Assessing ‘Takaful’ Insurance Business Regulation in Ethiopia against Sharia

Norms: A Comparative Analysis

Farid Tayib Abatamam

Abstract
Muslim communities are not beneficiaries of conventional insurance schemes due to the perceived
absence of Insurance scheme that complies with Islamic principles and Sharia laws. While
insurance plays an important role in compensating and mitigating risks related to unpredictable
loss of life and property, it needs to accommodate Islamic law to make Muslim communities on
board. This article seeks to examine the reasons behind Muslim communities are left out of
conventional insurance schemes. Then, the article asks whether or not the Islamic insurance
scheme introduced by Ethiopian insurance business regulation complies with sharia standards. By
employing doctrinal and comparative research methods, the article has found that conventional
insurance is prohibited because it violates Islamic principles by involving elements of Riba
(Usury), Gharar (peril), and Maysir (gambling). Moreover, while the Ethiopian insurance
regulation introduces the Islamic insurance scheme, it falls short of assuring the fulfillment of
Sharia standards provided by Islamic scholars and international non-profit organizations. Finally,
the article suggests the insurance business regulation in Ethiopia should be overhauled by
considering the Sharia standards.

Keywords: Islamic Insurance, Conventional Insurance, Sharia standard, Regulation, Ethiopia.


Farid Tayib Abatamam, LL. B from Samara University, assistant lecturer at Gambella University, and LL.M
candidate in Commercial and investment law in Jimma University school of law. The author can be reached at
ababogibo@gmail.com.
Introduction
The realization of modern trade and commerce is unimaginable without the involvement of the
financial institution in general and the insurance business in particular.1 The role played by the
insurance business in reducing the effect of several perils, like illness, accident, loss of property
due to theft or fire, agricultural losses, and other natural and artificial risks is profound in that it
will reimburse the losses.2

Consequently, countries around the world established insurance businesses and their legal
frameworks. However, the establishment, as well as the legal framework of conventional insurance
(hereinafter referred to as Insurance), is contrary to the Sharia principles as they involve elements
of Gharar (aleatory nature of the insurance contract)3, Riba (Usury)4, and Maysir(gambling)5.6
This has become an obstacle to the needs of Muslim communities to enhance their lives by
covering life, health, property, motor, and liability risk without going beyond the teaching of their
religion.7

Hence, Muslim scholars were searching for an alternative institution as an answer to the quest of
Muslim communities until they met at the conference in Mecca in the name of the Council of
Islamic scholars8 in 1985.9 At the end of the conference, they came to a consensus on the non-

1
Anwar, Habiba, Islamic Finance: A Guide for International Business and Investment. GMB Publishing Ltd., United
Kingdom. 2008.
2
Birritu,a quarterly magazine,The National Bank of Ethiopia, No. 112, 2012.http://www. Birritu@ethionet.et. (April
15, 2020).
3
Gharar (refers to peril, speculation, deception or uncertainty ) is its origin from Arabic verb ‘gharra’, to mean literally
to deceive. Gharar refers deceit, uncertainty, and hazard. http://www.investopedia.com/terms/g/gharar.asp(accessed
on April June, 2020). However, gharar refers to the feature of Insurance as aleatory transaction in this case.
4
The term ‘riba’ is an Arabic word which means an increase, an additions or excess.( Takaful (Islamic Insurance)
Practices: Challenges and Prospects in Nigeria, Journal of Insurance Law & Practice, Vol. 4, No. 2, 2015. P.14.
5
Is a type of business where financial gain results from mere chance, speculation and conjuncture; apart from work.
Instances of Maysir activities include horse racing, lottery, and crossword puzzles. Id. P. 15.
6
There are several publication on the prohibition of conventional insurance in line with Islamic laws-includes Abu-
Hussain, M. F., Muhamad, N. H. N., & Hussain, M. Y. M. (2014) compiled these fatwas as (1) Fiqh Council of the
Muslim World League (2) Islamic Research Institute of Al-Azhar University in 1965 (3) Grand Council of ‘Ulama of
Saudi Arabia (4) Majlis Taḥqīqāt al-Sharia Lucknow, India (5) Al Majma’ al-Fiqhi al-Islami of OIC in 1975 (6)
Council of Islamic Ideology, Pakistan (7) International conference on Islamic Economic in 1976, and (9) European
Council for Fatwa. See: Abu-Hussain, M. F., Muhamad, N. H. N. & Hussain, M. Y. M., ‘Takāful (Islamic Insurance)
Industry in Malaysia and the Arab Gulf States: Challenges and Future Direction,’ Asian Social Science, 10/21 (2014):
26-34.
7
Zainal Abidin Mohd Kassim, Takaful and Mutual Insurance: Alternative Approaches to Managing Risks, world bank
report on direction in development finance, Washington D.C. 2013. P. 88.
8
This council known as International Islamic Fiqh Academy which is head quartered in Jeddah, it consists of Islamic
scholar(Ulama) all over the world. http://www.iifa.aifi.org (accessed on April 10,2020).
9
Muhamad Badri Bin Othman, Development and Shariah issues of the Takaful industry in Malaysia: effects of the
regulatory framework on the implementation and growth, 2012 p.8.
compliance of conventional insurance with Sharia principles, which is followed by approval of
‘Takaful’ insurance (used interchangeably Islamic insurance throughout the writing) as an
alternative for Muslim communities. Subject to its Sharia compliance, non-Muslims are at liberty
to participate in Islamic insurance. Since then, Islamic insurance (Takaful) has been expanding in
Muslim majority countries; countries with diverse religions as well as counties with a Muslim
minority. As such, Takaful is growing at an average of 20% annually.10

Domestically, Insurance Business Proclamation No.1163/2019 (as amended)11 comes up with a

provision that allows the establishment of Islamic insurance operators and/or the opening of the
Takaful window in the existing conventional insurance companies.12 Moreover, the Proclamation
authorizes the National Bank of Ethiopia (NBE) to issue a directive regulating the licensing and
operation of Islamic insurance. In line with this law, the NBE issued Directive No. STB/1/2020
seeks to provide additional conditions for licensing and Supervision of the Islamic insurance
scheme.13

The overall objective of this article is to address the following questions: - the rationale for the
introduction of Islamic insurance? what are the elements involved in conventional insurance that
are against Islamic financial principles? And how far do Ethiopia’s insurance business
proclamation and NBE directive give assurance of Islamic insurance’s compliance to sharia
principles? To put it in another way, are the aforementioned proclamation and directive help us
realize Takaful insurance in Ethiopia which is ultimately consistent with sharia standards?

The article proceeds in seven sections, including the introduction. The first section deals with the
general overview of Islamic insurance. Section two is a comparison and contrasts between
Conventional insurance and Islamic insurance. The third section is a discussion on the background
of the Ethiopian insurance business. Section four as the main component of the article examines
the Ethiopian Islamic insurance legal framework that gives the green light for the Islamic insurance
business with its sharia compliance requirement. Then, the need for revision of the Ethiopian

10
Redzuan, H., Rahman, Z. A., and Aidid, S. S. (2009). Economic determinants of family takaful consumption:
Evidence from Malaysia. International Review of Business Research Papers, 5(5), p. 194.
11
Federal Democratic Republic of Ethiopia, amendment insurance business proclamation No. 1163/2019, Federal
Negarit Gazette, 26th years, No. 6.
12
Id. Article 60(2).
13
Licensing and Supervision of insurance Business Directives to License Takaful business operator and authorize
takaful window operator Directives No. SBB/1/2020.
Islamic insurance legal framework is discussed in section five. The final part of this article is the
conclusion.

