories as commanded, recommended, left
legally indifferent, reprehended, or else prohibited by Almighty God. And it is
only in regard to the middle category (i.e., those things which are left
legally indifferent) that there is in theory any scope for human
legislation" (Coulson, 1964, p. 85).
Flowing from the above is that
law is law under Islamic law when it comes directly from Almighty God. The only
way man can legislate is within the extent and scope of the general Islamic law
categorized as indifferent, and any laws made must be in accordance with the
general principles of Shariah as ordained by God. Thus, Islamic insurance,
though not directly mentioned in the primary sources, must be modeled and
structured in line with the general requirements of Shariah. This was aptly
recognized by Coulson: "Law, therefore, does not grow out of and is not
molded by society as is the case with Western systems. Human thoughts, unaided,
cannot discern the true values and standards of conduct; such knowledge can
only be attained through divine revelation, and acts are good or evil
exclusively because God has attributed this quality to them. In the Islamic
concept, law precedes and molds society; to its eternally valid dictates, the
structure of state and society must conform" (Anderson, 1959, p. 3).
The appellation 'Islam'
attached to Islamic insurance suggests that everything about its jurisprudence
must reflect Islam and is therefore far from man-made law. Its divinity
presupposes that Islamic insurance must be wholly conducted according to the dictates
of Shariah. Thus, all factors condemned by Shariah in commercial transactions
must be avoided (Arbouna, 2008). Therefore, the jurisprudential differences
between Islamic law and English law lie in the fact that while Islamic law
derives all its sources from divinity, English law derives its own from man.
The quality and quantity of the two are therefore incomparable. This also
suggests that the operation and conceptualization of the two systems will
differ. English law, unlike Islamic law, is rationalistic in nature and depends
heavily on human vagaries and rationality. Stating the clear jurisprudential
differences between Islamic law and secular law, Jackson, J., has this to say:
"The divine law of Islam finds its chief source in the will of Allah as revealed
to the Prophet Muhammad (SAW). It contemplates one community of the faithful,
though they may be of various tribes and in widely separated locations.
Religion, not nationalism or geography, is the proper cohesive force. The state
itself is subordinate to the Qur’an, which leaves little room for additional
legislation, none for criticism or dissent. This world is viewed as but the
vestibule to another and a better one for the faithful, and the Qur’an lays
down rules of behavior towards others and towards society to assure a safe
transition. It is not possible to separate political or juristic theories from
the teaching of the Prophet (SAW), which establishes rules of conduct
concerning religious, domestic, social, and political life" (Jackson, 1955,
p. vii). The foregoing exposition indicates that the ultimate aim of Islamic
law, unlike man-made law, is to reform human conduct and behavior temporally
and spiritually. This is to achieve the purpose and goal of life: the
satisfaction of the Almighty and the attainment of eternal life.
3.6.2 Governance Regulatory Requirement
The most important and most serious regulatory challenge facing the takaful
insurance industry in Nigeria today has to do with the provisions of the
Insurance Act, 2003 (Jackson, 1955, p. vii). This is the primary legislation
regulating insurance business in Nigeria. This Act makes no express reference
to Islamic insurance in all its sections. Section 1, which is the main section
that provides for the scope of the Act, conspicuously omits takaful
insurance. The Act applies to all insurance business and insurers, other than
insurance business carried on by insurers of the following description: a
friendly society that does not employ any person whose main occupation is
canvassing others to become members of the association or collecting
contributions; or a person whose business is established outside Nigeria
engaged solely in reinsurance transactions with insurers authorized pursuant to
the provisions of this Act to carry on any class of insurance business, but not
otherwise; however, that is an association of persons established with no share
capital for the purposes of aiding its members or their dependents where such
association collects subscriptions towards the funds of the association for its
members or a company or any other body (whether corporate or unincorporated).
Perusing the provisions of Section 1 above reveals an express omission of
Islamic insurance (Takaful). This is a serious omission and poses a
grave danger to the viability of the insurance industry in Nigeria. Recognizing
this regulatory gap, insurance actors have endeavored desperately to bridge it
by formulating policy guidelines for the takaful industry. The policy
guidelines so released conflict with the provisions of the Act (Gambo, Saad,
& Kasim, 2014).
