How you will benefit from Islamic insurance

The Bank of Uganda (BoU) recently issued the first Islamic Banking licence, finally ending the long wait for operationalising Islamic finance in Uganda.
This followed the Parliament of Uganda’s amendment of Section 115b (2) of the Financial Institutions Act which struck out the provision of the requirement for a Shari’ah Advisory Council, and replaced it with one of BoU to institutionally address operational issues relating to Islamic Banking. 

This is a much welcome development even for other financial services such as insurance. The Insurance Regulatory Authority of Uganda (IRA), is also in advanced stages of finalising Takaful regulations to pave way for the operationalisation of Islamic insurance in Uganda, to complement traditional insurance. 

One issue we have been grappling with which Islamic banking has now addressed is the investment of insurance funds. Islamic Banking will provide halal investment options that Takaful operators will invest their funds on behalf of the members.

Just like traditional insurance, Islamic insurance, also known as Takaful, provides coverage for a variety of risks, such as property damage, loss and health-related expenses and compensates the insured person once an insured against risk occurs whilst adhering to shariah principles. 

Takaful  insurance
While both Takaful and conventional insurance guarantee you in the event of unforeseen events, and participants make contributions in form of premiums, Takaful is based on the principles of mutual protection, co-operative risk and profit sharing. Although its origin lies in Islam, it is available to all people irrespective of their faith. 

Besides the principles above, takaful works in a distinctly different way from conventional insurance products. Policyholders pay into a fund and they retain an ownership interest. Contributions from participants are later invested into Sharia-compliant investments to derive investment income. In the event of the fund generating a surplus, the profits are shared among both the participants and shareholders, creating a ‘win-win’ situation for all participants. Likewise, the losses are shared mutually. 

Operationalising Takaful in Uganda presents immense benefits for the Ugandans/insuring public. Key among them is inclusivity. Currently, there are people who need better risk protection tools but do not feel comfortable with conventional insurance products. Takaful would thus provide an alternative for people to choose what they are more comfortable with. 

Additionally, Takaful insurance policies are based on ethical and moral standards that are consistent with Shariah principles; thus Islamic insurance policies do not involve interest-based transactions, gambling, or speculation. This means that all transactions should be based on real economic activity. This poses less risk than conventional insurance to the stability of the financial system.

Takaful insurance encourages risk sharing where all participants contribute to a pool of funds which is used to indemnify participants who suffer a loss, meaning the risk is shared among all participants. The profits made from investing the funds are distributed among members, giving an advantage over conventional insurance. It also promotes better risk management by both insurers and their customers.

Furthermore, the policies are transparent and accountable, meaning participants are fully informed about the operations and performance of the Takaful fund. This promotes trust and confidence among participants and ensures that the Takaful fund is managed efficiently and effectively.

While conventional insurance providers use underwriters to assess an applicant’s level of risk before setting their premium, takaful products are generally offered at a set price. However, there are a few exceptions to this rule; if someone develops a serious health condition for example, the provider may ask them to increase their contribution to the medical takaful fund based on medical evidence. 

As IRA, we shall continue to support efforts aimed at creating formidable options such as Takaful as they present a good opportunity to boost insurance penetration in Uganda. Once operationalised, it will promote an inclusive, competitive and more stable insurance industry.

Ibrahim Kaddunabbi Lubega is chief executive officer of Insurance Regulatory Authority.