1. General Overview
Insurance is crucial in solving some problems that bring uncertainty to human life and build
people’s confidence in business activities. In addition to this, some types of insurance like vehicle
insurance against third parties and health insurance coverage become compulsory for the owner of
the vehicle and every citizen, respectively.14 However, the question of conventional insurance’s
compliance with Sharia principles was frequently asked by Muslim scholars. Initially, Muslim
scholars were divided over the answer as to whether Conventional insurance is sharia-compliant
or not.15 Indeed, the Organization of Islamic Cooperation (is the second largest inter-governmental
organization after the United Nations and the collective voice of the Muslim world to ensure and
safeguard their interest in economic, social, and political areas)16, come up with two Fatwas (legal
opinion of Islamic Scholars) at the Conference of Mecca in 1985.17 The first of these ‘Fatwa’18 is
a decision on the impermissibility of Insurance with Sharia principles. As a result of this decision,
the argument on the permissibility or otherwise of conventional insurance schemes for Muslims is
solved as the Muslim community has to respect the rules made by a majority of the Islamic scholars
as a fourth source of the sharia principle (Ijma which literally to mean, consensus by a majority of
Muslim Jurist).19

The scholars backed their decision basically on the involvements of three things into Insurance is
provided as the rationale for its Sharia non-compliance. These are: (i) Riba (Usury), (ii)
Gharar(uncertainty), and (iii) Maysir (Gambling).20 Riba (Usury) is prohibited as trading money
for money by the verses of the Holy Quran and Hadith of the Holy Prophet. Under conventional

14
Spencer L. Kimball, The Purpose of Insurance Regulation: A Preliminary Inquiry in the Theory of Insurance Law,
Minnesota Law Review. 2324. Vol. 45. No. 471. 1961. In Ethiopia vehicle insurance is compulsory on a person who
owns a vehicle buy an insurance policy according to vehicle insurance proclamation No.
15
Rejda E. G. (2011). Principles of Risk Management and Insurance, eleventh edition, Prentice Hall, United States.
Sahih al-Muslim, Kitab al-Birr, 59. See also Ma’sum Billah Mohd, Dispute among the Ulama on the Validity of life
Insurance & Possible Refutation to the Misconception, 2011.
16
A brief on the Organization of Islamic Cooperation (OIC) and its institution. https://www.sesric.org/about-
oic.php.
17
See Anwar supra note. 1.
18
Fatwa refers to a legal opinion or decree issued down by an Islamic expert in sharia laws. In order to come to this
conclusion. Islamic scholars critically assess the theories and operations of the conventional insurance and attempted
to formulate an alternative system based on Islamic values and principles.
19
See Anwar. supra note, 1.
20
Nasser, Y. & Jamil, R., Takāful: A Study Guide (Kuala Lumpur: IBFIM, 2011), 81-84.
insurance, the insured pays a premium in exchange for the insurer’s undertaking to pay the sum
much higher than the policyholder paid, on the realization of the specific event clearly outlined in
the policy. This unjustified increase leads to riba. Further, riba would also involve in the case of
non-occurrence of the defined event in the policy. When the specified event in the policy is not
realized, the insured loses the money and unjustified increases of capital for the insurance
company.21 Gharar(uncertainty), Sharia exemplifies it with a fisherman’s sale of fish that one will
catch tomorrow because of the uncertainty on whether one will catch the fish or not. In Islam,
engaging in indeterminate events whose occurrence is uncertain is prohibited.22 The periodical
premium payment by the policyholder without being certain on the payment for the payment is
upon the occurrence of a defined event in the policy.23 Its involvement is a result of inequality of
the premium payable by the policyholder with the reimbursement that will be payable by the
insurer in case the risk is materialized.24

Thus, it is against the core Islamic economic principle of equitable distribution of wealth, and lack
of transparency in the common insurance regarding its profit and expenses.25 The Second ruling
of the council is the approval of Takaful as a Sharia-compliant alternative to Insurance.26 By the
same token, the Muslim Scholars cite the following verses from the Holy Quran and Hadith of the
Holy Prophet for approval of Takaful respectively.

(The Quran says under vol.5: verses 2)

“Help ye one another in righteousness and piety, but help ye not one another in sin and rancor”.27

21
Aly Khorshid, Islamic Insurance: A modern approach to Islamic banking, RoutledgeCurzon is an imprint of the
Taylor & Francis Group, New York, 2004, p. 63.
22
See: “Sharh Al-’Inayah Ma’a Fath Al-Qadir” “Sharh Al-’Inayah Ma’a Fath Al-Qadir” [5: 192]; [5: 192]; “Tabyin
Al-Haqa`iq” “Tabyin Al-Haqa`iq” [4: 46]; [4: 46]; “Al-Taj “Al-Taj Wa Al-Iklil” Wa Al-Iklil” [4: 362]; [4: 362];
“Fath Al-’Aziz Bi-Hamish Al-Majmu’” “Fath Al-’Aziz Bi-Hamish Al-Majmu’” [8: 127]; [8: 127]; “Matalib Uli
Al“Matalib Uli AlNuha” Nuha” [3: 25]; [3: 25]; “Al-Qawa’id Al-Nuraniyyah” “Al-Qawa’id Al-Nuraniyyah” (P.
116); (P. 116); “Nazariyyat Al-’Aqd” “Nazariyyat Al-’Aqd” (P. 224). See: (P. 224). See: “Al-Gharar Wa Atharahu
Fi Al-’Uqud” “Al-Gharar Wa Atharahu Fi Al-’Uqud” by Al-Siddiq Al-Amin Al-Darir (published by by Al-Siddiq
Al-Amin Al-Darir (published by Saleh Kamil Center for University Thesis), (P. 54). Saleh Kamil Center for University
Thesis), (P. 54).
23
See Aly Khorshid, supra note 21, P.61.
24
Mohd Fadzli, Y., Wan Zamri, W.I. & Abdul Khudus, M.N., Fundamentals of Takāful, 18.
25
Mohammed, J. A. (2007). Corporate Social Responsibility in Islam. Unpublished doctoral thesis, Auckland
University of Technology. Retrieved September 14, 2008.
26
See Anwar. Supra note 1.
27
Holy Quran, vol. 5:2.
The Prophet Muhammad said: “The believers, in their affection, mercy, and sympathy to each
other, are like the body, if one of its organs suffers and complains, the entire body responds with
insomnia and fever” (Muslim).28

In addition, they cited Aqilah and Diya which were seen as arrangements customarily used for
sharing responsibility, mutual help, and solidarity in some tribes during the time of Prophet
Mohammed.29

The word Takaful is derived from the Arabic root word ‘Kafala’ which is defined as taking care
of each other in the time of need and guarantying for one another.30 Takaful is the way of providing
mutual help and assistance for the member who suffers loss from the money contribution already
made by all participants.31 It is the agreement for cooperation voluntarily whereby the members
contribute money to a fund for helping and indemnifying each other in case of loss/losses and
invest and/or distribute its surplus under the model adopted.32 Preceded to Fatwa given by the
Organization of Islamic Cooperation, the first Islamic Insurance (Takaful) is established in Sudan
by Faisal Islamic banks in 1979.33

The Islamic insurance is categorized as Family and General Takaful. Like life insurance, family
Takaful is long-term insurance and it covers all risks related to danger to human life. In contrast,
general insurance covers non-family insurance including property, marine, motor, and other
risks.34

28
Sahih Al-Muslim, Kitabul Birr Wa’s-salat-wa’l-Adab, Book 32 No. 59.
29
Ibn Ḥajar al-ʻAsqalānī, Fatḥ al-Bārī bi Sharḥ Ṣaḥīḥ al-Bukhārī, vol. 12 (Cairo, Egypt: Dār al-Ḥadīth, 2004), 289,
290, no. hadīth 6910.Manjoo, Faizal . Why Different Takaful Models in the World? No. 10.
2007http://www.sabbir@icmif.org. www.takaful.coop. (accessed on 28 May, 2020).
30
Stagg-Macey, Catherine (2007). An Overview of Islamic Insurance. No. 8. http://www.sabbir@icmif.org. (accessed
on 28 May, 2020) Engku Rabiah Adawiah, E.A., & Hassan Scott, P.O., Essential Guide to Takāful, 3.
31
Takāful is derived from an Arabic word which means “solidarity”, whereby a group of participants agree among
themselves to support one another jointly for the losses arising from specified risks. In a Takāful arrangement, the
participants contribute a sum of money as Tabarru’ commitment into a common fund, which will be used for mutual
assistance of the members against specified loss or damage. See Islamic financial service board, guidance on the
recognition of ratings by external credit assessment institutions on takaful and retakaful undertaking, IFSB standard
No.5, 2011.http://www.ifsb.org. (accessed on May 20, 2020)
32
See Anwar, supra note No. 1.
33
Hamid, M. A., and Othman M. S. (2009). A study on the level of knowledge and understanding among Muslims
towards the concepts, Arabic and Sharia terms in Islamic Insurance (takaful). European Journal of Social Sciences,
10(3),p. 470.
34
Id.
Another issue worth discussing here is the Takaful insurance model. The takaful model is the
method of governing the relationship between the Takaful operator and participant. The three
frequently adopted models of Takaful insurance include - Mudharaba, Wakala, and Wakala-
Mudharaba. In the Mudharaba model, the participants are considered the owner of the money
contributed, and the Takaful operator/window is the administrator of the fund/money. In this case,
the funds contributed by participants are categorized as participants’ risk fund (PRF) and
participants’ investment fund (PIF). Participants’ risk fund is a portion of the fund paid for the
claims of the member participant in case the defined event is realized. Whereas participants’
investment fund is the portion contribution of the participant allocated for investment. 35 This
Investment is based on sharing of both profit and loss between participants and Mudarib(Takaful
operator/window) and should be on permissible investment.36 While, in the case of the Wakala
model, the operator/window carries on the investment as a mere agent on behalf of participants for
commission.37 The third one, the Wakala-Mudharaba model includes the elements of the two
models above. The operator/window is entitled to a commission as an agent for the management
of the participants’ fund and the service they provide. In addition, they have also entitled to the
share of profit or loss for investing participant’s investment funds.38