The Insurance Act serves as the legal basis for the operation of insurance
business in Nigeria. It is an Act of the National Assembly, and therefore any
issue relating to the operation and regulation of insurance in Nigeria must
derive from it. Any contrary arrangement will be null and void. Moreover, while
the Act is a product of legislators, the policy guidelines are products of
delegated authorities and therefore have less legislative power. Therefore,
where there is a conflict between the provisions of the Insurance Act and those
of the policy guidelines, the Act shall prevail. In essence, if the provisions
of the policy guidelines were challenged before a court of law in Nigeria on
the basis of conflicting with the Act, the policy guidelines would be invalidated.
Consequently, the operation of takaful insurance would also fail.
Furthermore, the Act sets standards for the registration, regulation, and
administration of insurance business in Nigeria (Ahmad, 2009; Divanna &
Shreih, 2009). The Act also provides financial and prudential requirements for
insurance businesses in Nigeria (Ahmad, 2009; Divanna & Shreih, 2009). The
Act vests the National Insurance Commission with the responsibility of
administering and enforcing its provisions (Insurance Act, 2003, s. 86). The
Act states: "Subject to the provisions of this Act, the National Insurance
Commission (in this Act referred to as the Commission) shall be responsible for
the administration and enforcement of this Act and is hereby authorized to carry
out the provisions of this Act" (Insurance Act, 2003, s. 86). NAICOM is
the institution charged with regulating the insurance industry in Nigeria,
including takaful insurance. This body is also established based on
common law insurance principles. The officers managing it are trained under
conventional insurance systems and have little or no knowledge of takaful
or Islamic insurance. Thus, this presents another institutional framework
challenge to the operation of takaful insurance in Nigeria.
The investment portfolio provisions contained in Section 25 of the
Insurance Act (Insurance Act, 2003, s. 25) are a potential source of conflict
with the Takaful Operational Guidelines, 2013. The basic requirement of
investment in takaful is compliance with Shariah principles. This
presupposes that the investment must be free from Shariah-prohibited elements,
namely interest, uncertainty, and gambling. The Takaful Operational
Guidelines require operators to establish investment policies for the
Participant’s Risk Fund (PRF) and Participant’s Investment Fund (PIF). However,
Section 25 of the Insurance Act, which is the main regulatory law, provides for
investments by insurers in a manner entirely different from the takaful
guidelines. There is no express exemption of takaful from the
requirements of Section 25 of the Insurance Act. Furthermore, interest is a key
component of admissible assets under Section 24(13) of the Insurance Act,
whereas under takaful, interest is prohibited. This view, however,
depends on the purification concept stipulated in Section 4.4(a) of the Takaful
Operational Guidelines. What remains unclear is whether Section 25 of the
Insurance Act will apply to takaful insurance. If the provisions of the
Act apply alongside the takaful investment regulations in the
Guidelines, takaful operators must also meet the requirements of Section
25 of the Act. The supremacy of the Insurance Act in regulating insurance
business in Nigeria has been clearly stated in Section 100 of the Act
(Insurance Act, 2003, s. 100). The murky nature of these general and regulatory
challenges facing takaful insurance does not bode well for its smooth
application in Nigeria. A harmonization of these statutory and regulatory
provisions in the frameworks cannot be overemphasized.
3.6.3 Challenges
Conventional insurance has existed in Nigeria since colonial days (Yusuf
& Babalola, 2015). Until recently, it was the only risk-mitigating venture
available for both Muslims and Christians in Nigeria. This was made possible
because all enabling legal regimes recognized only this form of insurance
(Yusuf & Babalola, 2015). Similarly, the necessary framework for the
establishment of takaful insurance by Muslims has been lacking, despite
its existence in other jurisdictions.
In view of the foregoing, the challenges discussed under this topic shall
be classified into two major categories: legal challenges and non-legal
challenges. The legal challenges include challenges with respect to the
adjudication of insurance disputes and challenges regarding regulatory
frameworks. The non-legal challenges include challenges related to awareness
and marketability of takaful products, lack of manpower to manage and
administer takaful insurance, capital requirements and management, and
risk management.
The legal challenges for the successful operation of takaful in
Nigeria include challenges with respect to the adjudication of Islamic
insurance disputes and regulatory challenges concerning takaful
operations. These challenges are discussed below:
3.6.5 Challenges with regards to Adjudication
Every society has its own well-established dispute settlement mechanism to
deal effectively with disputes arising from the day-to-day activities of its
members. Some societies adopt an accusatorial system, while others adopt an
inquisitorial system. Others still adopt Islamic law. Some Muslim-dominated
states employ a mixed system, with common law operating alongside Islamic law.
