NAICOM urges expansion of  Islamic finance to tackle economic challenges

Joy Agwunobi

Amid global economic uncertainty, environmental crises, and social upheavals, the National Insurance Commission (NAICOM) is advocating for the growing role of Islamic finance as a key solution.

The Commission noted that Islamic finance, with its ethical foundation and emphasis on risk-sharing, can effectively address the shortcomings of traditional financial systems, offering a more resilient approach to the challenges of the modern world.

At the 2nd edition of the African Takaful and Non-Interest (Islamic) Finance Conference in Lagos, themed “Islamic Finance and Takaful: Building Resilience in a Volatile World,” Olusegun Omosehin, the Commissioner for Insurance, represented by Usman Jankara, the Deputy Commissioner Technical for NAICOM, emphasised how Islamic finance offers a distinctive approach.

According to Omosehin, while conventional financial systems often fail to address the broad range of risks faced by individuals and communities, Islamic finance is grounded in ethical principles and social responsibility.

Omosehin emphasised that while conventional financial systems often fall short in addressing the diverse risks individuals and communities face, Islamic finance provides a unique approach centred on fairness, transparency, and social responsibility.

“Islamic finance is not just a set of financial products; it is a holistic system that promotes equity, transparency, and mutual risk-sharing,” Omosehin said, adding that the Commission is collaborating with other regulatory bodies in Nigeria to expand Shariah-compliant investment opportunities for Takaful and other non-interest financial institutions.

Omosehin further explained that as the world grapples with challenges like pandemics, environmental disasters, and geopolitical uncertainties, the resilience inherent in Islamic finance and Takaful becomes more critical.

 “The recent pandemic exposed the vulnerabilities of our existing systems and underscored that relying solely on conventional models is insufficient in times of crisis. Islamic finance has the flexibility to innovate, adapt, and create solutions that meet emerging needs,” he said.

Islamic finance is experiencing rapid growth in Nigeria, driven by the increasing demand for Shariah-compliant services. The sector currently represents about 2-3 per cent of Nigeria’s financial market, valued at $3.8 billion. Sukuk makes up 59.3 per cent  of this market, with non-interest banks accounting for 39.8 per cent, and Islamic funds and Takaful making up 0.9 percent.

“The Islamic financial ecosystem in Nigeria includes four non-interest finance banks, five Takaful companies, 15 microfinance institutions, and 10 non-bank financial institutions,” he noted. Central to Islamic finance is Takaful, or Islamic insurance, which differs from conventional insurance that often relies on risk transfer and interest.

“Takaful is a Shariah-compliant form of insurance built on mutual cooperation and shared responsibility. Participants contribute to a collective fund, which is then used to support those in need, fostering a sense of community and solidarity,” Omosehin explained, adding that in a world facing climate change, health crises, and economic instability, Takaful provides a resilient framework that not only offers financial protection but also a safety net that empowers individuals and communities to recover from adversity.

According to Omosehin, Takaful’s emphasis on risk-sharing and collective responsibility helps mitigate the impact of unforeseen events, allowing families and businesses to bounce back more effectively. “We must leverage the principles of Islamic finance and Takaful to build a more resilient world. Together, we can create a financial system that not only withstands volatility but also promotes prosperity for all,” he said.

Omosehin also highlighted NAICOM’s efforts in fostering the growth of the Takaful industry in Nigeria through various initiatives. While Takaful currently represents 1-2 per cent  of the insurance market, its future looks promising, with an annual growth rate of over 34 per cent  in the last four years.

To support the sector’s growth, NAICOM has introduced measures such as a risk-based capital system that offers more flexible capital requirements for Takaful operators, and proportionate qualification standards that encourage new entrants into the market. Additionally, Omosehin mentioned that guidelines for market conduct and enterprise risk management have been issued to ensure best practices in the Takaful and reTakaful sectors.

“NAICOM has also conducted several stakeholder engagement workshops to raise awareness about Takaful and its benefits,” he noted. “We continue to collaborate with international bodies like the Islamic Financial Services Board and the Accounting & Auditing Organisation for Islamic Financial Institutions to provide regulatory guidelines, technical training, and ongoing support for the industry.”

Omosehin called for greater policy support to foster partnerships that drive innovation and to educate communities on the advantages and growth of Takaful and Islamic finance.