Currently, Takaful is developing faster than Insurance in both Muslim and non-Muslim
countries.39 However, this development is not free of institutional, operational, and regulatory
challenges. To put it differently, challenges identified by scholars, include lack of awareness
among the communities, absence of Takaful scholars and experts, and lack of standard setter and
supporting Sharia-based institutions. Moreover, the lack of appropriate external regulatory
frameworks at international, regional, as well as national levels are the challenges that are facing
Takaful insurance.40

35
Islamic financial service board, guiding principles on the governance of Takaful undertaking, December 2009.
36
Mohd Fauzi Abu-Hussin, Nasrul Hisyam Nor Muhamad & Mohd. Yahya Mohd. Hussin,Takaful (Islamic Insurance)
Industry in Malaysia and the Arab Gulf States: Challenges and Future Direction, Asian Social Science; Vol. 10, No.
21; 2014 p.29.
37
See Islamic financial service board, supra note 41.
38
Odierno, Hassan Scott P., and Muhaimin Iqbal. “Takaful Windows: An Initial Stepping Stone to Bigger Islamic
Insurance Market.” Middle East Insurance Review. Dec. 2006 p. 65–66.
39
40
See Mohd Fauzi Abu-Hussin, Nasrul Hisyam Nor Muhamad & Mohd. Yahya Mohd. Hussin, supra note 42.
As the basic and underlining rationale for the introduction of Islamic insurance as an independent
entity from conventional insurance is strict adherence to the Sharia principles. Therefore, the
regulatory requirements of Takaful insurance’s sharia compliance by the government regulatory
and supervisory authority through different methods- including but not limited to imposing the
establishment of a qualified sharia board/council with clear mandate and duties in the formation
and operation(as to ensure the products, services, and operations of Islamic insurance comply with
sharia) as well as regular monitoring and supervision by government’s supervisory authority plays
a crucial role for the success of the business and protection of the stakeholders in Islamic
insurance.41

2. Conventional Insurance Vis-à-vis Islamic Insurance

As far the reason why Islamic insurance was introduced as a distinct engagement is directly related
to the non-compliance of common insurance with the sharia principles. This incompliance leads
to the search for the alternative by Muslim scholars to solve the unpredictable problems and enable
Muslim communities’ participation in economic activities in line with the teachings of sharia.
Given that, they come up with an institution that is an alternative to the mainstream insurance
called Takaful (Islamic insurance)42. Having identified the areas of incompliance with the sharia
principle in conventional insurance above, the discrepancy between Islamic insurance and
commercial insurance in line with AAOIFI standards and scholarly literature will be elaborated on

41
Hasan, Zulkifli. (2010). Regulatory framework of Sharia governance system in Malaysia, GCC Countries and the
UK. Kyoto Bulletin of Islamic Area Studies, 3-2, p. 90.
42
“Islamic Insurance is a process of agreement among a group of persons to Islamic Insurance is a process of
agreement among a group of persons to handle the injuries resulting from specific risks to which all of them are
handle the injuries resulting from specific risks to which all of them are vulnerable. A process, thus initiated,
involves payment of contributions vulnerable. A process, thus initiated, involves payment of contributions as
donations, and leads to the establishment of an insurance fund that as donations, and leads to the establishment of
an insurance fund that enjoys the status of a legal entity and has independent financial liability. enjoys the status of
a legal entity and has independent financial liability. The resources of this fund are used to indemnify any
participant who The resources of this fund are used to indemnify any participant who encounters injury, subject to a
specific set of rules and a given process encounters injury, subject to a specific set of rules and a given process of
documentation. The fund is managed by either a selected group of documentation. The fund is managed by either a
selected group of policyholders, or a joint stock company that manages the insurance policyholders, or a joint stock
company that manages the insurance operations and invests the assets of the fund, against a specific fee.” See
Accounting and Auditing organization of Islamic financial institution(AAOIFI), Islamic insurance, sharia standard
No. 26. May 2005, p. 678.
in this part of the discussion. Accordingly, the following can be said about the difference between
insurance and Islamic insurance:

Firstly, the contract in conventional insurance is a contract between an insurer and the insured. In
this contract, the insurance company undertakes an insurance policy(for reimbursing the
policyholder in case of materialization of specific events in the policy) in return for the premium
paid by the insured.43 The goal of the company selling this insurance policy is the maximization
of profit for its shareholders.44 While the main purpose of takaful insurance is for solidarity and
mutual help among members in every legislation including ours.45 Thus, the contribution made by
the participant is in the form of a donation (tabarru). The main objective of Takaful is the
protection of the well-being of the members through cooperation and solidarity by joint-
guarantying the participants in case of losses or injury and achieving pleasure with minimum
profit. This is aimed at consisting with Islamic financial principles that prohibit an exchange
contract because it involved uncertainty on the occurrence or otherwise of the event (i.e., Gharar)
which is forbidden in Islam.46

Secondly, the insurance company is one of a party that undertakes a contract with the insured in
its name. The insured bought the policy from the insurer as a product from the marketplace and
the company is entitled to the ownership of the premium paid in exchange for indemnity for the
insured only in case of the fulfillment of the specified risk in the policy. In other words, the
policyholder has no right to the premium paid unless the event specified in the policy brought is
materialized.47 Whereas, the role of the Takaful operator is an agent of the participant(principal)
to manage the affairs of the undertaking and the funds contributed. The participant in turn pays a
commission to the operator for the service according to the underlying agreement on the takaful

43
Federal democratic republic of Ethiopia, insurance business proclamation No. 746/2012, federal negarit gazetta,
article 2(17), 18th year, No. 57.
44
Id. P.692.
45
See amended insurance business proclamation No. 1163/2019, supra note 11, article 2(39). See also AAOIFI
standard No. 26 supra note 18. And see also IFSB supra note 19.
46
Seyed Mohamed Mohamed Mazahir, Asmak Ab Rahman, Mohammad Ismath Ramzy, an analysis of policy
compatibility between conventional insurance and Islamic insurance policy: a case study of conceptual and
operational difference, Shariah Journal, Vol. 25, No. 3, 2017 p. 496.
47
See AAOIFI standard No.26, supra note No. 45.
model. The participant is entitled to the ownership of their contribution and the fruit of
investments.48

Thirdly, the policyholder exchanged the premium they paid for the insurance company in return
for the transfer of risk to the company in normal insurance. Thus, insurance is based on the transfer
of the future risk (if any) from the policyholders to the insurer once the premium is paid.49
However, the money payments of the participant are not premium rather, it is a contribution in the
form of donation which is used for the joint guarantees of each other. Moreover, neither transfer
ownership of money contributed to the takaful operator nor transfer risk from the participants to
the operator. Thus, the contribution is deposited to the segregated account (interest-free account)
from the operator’s account.50

Fourthly, the surplus of the contribution left (if any) after the following payment including -
payment of claims, payment of the agreed-upon commission for the Takaful operator/window, and
Retakaful (reinsurance) expense can be either invested or distributed to the participant according
to the model adopted by the Islamic insurance. Not only is the surplus that is shared among the
members, but also the loss is shared between them as one feature of Islamic investments. 51 In
contrast to this, the premium paid by the policyholder is the asset of the company once the policy
document is signed. The insured has no right either on the surplus or loss of the insurance company.
Thus, both the surplus and loss go to the insurer’s accounts to be shared among the shareholders.52

Fifthly, the participants are insured as well as insurers at the same time in Islamic insurance. It is
to mean that, the contribution payable by a participant is deposited in their name to indemnify the
loss of the member specified according to the agreement among them and the surplus can also be
invested in sharia compliance investment by their name.53 In the case of Conventional insurance,
the insurance fund is owned and managed in the name of the company. The payment of