Islamic insurance disputes are disputes emanating from Islamic principles
of contract or commercial transactions. As such, these disputes ought to be
resolved through dispute resolution mechanisms established by Shariah. Using
any other means may not only be counterproductive but may also undermine the
prospects of takaful insurance. It is with this conviction that the
dispute resolution mechanisms for takaful insurance under the Nigerian
legal system become imperative.
It is elementary law that jurisdiction forms the superstructure upon which
the judicial power of a court is founded. In other words, jurisdiction is the
lifeline, bedrock, and foundation of all judicial and quasi-judicial
proceedings. Consequently, any decision reached without jurisdiction by a court
or tribunal is generally considered null, void, and of no legal effect
whatsoever (All Progressive Grand Alliance v. Anyanwu, 2014). In the recent
case of GTB v. Toyed (Nig) Ltd & Anor (LPELR-4181, 2016, p. 20, paras.
A–D), the Nigerian Court of Appeal, per Ndukwe-Anyawu, J.C.A., restated this
fundamental principle:
"The law is well settled and no longer admits any argument that
jurisdiction is the very basis and lifeline of every matter upon which any
court tries or hears a case. Metaphorically speaking, it is the lifeblood of
all trials, whether at the trial court or on appeal, without which all such
proceedings are nullities, no matter how well conducted or how sound the
resulting judgment may be. It is simply a nullity" (Madukolu v. Nkemdilim,
1962; PetroJessica Enterprises Ltd v. Leventis Technical Co. Ltd., 1992;
Onuorah v. KRPC Ltd, 2005; Essien v. Essien, 2010).
The preeminence of jurisdiction as a sine qua non in judicial proceedings
is such that objections to jurisdiction can be raised at any stage, before,
during, or after proceedings, before the same court or even for the first time
on appeal to higher courts, including the Supreme Court (Madukolu v. Nkemdilim,
1962; PetroJessica Enterprises Ltd v. Leventis Technical Co. Ltd., 1992).
Despite the clarity of the law on this point, Nigerian courts routinely
encounter jurisdictional challenges in both civil and criminal cases. These
often compel defendants or accused persons to file preliminary objections to
the court's jurisdiction. Sometimes, courts may raise such objections suo motu.
Regardless of how the objection arises, it remains elementary that the court must
resolve it before proceeding to the substantive matter (Abubakar v. Nasamu,
2012; A.G. Adamawa State v. A.G. Federation, 2014).
Indeed, the Supreme Court in Ajayi v. Adebiyi (2012) (S.C., 2012, p. 30,
para. C), per Adekeye JSC, held inter alia that a jurisdictional objection, or
an application to strike out a suit for incompetence on jurisdictional grounds,
is not a demurrer. Thus, it may be filed and adjudicated even before the
defendant submits a statement of defense or without any defense being filed at
all.
Moreover, it is standard practice for lawyers, upon receiving an
originating process like a writ of summons, to scrutinize it for jurisdictional
flaws that could terminate the opponent's case preemptively. Given this
reality, every court or tribunal must confirm its jurisdiction before
undertaking judicial or quasi-judicial functions to avoid futile exercises.
4.0 Challenges with Regards to Adjudication
In this part, it is intended to examine the jurisdiction of various
superior courts in Nigeria. This is to help facilitate an understanding of the
meaning and scope of their jurisdictions, as well as the factors that confer or
may deprive them of such jurisdictions, and the implications for Takaful
cases. The discussions here, given the constraints of space and scope, will by
no means be exhaustive of the jurisdictions of each court but will highlight
major aspects. Likewise, inferior courts will not be specifically discussed but
will be referenced where appropriate.
4.1 The Federal High Court
The Federal High Court as we have it today was first established in 1973
and was originally known as the Federal Revenue Court under the Federal Revenue
Act of 1973 (Decree No. 13 of 1973) which established it. It was subsequently
renamed as the Federal High Court under section 230 of the 1979 Constitution of
the Federal Republic of Nigeria. In discussing the jurisdiction of the Federal
High Court, it should be noted from the outset that no other court in Nigeria
has had the scope of its jurisdiction subjected to so much litigation as the
Federal High Court. Several reasons may be advanced to support this point, but
foremost among them is the fact that the Federal High Court and the High Courts
of the Federal Capital Territory, Abuja and those of the States are on par
(Constitution of the Federal Republic of Nigeria, 1999, s. 252(1)) in the
hierarchy of courts in Nigeria and share concurrent and even conflicting
jurisdiction over several matters. There are several cases that support this
point, though it is not within the scope of this discussion to examine the
complex intricacies of the Federal High Court's contentious jurisdictional
history.
