Takaful products are set to secure livestock

As Islamic financial products become increasingly popular in Kenya’s financial landscape, sharia-compliant agricultural insurance offerings are poised to make a significant impact on food security in the country.

Kenya’s sole takaful provider has witnessed strong growth since its inception in 2011, setting a precedent for future expansion. Islamic finance, which adheres to religious principles including bans on interest and gambling, has witnessed rapid international growth in recent years. The global market for sharia-compliant financing is set to double to $3trn by 2015, and Kenya has identified Islamic finance as a lucrative channel for growth. Although Muslims comprise about 10% of the population, the development of sharia-compliant financial products is viewed as a strategy through which to attract investment from the large Islamic finance sectors in the Middle East and South-east Asia.

“Sharia-compliant insurance is a new market in this region and a global phenomenon,” John Ng’ang’a, the CEO of Cannon Assurance, told OBG.

Main Providers

Takaful Insurance of Africa (TIA), Kenya’s first sharia-compliant underwriter, launched services in 2011. TIA offers mutual or charity insurance, with the insurer acting as an agent and charging a set fee, rather than interest. The niche is sufficiently attractive, with some 4m Muslims in Kenya, that in July 2014, Kenya Commercial Bank received all necessary approvals to provide an Islamic window as well. Within the reinsurance segment, Kenya Reinsurance Corporation established a retakaful board in 2013, with retakaful premiums reaching KSh96m ($1.09m) in 2012 and projected to have grown by an additional 10% in 2013.

In March 2014 the Capital Markets Authority proposed a separate regulatory framework for Islamic financial institutions, one facet of a 10-year strategy aimed at improving capital markets in the country. There are currently two fully fledged Islamic lenders in Kenya – Gulf African Bank and First Community Bank – while other conventional banks have been moving to introduce Islamic products, most recently when Standard Chartered opened an Islamic window in early 2014.

Farms & Farmers 

Livestock insurance is viewed as a high-growth segment within the industry, as northern pastoralist herders have suffered from extreme weather fluctuations and damaging drought. Takaful livestock insurance could be used to significantly expand food security among the predominantly Muslim northern herder population. Indeed, TIA widened its portfolio to include index-based livestock insurance after its motor, home and business products proved popular.

“One front where we expect major growth in insurance is in agriculture. It is still in its rudimentary stages, but there is huge potential when you realise that 70% of the economy depends on agriculture and roughly 20% of GDP comes from this sector,” Tom Gichuhi, CEO of the Association of Kenya Insurers, told OBG. There are a lot of risks and a lot of potential in crop, livestock, and farm asset insurance.” Index-based crop insurance, which monitors weather and feed supply conditions to determine losses suffered by farmers, has seen significant uptake in recent years, with programmes such as Kilimo Salama offering coverage on a pay-as-you-plant basis. This targeted approach will help farmers who may be sceptical of the benefits of insurance to see for themselves the protection it offers.

Challenges

Takaful still faces unique challenges in Kenya. Regulators require 10% of premiums to be invested in Treasury bills and bonds, but neither instrument is sharia-compliant. TIA has allocated interest from these premiums into a charity while the firm awaits approval to invest it in Islamic banks, with all other investments channelled into the country’s sharia-compliant banks, real estate and short-term oil lending. The results have been promising and could set a precedent for future expansion into takaful agriculture insurance; TIA has four outlets and 80 agents in Nairobi and Mombasa, with plans to double the number of agents by the end of 2014. The firm also plans to raise KSh300m ($3.42m) by selling a third of its stock to investors.