48
Id.
49
Seyed Mohamed Mohamed Mazahir et al, supranote 46 p. 493.
50
Id.
51
See AAOIFI, supra note No.45. The policyholders of takāful share any surplus or loss from the pool collectively.
Due to surplus money in addition to premium contribution, takāful system has a built-in mechanism to counter any
over-pricing policies of the insurance companies, see also Farooq, S.U., Chaudry, T.S., Fakhr-e-Alam & Ahmad, G.,
‘An Analytical Study of the Potential of Takāful Companies’, p. 58.
52
Seyed Mohamed Mohamed Mazahir et al, supra note 46 p. 497.
53
Nico P. Swartz & Pieter Coetzer, ‘Takāful: An Islamic Insurance Instrument,’ Journal of Development and
Agricultural Economics, 2010: p.334
compensation by the insurer is based on the policy document when the specified events in policy
is materialized. Apart from this, the insured is the policyholder who signs the policy document and
pays the premium to the insurance company. Therefore, insured and insurer are different in the
case of conventional insurance.54

Sixthly, there are two distinct agreements in Islamic insurance. One is the agreement between the
participant and the operator/window. This agreement is an agency relationship to administer the
participant’s fund, payment of the claim in case of materialization of a defined event in the policy,
invest the surplus in the sharia-compliant business, and carry out other day-to-day activities in
return for a commission.55 The other agreement is undertaken among the member participants as
a partnership (Musharaka) for solidarity and mutual help among themselves. 56 Seventh, Islamic
insurance needs the establishment of a supervisory committee named as sharia advisory
board/council for monitoring its daily activities in the eyes of Islamic principles. In the case of
Insurance, no needs to establish such a committee apart from the board and other management.57

To conclude, the commercial insurance scheme is contrary to Islamic finance. The implication is
that; it is impermissible(haram) for Muslims to enter into the concession contract with insurers
according to the sharia principle. Having discussed how insurance violates Islamic financial rules,
the next question will be whether or not the Muslim community have an alternative option? The
answer is positive thanks to the effort made by Muslim scholars and Jurists by taking into account
the crucial nature of insurance schemes in individual life as well as business to come up with an
alternative for Muslims called Takaful (Islamic insurance) in place of conventional insurance.

54
See Seyed Mohamed Mohamed Mazahir et al, supra note 52.
55
See AAOIFI standard No. 26, p. 670. “The Musharakah (partnership) among the participants, which leads 4/1 The
Musharakah (partnership) among the participants, which leads to the establishment of a company that has articles of
association and to the establishment of a company that has articles of association and all other documents. The
relationship between the participants may all other documents. The relationship between the participants may be
confined to a Musharakah contract if a company manages the be confined to a Musharakah contract if a company
manages the fund. [see Shari’ah Standard No. (12), on Sharikah (Musharakah) fund. [see Shari’ah Standard No. (12),
on Sharikah (Musharakah) and Modern Corporations]”.
56
See AAOIFI standard No. 26, p. 670. “The Musharakah (partnership) among the participants, which leads 4/1
The Musharakah (partnership) among the participants, which leads to the establishment of a company that has
articles of association and to the establishment of a company that has articles of association and all other
documents. The relationship between the participants may all other documents. The relationship between the
participants may be confined to a Musharakah contract if a company manages the be confined to a Musharakah
contract if a company manages the fund. [see Shari’ah Standard No. (12), on Sharikah (Musharakah) fund. [see
Shari’ah Standard No. (12), on Sharikah (Musharakah) and Modern Corporations]”.
57
Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Sharia Standards for Islamic
Financial Institutions, Bahrain, 2008, 473.
3. Background of insurance in Ethiopia
The developments of the insurance business legal regime in Ethiopia pass through different stages.
Before the establishment of the Imperial insurance company in 1951, the modern history of the
Insurance business in Ethiopia was occupied by foreign investors, especially from Italy, Great
Britain, and France.58 The insurance policy issued by both imperial insurance
companies(domestic) and foreign insurance agents were fire, marine, life, and general accident
insurance policy.59 As to the regulation of the then growth of insurance business in Ethiopia, the
1960 Commercial and Maritime codes had provided a minimum standard for operation of inland,
river, air, and maritime insurance in book III title III and title VII, respectively. 60 Added to this,
the regime issued legal notice 393/1971 to regulate licensing, renewal, and other supplementary
provisions.61

The nationalization of private property which the insurance companies were not an exception
followed during the Derg regime. Proclamation No. 68/1975 was used as a green light for the
monopolization of the insurance industry by the government which had a negative consequence
for the industry as a whole.62 post-1991, the transitional government’s shift to a free-market
economy paved the way for the establishment of the domestic private insurance company and
competition in the industry through licensing and supervision of insurance business proclamation
No.86/1994.63

This proclamation is more comprehensive than the preceding insurance legislations and it re-
establishes the National Bank of Ethiopia as a central bank with a regulatory and supervisory role
in the financial institution and opens the business for the private where some new developments
by the proclamation are made.64 With the development of the insurance business, proclamation

58
Hailu Zeleke, Insurance in Ethiopia: Historical Development, Present Status and Future Challenges. Addis Ababa:
Master Printing Press. 2007.
59
Id.
60
Abay Yimer,S. Financial Market Development, Policy and Regulation, the international experience and Ethiopia’s
need for further reform (PHD theses, University of Amsterdam, 2011), p.13.
61
IGE(MI), 1960, Ethiopia Facts and Figures (Ministry of Information of Imperial Government of Ethiopia, Addis
Ababa, 1960). As Cited by Abay Yimer,S.
62
Abay Yimer,S. supra note.70.
63
TGE, 1994, Ethiopian Insurance Corporation Establishment Council of Ministers Regulation No. 201/1994, Negarit
Gazeta, Year 53, No. 110, Addis Ababa, 19th September, 1994.
64
Itana Ayana, 1994, “Credit Policy, Financial Institutions and Private Investment In Ethiopia,” in Getachew Yoseph
And Abdulhamid Bedrikello, (eds.), The Ethiopian Economy: Problems And Prospects Of Private Sector
Development, Proceedings Of The Third Annual Conference On The Ethiopian Economy (Addis Ababa University
Press, Addis Ababa, 1994).As Cited by Abay Yimer,S.
No. 86/1994 is repealed after almost two decades in order to ensure stability and reliability and
replaced by insurance business proclamation No. 743/2012.65 Thus, there are about 18 insurance
companies are operating in Ethiopia currently.66

However, none of the above legal regimes allows the establishment and operation of either the
Takaful window under a conventional insurance company or a full-fledged Islamic insurance
business until the insurance business amendment proclamation No. 1163/2019 comes up with a
provision that allows the licensing of both full-fledged Islamic insurance business undertaking and
opening a takaful window under the existing insurance company. Moreover, the proclamation
authorizes the NBE to issue a directive that provides additional criteria specific to Takaful. As per
this authorization, the NBE issued directive No. STB/1/2020 in order to provide an additional
condition that is unique to Takaful in licensing and supervision.

4. Assessment of Sharia Compliance Requirement of Islamic Insurance in Ethiopia

4.1. Insurance Business Law

The FDRE constitution of 1995 attempted to secular arrangements that accommodate cultural and
religious diversity in the country. As part of legal pluralism, the adjudication of disputes related to
personal matters through customary and religious courts is recognized.67

Most importantly, the main reason for the evolvement of Takaful is conventional insurance’s odds
with the sharia principles on the presence of Riba (interest, Usury), Gharar (uncertainty), and
Maysir (gambling) as it is discussed elsewhere above.68 The 1995 FDRE constitution establishes
the separation of state and religion under article 11.69 This shows the absence of state religion and
the legislation that outlaws or favors one religion over another is void. The FDRE constitution
recognizes freedom of religion to be freely exercised individually and/or in a group. Furthermore,
individuals have the freedom to advance their religious values in social organizations and establish
religious-based institutions so long as the public advancement of these beliefs does not impinge

65
Federal Democratic Republic of Ethiopia, Insurance Business Proclamation No. 746/2012, Negarit Gazeta, Year 18,
No. 57, Addis Ababa, 22st Aug., 2012.
66
NBE, 2007/2008 (4), Quarterly Bulletin Fiscal Year 2020/21 Vol. 37 No. 1 [of the National Bank of Ethiopia] First
Quarter 2020/21 (Ethiopian Fiscal Year 2013), Addis Ababa, 2020/21.
67
FDRE, 1995, Constitution of the Federal Democratic Republic of Ethiopia Proclamation No 1/1995, Federal
Negarit Gazeta, Year 1, No 1 Addis Ababa, 21st August 1995.
68
Nasser, Y. & Jamil, R., Takāful: A Study Guide (Kuala Lumpur: IBFIM, 2011), p. 81-84.
69
See FDRE constitution, supra note 78. Article. 11.
negatively on the liberty of other citizens, or violate democracy and the law through violence or
illegal means.70 Given that, Sharia rules forbid the conventional insurance scheme on one hand
and the importance of the insurance scheme for a considerable number of the Muslim population
of Ethiopia on the other hand needs to be reconciled. That’s why amended insurance business
proclamation No. 1163/2019 provides for the establishment of the Islamic insurance scheme.