4.1.1 Original Jurisdiction
Generally, a High Court of a State has original civil and criminal
jurisdiction as well as appellate and supervisory jurisdiction. A High Court of
a State also has concurrent jurisdiction with other courts of coordinate
jurisdiction such as the Federal High Court, National Industrial Court, and the
High Court of the Federal Capital Territory, Abuja. For its original
jurisdiction, section 272(1) of the 1999 Constitution provides thus:
"272. (1) Subject to the provisions of section 251 and other
provisions of this Constitution, the High Court of a State shall have
jurisdiction to hear and determine any civil proceedings in which the existence
or extent of a legal right, power, duty, liability, privilege, interest,
obligation or claim is in issue or to hear and determine any criminal
proceedings involving or relating to any penalty, forfeiture, punishment or
other liability in respect of an offence committed by any person.
(2) The reference to civil or criminal proceedings in this section includes
a reference to proceedings which originate in the High Court of a State and
those which are brought before the High Court to be dealt with by the court in
the exercise of its appellate or supervisory jurisdiction."
In addition to the Constitution, there are also laws of individual States
as well as their peculiar rules of court regarding the jurisdiction of the High
Court. By the provisions above, it is clear that save for matters within the
exclusive jurisdiction of the Federal High Court under section 251 of the
Constitution, the original jurisdiction of a High Court in civil and criminal
matters is quite broad and covers matters provided for under the law of the
State or any enactment of the National Assembly.
Further to the above provision of section 272 of the 1999 Constitution,
section 286(1)(a) also vests the High Court of the State with expansive
jurisdiction over federal causes. In other words, a cause or matter which is
the subject of an Act of the National Assembly may be litigated at the High
Court of a State subject to the provisions of the Constitution (A.G. Ondo State
v. A.G. Federation, 2002). Put differently, an Act of the National Assembly may
also confer jurisdiction on the High Court of a State regarding federal causes.
4.2 Concurrent Jurisdiction
Concurrent jurisdiction basically relates to the exercise of jurisdiction
over the same subject matter by courts of coordinate jurisdiction. Does this
mean conflict? Not necessarily so. It simply means that each court, though
autonomous and independent of the other, could exercise jurisdiction over the
same subject matter that is not exclusive to either. In Nigeria, the High
Court.
4.2.1 Courts with Jurisdiction Over Insurance Disputes in Nigeria
State High Courts, being courts with coordinate jurisdiction with the
Federal High Court, National Industrial Court, and the High Court of the FCT,
Abuja, do exercise concurrent jurisdiction over certain subjects that are not
mutually exclusive to each other. Common subject matters include applications
for the enforcement of fundamental human rights as well as pure contract issues
or disputes arising from banker-customer relationships. In the case of Bronik
Motors Ltd v. Wema Bank Ltd (1983), an attempt by the defendant to oust the
jurisdiction of the High Court of a State was struck down by the Supreme Court,
holding that section 8 of the Federal High Court Act 1973 (as amended), which
purported to oust the jurisdiction of the State High Court, was null and void
for being inconsistent with section 236(1) of the 1979 Constitution. The
Supreme Court then concluded that where both the Federal High Court and a State
High Court exist in a State, they both have concurrent jurisdiction in matters
pertaining to fundamental human rights. This was also the position of the
Supreme Court in the cases of Tukur v. Government of Gongola State (1989) and
Grace Jack v. University of Agriculture Makurdi (2004). It should be noted also
that the criminal jurisdiction of the Federal High Court under sections 251(2)
and (3) of the 1999 Constitution is not exclusive but is also exercised
concurrently with the State High Courts.
The debate over the extent and limits of the jurisdiction of the Federal
High Court and the State High Courts in Nigeria is age-long. While much of that
debate has subsided due to pronouncements of the apex Court in a series of
cases, it would however appear that questions of law arising therefrom continue
to linger in a few instances. One such case where some controversy and debate
continue amongst practitioners is that of the court vested with jurisdiction to
adjudicate insurance claim disputes.
