Background to The Study The Islamic Insurance (Takaful)
In the context of Islamic financial system and economy, there is emergence of insurance practice called by name; Takaful. Takaful is an alternative to conventional insurance. It is an Islamic insurance product which acts as a social scheme based on the principle of brotherhood, solidarity and mutual assistance among society. It provides mutual financial assistance to those who are members of Takaful scheme; that voluntarily agree to contribute a certain amount of money for that purpose (Ali, 2011).
The scheme operates as a legally binding agreement among all the participants who pay or indemnify any of their members that suffers a loss as specified in the policy document. Therefore; should any member suffers a catastrophe; he would receive a certain sum of money or financial benefit from the fund as defined in the pact so as to help him meet the loss for a defined loss from a defined fund (Stagg-Mecey; 2007 in Swarz & Coetzer, 2010; and Billah; undated (a)).
On the other hand, modern conventional commercial insurance, in these days, has emerged to mitigate the seriousness of both personal and business risks which are inherently in- built in every human endeavor. Its products are specifically designed to provide a protection to individuals or businesses against contingencies; created out of human quest for security and stability (Redzuan, Rahman & Aidid; 2009).
It acts as a risk transfer mechanism which is aimed at providing peace of mind and the protection against losses. It is either to handle risk assumption or risk transfer or loss prevention activities. The scheme utilizes method that combines people or institutions by persuading a large number of individuals or companies to pool their own risk into a large group to minimize overall risk (Ali, 2005).
Risk, in insurance business, represents a probability of particular event to occur or not. It is a chance of happening of something that will have an impact upon peoples’ objectives. It is measured in terms of likelihood and consequences (Gowa, 2002). Traditionally, the concept of risk has been associated with uncertainty of events in the future.
The higher the uncertainty of an event, the higher is the risk. It is argued that risk is the amount of loss associated with property or life. Risk to a property can be damages to a car, building or house. Risk; to a life, however, is simply described as a poor health, pre-mature death, or injuries as a result of an accident etc. Thus, risk is defined as a culture, processes and structures directed toward effective management of potential opportunities and adverse effect (Akhter, Akhtar & Jafri; undated).
It has for long been established that in every society, there exist risk management strategies. They are culturally embedded to suit the people’s peculiarities and risk exposure. This has made many scholars to view the term differently. As argued by Okofor & Tela (2006), to manage risk, means to identify vulnerabilities and threats to assets or life in achieving one’s objectives and deciding what counter measures if any, to take in reducing the pure risk to an acceptable level.
In their submission; Falegan (1991) and Harrington & Niehaus (1999) maintain that pure risk is only managed through either risk control mechanism or risk financing; and among the risk financing schemes include: risk retention, hedging contract and insurance. This study has adopted an insurance practice and wants to examine it in the context of Islamic financial system.
Islamic insurance (Takaful) service has been at embryonic stage in Nigerian insurance industry. Its introduction has not lasted for more than 10years. In fact, it is in the year 2003 that the African Alliance Insurance Plc has entered Kano market.
No Insurance company has followed the suit till 2009; when Corner Stone Insurance plc; through its division; Halal Takaful Nigeria Limited which enters the market and offers general Takaful products. Niger insurance Plc also has been in the market (2008/2009) competing directly with these companies. Thus, Niger insurance Plc, instead of African Alliance insurance Plc which offers Family Takaful services as Window operation and Corner Stone Insurance Plc that offers General Takaful services by creating a Division to handle the products, sales its Takaful (Mutual Halal Plan Policy) as a mere extension of the conventional insurance products mix.
The companies have offered two distinct and different types of Takaful services which signify absence of direct competition. Although, emergence of Niger Insurance Plc in the market creates competition in offering Family Takaful services, it is not very pronounced, as observed.
Yet, with this partial monopoly status enjoyed by the companies and more than 7 years stay in the market, the services patronage have not gained presupposed wider use and acceptability among consumers in the market. It is against this background that this study is designed to explore the determinants or factors that can guarantee effective consumption of the services so that wider acceptability and patronage would be obtained.