Additionally, the establishment of takaful insurance promotes the participation of Muslims in

commercial activities and entrepreneurship.71 International instruments in which Ethiopia is a
party guarantees freedom of religion.72 As such, once ratified they become an integral part of the
law of the country to respect, protect, fulfilling the same.73 Religious freedom entitles everyone to
follow the religion of his choice, including the freedom to respect the principles of the religion he
chooses to follow, advancing its values in social organization, and forming religious-based
institutions as long as the right of others is respected.

In our county, the insurance business proclamation No.1163/2019 (as amended) come up with the
provision that allows the licensing of both independent operators of Takaful insurance/window
under the operational insurance company. The regulatory and supervisory authority of the financial
institutions (NBE) is authorized to issue a directive for additional conditions unique to Takaful
insurance information and operation.74 The first step of the amended proclamation is inserting the
definition of Takaful under the definitional part. Accordingly, Takaful is defined as community
cooperation in which members contribute a fixed amount of money to mutually compensate each
other in the case specified risk is materialized.75 The element of the definition is:- Takaful
insurance is community cooperation rather than an agreement between the insurer and
policyholder; the money payable by the member is a contribution, not a premium; and the money
is contributed for mutual assistance not as a premium to the company payable in exchange of

70
Id. Article 27(1).
71
Kazi Md. Mortuza Ali, Present Scenario and Future Potentials of Takaful, Prime Islami Life Insurance Limited,
Bangladesh, V. 2 No. 2. P. 7.
72
UN General Assembly, International Covenant on Civil and Political Rights, 16 December 1966, United Nations
Treaty Series(UNTS), vol. 999, p. 171, Art 18(1)
73
Article 9(4) provides that international treaties ratified by Ethiopia are the integral part of the law of the land.
Furthermore, Article 13(2) of the Constitution requires the provisions on human rights to be construed in conformity
“to the principles of the Universal Declaration of Human Rights, International Covenants on HumanRights and
international instruments adopted by Ethiopia.” Mohammed Abdo, legal pluralism, sharia courts, and
constitutional issues in Ethiopia,Mizan law review, Vol. 5 No.1, 2011. P.80.
74
Abay Yimer,S. supra note 70 p.14-15
75
Amended insurance business proclamation, supra note 11, art. 2(39)
transferring the risk.76 Furthermore, the proclamation stipulates the application of the provisions
of the insurance business proclamation with its amendment and relevant directives issued by the
NBE for conventional insurance businesses.77 In contrast, not only Takaful is defined as a
cooperation of the community, but also not included in the lists provided under the definition of
financial institution by the same proclamation.78 Nevertheless, this proclamation leaves the
following question without a proper answer. These are: - firstly, the amendment proclamation lacks
a proper definition for Takaful insurance per se apart from defining the word Takaful. Indeed, the
definition given for ‘Takaful’ seems to include Takaful insurance (Islamic insurance). If it is
assumed according to the formula provided for the application of insurance legislation and
directives under article 60 of the amendment on applying the definition provided for insurance
business on Takaful insurance, issuance of the directive by NBE apart from the conventional one
become meaningless.79 However, Takaful has its salient features that are distinct from ordinary
insurance which is the reason for the additional condition and specific authorization to commence
its undertaking.

More broadly, the above definition falls short of including the following main elements of Takaful
insurance by AAOIFI standard on Islamic insurance No. 26.80 AAOIFI defines Takaful insurance
as a process of the agreement by a group of people to mutually handle a specific risk by payment
of contribution as a donation under the specialized management of the company adheres to rules
and principles of sharia to manage its affairs and invest the fund.81 Comparative to this definition,
the amended proclamation failed to include the following: - First, the definition is not
comprehensive enough to include the specification of contributions by the participant as Tabarru
(donation) which, inter alia, is the main element of Takaful insurance provided by the council of
Islamic scholars. In a nutshell, Takaful insurance is based on two basic principles regarding
participants namely: (i) Tabarru(donation) and (ii) Ta’awun(cooperation) according to the IFSB.82
Perhaps, the second principle (i.e., Ta’awun) is included in the definition of the phrase

76
Id.
77
Id. Art. 60(1&2).
78
Id. Art. 2(12) & art. 2(39).
79
It is sound to make the applicability of the provision of the proclamation and other directives of NBE on Takaful
only in case it doesn’t go against the nature and principles of sharia law.
80
See AAOIFI standard No. 26. Supra note 70.
81
Id.
82
Zainal Abidin Mohd Kassim Hassan Scott Odierno Sabbir Patel, hiybrid insurance structure: reciprocal, hybrid
mutual insurer, and Takaful, world Bank, Washington D.C. 2013. P.74.
“cooperation of community” and the element missed out is the contribution of the member in the
form of donation (Tabarru).83

The rationale for contributing as a donation (Tabarru) is for the protection of the scheme from the
involvement of the aforementioned sharia prohibited elements mainly Gharar (uncertainty) and
Maysir (gambling).84 Failure to contribute the money as a donation makes the contract/transaction
similar to a commercial insurance business against the Islamic Law of Contracts principle.85 This
is supported by a popular statement among Maliki schools86 that read as Gharar(uncertainty) has
no impact on donation contract. Moreover, it exonerated Takaful insurance from the involvement
of gambling as every participant agrees his/her contribution as a donation to help one another as
means of cooperation.

Secondly, unlike insurance companies that are only entitled to give insurance service with the
license mainly (apart from ancillary activities permitted for long-term insurance and general
insurance under article 6 of insurance business proclamation No.746/2012), the license and
authorization of Islamic insurance include the permission to invest from participants’ investment
fund and in the name of the participants’ subject to the model adopted. The difference is that
ancillary activities permitted as per the above provision by conventional insurance are in the name
of the shareholders of the said company.87 The NBE issued directive No. SIB/52/2020 (as
amended) for licensing and supervision of insurance business investment of their funds. The
preamble of this directive stated that income-earning for the sake of profit maximization by the
insurance company is a source of financial risk unless it is practiced prudently.88 As per this
directive, the investment of insurance funds in both general insurance and long-term insurance is
limited. In general insurance, the area of investment highly encouraged is treasury bills and bank

83
Id.
84
Id.
85
“Sahih Muslim” “Sahih Muslim”, , Kitab: Al-Buyu’ Kitab: Al-Buyu’ [3: 1153]; [3: 1153]; “Sunan Abu Dawud”
“Sunan Abu Dawud” [2: 228] (H: 3367); [2: 228] (H: 3367); “Sunan Al Nasa`i’” “Sunan Al Nasa`i’” [2: 217]; [2:
217]; “Sunan Ibn Majah” “Sunan Ibn Majah” [2: 739]; [2: 739]; “Sunan Al-Tirmidhi” “Sunan Al-Tirmidhi” [3:
532]; [3: 532]; “Sunan Al-Darimi” “Sunan Al-Darimi” [2: 167]; [2: 167]; “Al-Muwatta`” “Al-Muwatta`” [2: 664];
[2: 664]; “Musnad Al-Imam “Musnad Al-Imam Ahmad” Ahmad” [1: 203] and [2: 367 and 439]; [1: 203] and [2:
367 and 439]; “Sunan Al-Bayhaqi” “Sunan Al-Bayhaqi” [5: 226]; and [5: 226]; and “Musannaf “Musannaf Ibn
Abu Shaybah” Ibn Abu Shaybah” [8: 194], Section (2).
86
“Bidayat Al-Mujtahid” “Bidayat Al-Mujtahid” [2: 534].
87
See insurance business proclamation No. 746/2012, supra note 88, article 6.
88
Licensing and supervision of Insurance Business a directive on the investment of insurance fund, directive No.
SIB/52/2020.
deposits with at least 60% of the total asset of the company. Moreover, investment in the purchase
or construction of building for rent and company shares are to the maximum of 10% and 20% of
total assets respectively. Coming to the long-term insurance business, investment in treasury bills
and bank deposits should not be less than 50% of the total asset of the company, up to 25% of the
investment on purchase construction of building or rent, and, 15% on the company share.
Therefore, only 10% of the total asset of the companies are allowed to be invested in the areas of
their choice in both general and long-term insurance.89 The provision of the directive limits the
maximum percentage of the sectors to be invested by the insurance company and at the same time,
the restriction applies to Takaful insurance as it mentioned the applicability of other insurance
directives on Takaful insurance above. The problem in the application above directive can be seen
from a different angle, but for the objective of this study, let’s see the requirement of investing the
maximum percentage of the fund on treasury bills and bank deposits. The reason for the argument
against this requirement in Islamic insurance is derived from the source of profit in such
investments which is mainly from collecting interest on treasury bills or the money deposited in
banks. Such investment is prohibited according to the teachings of Islam and is also one of the
main reasons for the emergence of Takaful insurance.90 Nevertheless, neither the investment
permission nor its sharia adherence to the types of investment is included as an element of the
definition. Therefore, the non-inclusion of mandatory sharia compliance in the investment of
Takaful insurance is another great flow of the same proclamation.