The issue of the court vested with jurisdiction over insurance claims has
however been addressed by the courts in two recent cases: Sun Insurance Nigeria
Plc v. Umez Engineering Construction Company Ltd (LPELR-24737, 2015) and
Ydro-Tech Nigeria Ltd & Anor v. Leadway Assurance Co. Ltd & Ors
(LPELR-40146, 2016). The former was a decision of the Supreme Court, while the
latter was decided by the Court of Appeal. Both will now be briefly examined
below.
4.2 Alternative Dispute Resolution and Takaful
Under the Nigerian legal system, there is provision for resolution of
disputes through an informal system of resolving disputes outside the court
system called Alternative Dispute Resolution (ADR). This is statutorily
justified by the Arbitration and Conciliation Act (Arbitration and Conciliation
Act, 2004). In Nigeria, therefore, disputes may be resolved using ADR methods
instead of litigation through the courts. It should be noted, however, that
resolving disputes through the ADR system in Nigeria is governed by the
provisions of the Arbitration and Conciliation Act, which is modeled on the
common law ADR system. This therefore means that even where parties to a takaful
dispute choose to refer their dispute to be settled through ADR, it is the
provisions of this Act that will apply. Being a common law model, it may not be
compatible with Islamic dispute resolution, and conflicting decisions that go
against the principles of Shariah may likely result.
4.2.1 Regulatory Framework of Takaful
(Islamic Insurance) In Nigeria
Like any other establishment in the general insurance industry/business, Takaful
(Islamic Insurance) industry is regulated by laws, rules, regulations or
guidelines that control its operation. The main laws that guide the operation
of Takaful in Nigeria are the Insurance Act of 2003 and NAICOM TAKAFUL
OPERATIONAL GUIDELINES OF 2013 which shall be overviewed hereunder:
Insurance Act (2003)
The Insurance Act of 2003 applies to all insurance businesses and insurers.
The Act is the primary legislation that regulates insurance companies in
Nigeria, and makes provision for Requirements and Applications for
Registration, Modes of Operation of Insurers, Winding Up, Premiums and
Commissions, Insurance of Properties, General Insurance, Life Insurance,
Offences and so on (Insurance Act, 2003, s. 2). The Insurance Act of 1997
established the National Insurance Commission with the responsibility to ensure
effective administration, supervision and regulation of insurance businesses
and by virtue of Section 1 of the Insurance Act 2003, it is conferred the power
to register insurance businesses. In perusing the Act, it is obvious that the
Act did not expressly make provisions for Takaful which is a grave flaw.
However, the Act by virtue of its provisions granted NAICOM the power to
regulate insurance businesses. The implication is that they can establish
guidelines to regulate the operations of any insurance business. Hence, this
resulted in the establishment of the NAICOM TAKAFUL OPERATIONAL
GUIDELINES 2013.
4.2.2 The
National Insurance Commission (NAICOM)
In 2013 National Insurance Commission issues the Guidelines for Takaful-Insurance,
pursuant to Section 7 of the NAICOM Act 1997. According to the guideline, the Takaful-Insurance
Guidelines provide guidance on elements unique to the operations of a Takaful-Insurance
Operator. These Guidelines must be read in conjunction with all other relevant
legislations, guidelines, and circulars that the Commission has determined to
apply to Takaful-Insurance Operators. The Guidelines serve as the
primary regulatory framework for Takaful-Insurance transactions.
Section 1 of the guideline made provisions for the introduction of the
guideline, the concept of Takaful, and what the Guideline entails, such
as scope, objectives of the guidelines and implementation. More so, the
guidelines viewed Takaful as a form of insurance that is compatible with
the principle of the Shari’ah (Islamic Law). A market survey undertaken
by the Commission indicated a significant religiously based objection to
conventional insurance. A number of financial principles inspired by Shari’ah
are shared by other Abrahamic faith. To this end, Takaful-Insurance
aligns with elements of mutual insurance, ethical financial management, and is
accountable to all insuring public regardless of faith.
4.2.3 Challenges of Regulatory Framework for the Operation of Takaful
Insurance in Nigeria
The most important and most serious regulatory challenge facing the body takaful
insurance industry in Nigeria today has to do with the provisions of the
Insurance Act, 2003 (Arbitration and
Conciliation Act, 2004). This is the main primary legislation regulating
insurance business in Nigeria. This Act makes no express reference to Islamic
insurance in all its sections. Section 1 which is the main section that
provides on the scope of the Act conspicuously left out takaful
insurance. Per scoping the provisions of section 1 above reveals on expression
omission of Islamic insurance (Takaful). This is a serious omission and
a grave danger to the survivability of insurance industry in Nigeria.