Thirdly, it fails to articulate the objective that necessitates the emergency of Takaful insurance
which is the involvement of things contrary to Islamic sharia in insurance for serving the Muslim
community. To put it differently, the proclamation should have required Takaful insurance
operators/window’s strict compliance with sharia principles to protect and assure the client from
misleading acts and fraud and then show the green light for the participant that it is an optional
alternative to insurance. This demand is not without good reason, it is aimed at removing obstacles
that can hinder the proper operation of Takaful insurance under other laws. For example, Vehicle
insurance against third party risk proclamation No.799/2013 prohibited everyone from driving the

89
Licensing and supervision of Insurance Business a directive on the investment of insurance fund, directive No.
SIB/25/2004.
90
Even according to the new circular issued by the NBE in November 2020, the insurer needs to invest at least 40%
of the insurance fund on the treasure bill to support the monetary policy.
vehicle without entering into valid vehicle insurance against third party risk.91 The nature of the
obligation under this proclamation is ‘obligation to do’ on the person who owns the vehicle or
sanction in case of failure.92 The question that can be raised here is; how the participant in Takaful
insurance is excluded from the valid insurance mentioned above? In this case, the proclamation
answers the question by defining insurance company as a company registered to undertake general
insurance only.93 Thus, forwarding Takaful insurance as an option to insurance by revising this
proclamation will be a solution to such a problem by respecting the legislation on compulsory
insurance as well as fulfilling the teaching of the religion. For instance, Christian Health-sharing
arrangements are a grouping of people organized to help each other in paying major health care
costs from the contributions made by members voluntarily. Hence, the US health care bill exempts
members of this group from buying compulsory insurance bills.94 Likewise, this proclamation
should have to include such provision or gives an alternative option between insurance and Takaful
insurance in case of compulsory insurance by requiring the owner of the vehicle either to enter
into insurance or Takaful insurance. The reason is that NBE has no power to issue a contrasting
directive to such a law because of the principle of hierarchy law.

Finally, the requirement of the proclamation for compliance of Takaful insurance to all other
insurance legislation and regulation without providing exception in case it goes beyond the Islamic
financial principle is another flow.95 There is no problem with this provision in case the two legal
frameworks are complementary. However, the problem is in case of contradiction between the
two. According to articles 60(1&2) of the amended insurance business proclamation, the insurance
business legal framework prevails in case of contradiction with Takaful insurance.96 This put the
permission to establish Takaful insurance questionable for the area of contradiction between the
two is when the insurance legal framework goes against sharia principles.

4.2. The National Bank Directive

91
Federal democratic republic of Ethiopia, vehicle insurance against third party risk proclamation, No. 799/2013,
Federal Negarit Gazetta, year 19th, No.53, article 3(1).
92
The same proclamation provides sanction for the violation of its provision to be a fine of 3000(three thousand
birr) to 5000(five thousand birr) or up to one-year imprisonment. Id. Article 30.
93
Id. Article 2(2).
94
See NBE Directives No. SBB/1/2020, supra note 15.
95
See amended insurance business proclamation, supra note 95.
96
Id.
In Ethiopia, NBE is the regulator of the financial institutions through licensing and supervision.97
Up on the authorization of the amended proclamation, NBE issued directive No. STB/1/2020
provides for additional criteria for licensing and authorizing Takaful insurance.98 Based on the
preamble of this directive, ensuring the safety and soundness of the insurance sector; regulation of
Takaful by setting minimum requirements, and protection of participant’s interests are the general
objectives.99 The former two objectives are not an exception from the objectives of regulating
financial institutions in which the insurance business is a subset.100 Whereas, the latter resemble
to Takaful insurance as the term participant is only employed on Islamic insurance.

It is understandable from the title of the directive that, both full-fledged Takaful insurance and
Takaful insurance window inside the licensed conventional insurance is permitted to undertake by
obtaining license and authorization from the NBE, respectively. Apart from licensing and
authorization requirements from the NBE, the directive lists several special conditions for
licensing and operation of Takaful operator or window.101 The first and basic requirement is the
establishment of an advisory council consisting of three members on Sharia issues on the operation
of Takaful called sharia advisory council.102 Regarding the qualification of the member of the
council, one member needs to be a sharia scholar as indicated in the nomenclature of the council
to advise on the sharia principle. And the other two are required to be insurance and financial
expertise.103

The other special conditions required from Takaful insurance or window to license and operations
are: - submission of detailed policies and procedures on the sharia oversight, adoption of an
operating model104, maintenance of relevant documentation on contract governing the relationship
between participant and takaful operator/window and the relationship between the participant
themselves, policies on fund segregation, investment, recognition of surplus, a deficit of fund,

97
Federal democratic republic of Ethiopia, Amended National Bank of Ethiopia Establishment Proclamation No.
591/2008, federal negarit gazetta, 14th year No. 50, article 5(7).
98
See licensing and authorization of takaful insurance No. STB/1/2020. Supra note 13.
99
Id.
100
Id.
101
Id. Article 4.
102
Id. Article 4.2.
103
Id. Article 4.4.
104
Operating model is defined under the definitional part of the directive as a model that identifies the relationship
and fiduciary duties takaful operator/window towards participant.
commission for takaful operator/window, separation of shareholders asset from the fund of the
participant as well as separation of family takaful account from general takaful.105

Unlike the feature of conventional insurance whereby the policyholders have no right to the
premium paid, the participant of the takaful operator/window has the right to the funds as a whole
and the surplus after the payment of a claim in case of materialization risk. Thus, the NBE directive
requires effective and efficient management of funds to cover loss against the participant and
develop a policy on the distribution of surplus as well as profit obtained from the participant’s
investment fund.106

According to this directive, most of the mandates related to the Takaful operator and window to
regulate themselves by submitting the policies on their regulation to the NBE.107 This is aimed at
giving more freedom for them by requiring only minimum standards. Moreover, the whole
directive lacks detailed regulation with only general terms on the special requirement for
establishment and operation. The regulator takes into account the nature of Islamic insurance
which should be in line with the principles of sharia to be acceptable in the eyes of the public by
imposing mandatory conditions on Takaful operators and takaful window operators. However,
more regulation is expected from the regulatory authority for protecting the interest of the
participant and ensuring the product’s compliance with sharia principles and building public
confidence on the business.

Besides the pitfall we discussed above, the proclamation authorizes the NBE to issue directive for
additional conditions to be fulfilled. Accordingly, the NBE issued directive require sharia advisory
council consisting of three members in addition to the board as an indication of Takaful operations
in line with sharia principles.108 Despite requiring the establishment of sharia advisory council, the
establishment doesn’t guarantee for meeting its purpose genuinely rather than a mere formality.
The directive’s failure in providing proper composition, qualification and mandate of the council
in addition to its being silent on the time of establishing the council. A question may be raised as
to why it needs to specify the time of its establishment. The answer is for its importance compliance
of Takaful operator and window on every act and step to the principles. The pre-incorporation of

105
See NBE directive No. STB/1/2020, supra notes 110, art. 4.
106
Id. Article 5.
107
Id.
108
Id.
Takaful insurance also needs to be conducted in line with the sharia principles. The other thing
requiring the documents that need to be deposited by the Takaful operator or windows like a
contract that governs the relationship between participants and the Takaful operator and window,
a contract between participants, segregation of funds, investments policy, a commission of the
operator or window, and auditing requirement and risk management, a deficit of participant’s risk
funds have to comply to sharia principles. Therefore, the establishment of a sharia advisory council
should be at a very initial stage of pre-incorporation to ensure compliance in every activity. Yet,
the problem goes deep in the following:

a) Composition: - is the about the member of individuals consists in the council having sharia
knowledge. The name of the council and members included are not complimentary. The
reason is that its name is indicated as sharia advisory council, but the sharia scholar is a
minority in the establishment.109 The difficulty is that, in case they are asked for advice or
approval by the board as the decision needs to be supported by the majority, however, the
sharia scholar is a minority (only one person) as per the directive. According to the
experience of Nigeria’s National Insurance commission guidelines for Islamic insurance,
the sharia advisory board must consist of at least three members whereby two of them are
required to be qualified and experienced in Islamic law. Furthermore, the sharia scholar
needs to be majority according to the Islamic insurance guideline issued by the Nigerian
insurance commission.110 To meet the desired objective, entitling sharia scholar members
of the council to have veto power on the other two members in cases the decision needs
sharia approval. This is enough to solve the problem and for a suitable response to
customers’ demand for Islamic insurance products. The requirements of the council’s
members to be three in the directive are important even from the experience of the other
jurisdictions for decision making by the majority on two to one(2:1).111 Added to this, the
inclusion of interdisciplinary financial experts in the council is important to enable them to
giving solid and concrete decisions.112 However, making the sharia scholar minority

109
Id. Article 4(3).
110
Federal Republic of Nigeria, national insurance commission, operational guidelines of takaful insurance, section
3(6), 2013.
111
Negara bank of Malaysia, Central Bank of Malaysia, policy on the sharia governance BNM/RH/PD 028-100,
2019, section 13.1.
112
Hasen, Zulkifli (2010). Supra note 46.
 without granting veto power and giving mere advice may undermine its main objective
which in turn decreases the public confidence in the product. Therefore, the establishment
of the sharia advisory council seems symbolic without practical significance as the
directive neither requires the sharia scholar to be the majority nor veto power is given to
overrule the decision of the two non-sharia scholars on sharia issues.
b) Qualification: - the NBE directive No. SIB/32/2015 provides requirements of persons with
significant influences on insurer stipulated detailed qualification that is required for the
appointments of director, chief executive officer and senior executive officer which
includes character and building knowledge, experience, and age as to fulfill the objectives
stated under its preamble among others - ensuring public confidence and enhancing
effective governance in insurance.113 The same detailed criteria for the appointment of the
members of the sharia advisory council are required for the same objectives mentioned
above. Nevertheless, the Takaful licensing and authorization directive No. STB/1/2020
doesn’t provide the qualification, competency, ineligibility, and ethics of the proposed
membership sharia council. Sharia advisory council needs to be competent, and
independent to approve Islamic insurance products with sharia principles.114 The directive
stated only one of the members to be a scholar in sharia principles which is more general
without reference to the specific specialization in Fiqh al Mu’amalat (Islamic commercial
jurisprudence) which is more preferable for ensuring sharia compliance of its operation.115
One can question the existence of such scholars in our country, however, due to the role
they are called upon, it is mandatory to fulfill such qualifications at least through training
by the institution themselves before and after they are selected for the role as well as regular
training by the NBE on Fiqh-ul Mu’amalat as the supervisory authority. Furthermore, there

113
Licensing and supervision of insurance business directives on requirements for persons with significant influence
in an insurer directive No. SIB/32/2012, article 5.
114
Hussain G. Rammal, the importance of shari’ah supervisory in Islamic financial institutions, Corporate
Ownership and Control/ Volume 3, Issue 3, 2006. P. 205. See also World Bank paper deals with CG arrangements
that address issues of Shariah compliance. Grais and Pellegrini (2006a) provides an overview of the issues and
challenges of CG for IIFS. Grais and Pellegrini (2006b) deals with IIFS’ CG that address stakeholders’ financial
interests.
115
See Islamic insurance guidelines of national insurance commission of Nigeria, supra note 134. See also Nawal
Hussein Abbas El Hussein, The Sharia Supervisory Board: Does it Influence Corporate Social Responsibility
Disclosure by Islamic Banks? A Review, Journal of Islamic Studies and Culture, Published by American Research
Institute for Policy Development, USA, Vol. 6, No. 1, 2018 p. 124.See also AAOIFI (Governance Standard 1) which
recommends to include jurists of Fiqh Al-Muamalat in the sharia advisory board/council.
 is no way to ascertain the credibility of the qualification of the proposed sharia scholar as
the provision is silent about the way how the knowledge is obtained and the credibility of
the organization where the knowledge is gathered for the successful operation of Takaful
insurance in line with sharia principles.116
Besides, NBE directive No. SIB/42/2015 require the election of a Nomination committee from
shareholders at their general meeting who are independent of the insurer.117 The mandate of the
committee is for specifying/nominating candidates for the board members which is aimed at
ensuring sound and prudent corporate governance in the insurance company.118 It is equally
important for the nomination of a member of the council for the same purpose. Unfortunately,
nothing is said even whether the said sharia knowledge needs to be proved and how can it be
proved in the directive. For instance, the aforementioned Islamic insurance guidelines of Nigeria
which are issued by the insurance regulatory authority in the country; require the proposed
members of the sharia advisory council needs to provide curriculum vitae, and the takaful
operators/window is also required to have formal assessment mechanism for ensuring appropriate
knowledge and experience of the proposed members. Moreover, it requires the approval of the
insurance commission (supervisory authority) at the final stages. And the commission can approve
or otherwise the proposed members of the sharia advisory council.119 Likewise, it is sounder to
impose provision of the certificate as evidence of having the said knowledge, formal assessment
of their competency of having experience and training, and approval of the proposed appointment
of the members of the sharia advisory council by the National Bank of Ethiopia (NBE) to ensure
operational independence of the council.120

c) Power and responsibilities: - the aforementioned two NBE directives No. SIB/ 32/2012
and directive No. SIB/42/2015, clearly identified the power and responsibility of the
persons with significant influence in an insurer such as the director, chief executive officer,
senior officer, and nomination committee, respectively. In Malaysia, the Islamic financial
service act of 2013 authorizes Negara Bank which is the central bank as well as the
regulatory body of the financial institution to issue duties and mandates of the sharia

116
Grais and Pellegrini, supra note, 95.
117
Licensing and supervision of insurance business, insurance corporate directive No. SIB/42/2015,
118
Id.
119
See Islamic insurance guidelines of national insurance commission of Nigeria, supra note 134, section 3.9.
120
Gafoor, A.L.M. Interest-Free Commercial Banking. Malaysia: A.S. Noordeen. 1996.
 board.121 Likewise, the Negara bank of Malaysia issued the sharia governance policy with
detailed responsibility and power for the sharia board.122 Coming to the NBE directive,
some provisions look like the responsibility of the sharia advisory council without any
indication of the provision that deals with another matter including- endorsement of
operating mode, advising the board on distribution and management of surplus, and
approval of direct payment.123 Establishing the council without stating its power and duty
makes its establishment a mere formality without tangible roles in Takaful insurance
operator or window.124 In case of the nature of the council’s ruling, Malaysia Islamic
financial service act No. 759/2013 stated that:- compliance with any rulings of the sharia
advisory council by Islamic financial institution is a duty for its deemed compliance with
sharia principles.125 Identifying the nature of their decision as binding is basic for the
protection of the interest of the participant and its credibility in eyes of the public, the
participants, and other stakeholders. Added to this, it assures them that, they apply for the
correct product whereby their activities are supervised by the authority according to sharia.
The status of the council’s ruling and the decision should be the core criteria that indicate
the activities as complementary to Islamic principles.126 Reducing the ruling to mere advice
negatively affects the credibility and reliability of the institution in the eyes of the
participant and it also practically puts the decision of the board superior to the council even
on the issues that need sharia rulings.127
The responsibility of the sharia board/councils includes, but is not limited to the following:
Reviewing the guidelines and policies of Takaful operators or window in the eyes of sharia
principles and approving or rejecting the same; following the day-to-day activities and reporting
the compliance or otherwise of the activity to the board; providing remedies in case of non-
compliance; disclosure of accurate information for the participant on activities and product of
Takaful operator or window’s sharia compliance; reporting to the supervisory authority on