Discovering this regulatory gap, the insurance actors endeavor desperately to
bridge this gap by formulating policy guidelines for insurance industry. The
policy guidelines so released are in conflict with the provision of the Act (Gambo, Saad, & Kasim, 2014).
The Insurance Act legal basis for the operation of insurance business in
Nigeria. It is an Act of the National Assembly and therefore any issue relating
to operation and regulation of insurance in Nigeria must flow from it. Any
contrary arrangement will be a nullity. More so, while the Act is a product of
legislators, the policy guidelines are products of delegated authorities and
therefore have less legislative power. Therefore, where there is a conflict
between the provisions of the insurance Act and that of the policy guidelines
that of the Act shall prevail. In essence therefore, where the provisions of
policy guidelines were challenge before a court law in Nigeria on the basis of
conflicting with the Act, the policy guidelines will be impeached.
Consequently, the operation of takaful insurance will also fail.
Furthermore, the Act sets standard for the registration, regulation and
administration of insurance business in Nigeria (Ahmad, 2009; Divanna & Shreih, 2009). The Act also
provides for financial and prudential requirement for the insurance businesses
in Nigeria (Ahmad, 2009;
Divanna & Shreih, 2009). The Act vests the National Insurance
Commission with the responsibility of administering and enforcing the
provisions of the Act (Insurance Act,
2003, Section 86). The Act provides; “Subject to the provisions of this Act, the National
Insurance Commission (in this Act referred to as in the commission) shall be
responsible for administration and enforcement of this Act and is hereby
authorized to carry out the provisions of this Act” (Insurance Act, 2003, Section 86). NAICOM is the
Institution charged with the responsibility of regulating insurance industry in
Nigeria. This includes takaful Insurance. This body is also established
based on common law insurance. The officers manning it also those trained under
conventional insurance are with little or no knowledge of takaful or
Islamic insurance. Thus, another institutional framework challenge on the
operation of takaful insurance in Nigeria. The investment portfolio provisions contained
in Section 25 of the Insurance Act (Insurance Act, 2003, Section 25) is a potential
source of conflict with the Takaful Operational Guidelines, 2013. The
basic requirement of investment in Takaful is its compliance with
Shariah principles. This presupposes that the investment must be devoid of the Shariah
prohibitive elements namely, interest, uncertainty and gambling. The Takaful
Operational Guidelines impress on the operator to establish investment policies
for the Participant’s Risk Fund (PRF) and Participant’ Investment Fund (PIF).
However, Section 25 of the Insurance Act, which is the main regulatory law
provides for investment by an insurer in a totally different way from the
provisions of the takaful guidelines. There is no express exemption of takaful
from the requirement of Section 25 of the Insurance Act. Furthermore, interest
is a key component of admissible assets under Section 24 (13) of the Insurance
Act, while under takaful interest is the averting factor of the
transaction.
This view, however, depends on the purification concept stipulated in
Section 4.4(a) of the Takaful Operational Guidelines. What remains
unclear is whether Section 25 of the Insurance Act will apply to takaful
insurance. If the provisions of the Act apply besides the regulation of takaful
investment in the Guidelines, the takaful operator must also meet the
requirement of Section 25 of the Law. The supremacy of the Insurance Act in
regulating insurance business in Nigeria has been clearly stated in Section 100
of the Act (Insurance Act,
2003, Section 100). The murky nature of this plethora of general and
regulatory challenges facing takaful insurance will not bode well for
its smooth application in Nigeria. A harmonization of these statutory and
regulatory provisions in the frameworks cannot be overemphasized.
From the summary presented above, the following major findings emerged:
Firstly, takaful insurance is a sui generis - that is, a special
type of insurance business that needs to comply with the requirements of
Shariah. It differs in both structure and form. By mandating and requiring
compliance with Shariah, it must eschew all behaviors, dealings, and practices
prohibited by Shariah. Thus, employing the resources of the venture into
gambling, alcoholism, or interest is prohibited. This type of insurance is
therefore more ethical and thus a better and more reliable alternative to
conventional insurance.
Secondly, the legal and institutional frameworks for the operation of
insurance business in Nigeria are not favorable to the smooth, effective, and
successful operation of takaful insurance. They present many hiccups and
are not favorably disposed towards its success and survival. The legal and
institutional frameworks are not friendly or conducive for the operation of takaful
insurance in Nigeria as it currently exists. Additionally, takaful
insurance employs Islamic law principles of contract, like mudarabah, musharakah,
ijarah etc., in modeling its products and services to conform with ethical and
religious requirements. Failing to comply with these essential principles may
introduce gharar or usury prohibited by Shariah.
Thirdly, though both systems require monetary consideration - called
premium in conventional insurance and tabarru (donation) in takaful
insurance - they differ significantly in many aspects. Premium in conventional
insurance belongs to the company or insurers, while tabarru in Islamic
insurance belongs to both policyholders (insured) and insurer (company). The
consideration in conventional insurance may be employed in all ventures
provided they are profitable, even if unethical. In Islamic insurance, tabarru
can only be employed in Shariah-screened ventures.
Fourthly, both deal with risk management, but conventional insurance deals
with risk transfer from the insured to the insurer, while Islamic insurance
involves risk sharing between the insured and insurer. This makes the business
of takaful insurance more reliable and equitable.
Fifthly, the management of takaful insurance is more cumbersome and
expensive in Nigeria. Operators need to comply not only with Shariah
prescriptions but also with insurance laws in Nigeria and international
frameworks for insurance business generally and takaful insurance
specifically. Similarly, takaful insurance operations must employ
Advisory Council of Experts (ACE) in their governance structure, which entails
additional expenses.
Sixthly, the practice of takaful insurance faces issues inimical to
Shariah dictates. For example, conceptualizing consideration payable by parties
to takaful insurance as tabarru (donation) is problematic, as
donations in Islam do not belong to the donor, who cannot lay claim to them or
dictate their use.
Seventhly, this research finds that takaful insurance suffers from a
dearth of adequate and requisite manpower to effectively manage the sector.
This inadequacy may adversely affect its sustainability. Another finding is
that adjudication of Islamic insurance disputes will constitute a major obstacle,
as such disputes fall under the jurisdiction of Federal and State High Courts
in Nigeria's legal system. These courts are manned by judges learned in common
law but without knowledge of Shariah or Islamic commercial law specifically.
Closely related is that even Shariah Courts of Appeal, with judges learned
in Islamic law, lack jurisdiction to hear Islamic banking and insurance
disputes. Furthermore, these judges may lack expertise in this specialized area
of Islamic law. These factors may yield counter-productive results for this
nascent sector.
This research also finds that the best dispute resolution mechanism for takaful
insurance is amicable methods like mediation, conciliation, negotiation, or
arbitration - the approach used in jurisdictions like Malaysia and customary to
Islamic law.
Furthermore, the research identifies many impediments impacting the legal
and regulatory development of takaful in takaful-dominated
systems, including: compliance with multiple laws and regulatory bodies;
governance and manpower requirements; inadequate and inefficient legal
frameworks; lack of awareness; and consequent marketability challenges.
Finally, this research finds many lessons from jurisdictions like Malaysia
that could improve Nigeria's system, including: establishing separate legal
frameworks for takaful regulation; vesting jurisdiction over takaful
disputes in special courts; using Alternative Dispute Resolution mechanisms;
and providing specialized training for judicial officers. Malaysia also has
laws dedicated to insurance business and special authorities monitoring
insurance transactions using Shariah-compliant structures.
4.2.5 Conclusion
This research concludes that takaful insurance serves as a
complementary and more ethical alternative to conventional insurance, operating
on Shariah principles to address unmet needs, particularly for Muslim
communities, while gaining global acceptance with potential to displace
conventional insurance long-term. However, Nigeria's legal and regulatory
frameworks remain fraught with uncertainty and are currently unconducive to takaful's
survival, threatening to render its promised economic benefits merely wishful
thinking without urgent reforms. The study further finds Nigeria's adversarial
common law dispute resolution mechanisms fundamentally incompatible with takaful's
Islamic nature, recommending arbitration instead, and warns that despite takaful's
superior ethical foundations, it risks collapse under current regulatory and
judicial challenges unless immediate corrective actions are taken, including
specialized personnel training and streamlined legal frameworks to properly
harness its potential as a viable insurance alternative.
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