121
Law of Malaysia, Islamic financial act N. 759/2013, article 32.
122
See policy on the sharia governance of Negara bank of Malaysia BNM/RH/PD 028-100, 2019, section 10.
123
See a directive to license and authorize takaful insurance No. STB/1/2020, article 4.8. and 5.3.1.
124
Warde, I. (1998). The Role of Shari’ah Boards: A Survey. San Francisco: IBPC Working Papers.
125
See Islamic financial service act of Malaysia No.759/2013 supra notes 128, article 28.
126
Grais and Pellegrini, supra note, 95.
127
See Warde,(1998), supra note 99.
compliance in regular bases and approving the business to be undertaken by the Takaful operator
or window.128

d) Conflict of interest: - According to Malaysia’s experience, let alone the proposed member
of the sharia advisory council himself, his immediate family should not be a member of the
executive, substantial shareholder, senior officer, or its affiliate and other contractual
relationship with the financial institution to qualify as a candidate. Contrary to this, our
NBE directive is silent on the neutrality of the proposed member of the council. This will
lead to a conflict of interest especially if the member of the council is a member of the
management or a significant shareholder of the operator/window. The requirement of
Ineligibility to be a member of the council is crucial to avoid conflict of interest and ensure
its independence.129 Conflict of interest can be avoided by restricting members of the
Takaful operator/window from being members of the management such as director,
management staff, or senior officers, or having a relationship with one of them that can
reasonably be perceived to interfere in the independent judgments of the council, being a
shareholder, membership to sharia council or equivalent in another similar establishment,
and holding beneficial interest or investment with Takaful operator/window to be a member
of sharia advisory council at the same time.130 The other thing worthy discussion regarding
conflict of interest is members’ eligibility to be elected in another Takaful
operator/windows and/or financial institution which is prohibited in other jurisdictions.131
Furthermore, the ethical code of conduct of a member of the council is also not provided.
Ethical code is an important part in the sight of Sharia and to avoid controversy on whether
a criminal, accused, fraudulent, bankrupt, unethical, partier, or dishonest individual can be

128
The sharia advisory council will derive consensus on its recommendations and conclusions using the appropriate,
standard, and accepted methodology including interpretation or analogy from the Qur’an (Holy Book of Islam) and
Sunnah(Custom of the Prophet Muhammad). See Grais and Pellegrini identified five main roles of the Sharia
board/council as “certifying permissible financial instruments through fatwas (ex-ante Shariah audit), verifying that
transactions comply with issued fatwas (ex-post Shariah audit), calculating and paying Zakat, disposing of non-
Shariah compliant earnings, and advising on the distribution of income or expenses among shareholders and
investment account holders”.
129
Id. members’ dual relationship with the institution as providers of remunerated services and as assessors of the
nature of operations could be seen as creating a possible conflict of interest.
130
Moini, Y., (2015). IBD, Circular No. 01; Shari’ah Governance Framework for Islamic Banking Institutions (IBIs)
of SBP. Retrieved from http://sbp.org.pk//2015/C1.htm (accessed February 1st 2020)
131
See guidelines of Islamic insurance in Nigeria, supra note 134, section 3.17.
 appointed to the council or not. In the same fashion, no requirement for diligence, and
good faith in performing their duty in line with sharia principles in the directive.
e) Liability and term of office: - Providing the office term of a member of the council with
the possibility of limiting re-election to encourage expansion of knowledge; a rewarding
member who works hard; also avoids permanency of members and adding new workforce
is crucial for its success. Additionally, it is short of providing liability provision in case of
breach of sharia principle, duties for the member of the sharia council, tenure, Takaful
window, and/or takaful operator.132
Apart from the limitation of the directive regarding the sharia advisory council, there is also
another gap that should be filled for protecting Islamic insurance under the sharia principle. These
are: - first, in investing in Takaful funds, one of the main criteria is investing the sharia-compliant
businesses. The reason is that not all type of business is permissible in Islam. However, the
directive neither limits the type of investments undertaken by takaful insurance operators/windows
nor requires the investment to be in line with the underlying Islamic investment whereby both
profit and loss are shared.133

Second, as the main party for whom Islamic insurance is established, the participants are not given
the right to question the queries of sharia compliance in the operation for themselves. Likewise,
the relationship of the sharia advisory council with the participant and the council’s answerability
to the participant is absent. Moreover, no requirement for transparency which is the main element
of the Islamic insurance on all activities of Takaful provided.134 In the case of duties for the council,
the lesson from the two national jurisdictions discussed above, the sharia advisory council is duty-
bound to report sharia in compliance to the participant and the regulatory body if the Takaful
operator/window failed to follow their advice adequately.135 Therefore, the Ethiopian Islamic
insurance legal framework fails in providing a guarantee for the Muslim community in requiring
Islamic insurance operators and window strict compliance with sharia standards.

132
Usmani, M.T. (2001). The Historic Judgement On Interest: Delivered in The Supreme Court Of Pakistan. Karachi,
Pakistan: Idaratul Ma’arif.
133
Dar HA. Lack of Profit Loss Sharing in Islamic Banking, Management and Control Imbalances International,
Journal of Islamic Financial Services Vol. 2 No.2.
134
Banaga, A., Ray, G.H. and Tomkins, C.R. External Audit and Corporate Governance In Islamic Banks.
Aldershot: Avebury. 1994.
135
See sharia governance policy of Islamic financial institution, Negara bank of Malaysia BNM/RH/PD 028-100,
2019, section 10. And also see Islamic insurance guideline, insurance commission of Nigeria, 2013, section 3.31.
5. The need for Revision
The inclusion of the permission to establish Islamic insurance in the amended insurance business
proclamation is important development for recognition of religious equality and accommodation
of religious diversity in our country in addition to the interest-free banking service by the Banking
Proclamation 592/2008. Moreover, non-Muslims can also be members/participants. Non-Muslims
are also interested in Islamic insurance as it is characterized by solidarity and fairness. This
increases the culture of tolerance among different religious groups of the country; social justice;
economic prosperity of the whole community; and reduces the concentration of wealth in few
peoples.136

However, to serve the true intention of the Muslim community and meet the goal of its
establishment, the amended insurance business proclamation No.1163/2019, Vehicle insurance
against third party proclamation No. 799/2013 as well as takaful licensing and authorization
directive of NBE needs to be revised to include the following to fulfill genuine sharia compliance
and protection of the public from fraud in the name of Islamic insurance. Firstly, it needs to clearly
define Islamic insurance with clear objectives. The definition needs to be comprehensive enough
to include sharia compliance as the main criteria for the establishment of an Islamic insurance
operator/window. Secondly, the Islamic insurance so established should be specified as an
alternative/option, especially in the case of compulsory insurance like vehicle insurance against a
third party which imposes an obligation to enter into insurance coverage on every owner of the
vehicle.

Thirdly, detailed and broad regulation on the sharia advisory council needs to be included. To put
it in a more precise way, the detailed regulation should deal with the composition; qualification;
character and ethical conduct; conflict of interest; exhaustive power and responsibilities; and
liability provision of the personnel who is a member of the council. The provision should also
regulate the mandate of the board of takaful insurance operators/window and duty towards
implementation of the advice of the council. Moreover, the requirement of every decision of the
board to be approved sharia advisory council should be included; in transparency and disclosure
for the protection of stakeholders. Finally, the regulation of the relationship between participants

136
Michael Ainley, Ali Mashayekhi, Robert Hicks, Arshadur Rahman, Ali Ravalia, Islamic Finance in the UK:
Regulation and Challenges, Financial Services Authority, November 2007, p. 7.
and the sharia advisory council should be added. The council’s transparency with the participant
regarding the activities of the operator/window compliance with Islamic finance and the council’s
answerability to the participant’s questions and doubts would also help the development of Islamic
insurance by increasing the reliability among stakeholders.

6. Conclusion
Insurance is an important institution that reimburses the policyholder commonly known as the
insured in cases of materialization of losses to life/body or property according to the underlying
policy entered into between the insurer and the insured. This article has demonstrated how the non-
compliance of conventional insurance with Sharia Law Principles prompted Islamic insurance as
a viable substitute for Muslim communities in the form of solidarity in case of risk/loss. Yet, while
Islamic Scholars have advocated for widespread use of Islamic insurance, its e is a recent
phenomenon in Ethiopia that was introduced under the amended insurance business proclamation.
Further, the NBE Directive is issued to provide additional conditions regarding the formation and
operation of Takaful insurance operator and/or window in the existing conventional insurance.
However, it is not comprehensive enough to regulate let alone several important aspects of Islamic
insurance; at least its strict compliance to sharia principles to meet the goal of its establishment.

Specifically, both the proclamation and the authorization of the directive of the National Bank
failed to clearly define Islamic insurance and the objective of its establishment. Moreover, even
though it requires the establishment of a sharia advisory council for the compliance of the
undertaking to the sharia principles, it does not provide their duties. Added to this, the directive is
silent on most of the basic things that should be fulfilled to serve the purpose of its establishment
and increase the confidence of the people to participate in Islamic insurance for solidarity and
mutual assistance; monitor and supervise the Islamic insurance from fraud and invest the surplus
in compliance with the norms and teachings of Sharia.

This article suggests that Ethiopia needs to revise the Takaful regulation to include a clear
definition and objective by ensuring compliance with Takaful insurance. These among other things
include broad regulation regarding the established sharia advisory with clear power, responsibility,
liability on the member, and accountability on the Takaful operator/window’s board and
management to make the Islamic insurance effective and efficient in serving the participant in line
with sharia ruling and development of Islamic insurance undertaking.