The Non- Financial Factors Influencing The Performance of

8/10/2019 The Non- Financial Factors Influencing The Performance of

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European Journal of Business and Management www.iiste.org

ISSN 2222-1905 !aper" ISSN 2222-2#$9 %nline"

&ol.5' No.1$' 201$

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The Non- Financial Factors Influencing The Performance of

Islamic Insurance In Kenya: A Case Study of Takaful Insurance

of Africa

N(BI) S*)EIM(N (+ME,

,epartment of Business (dministration' Jomo enatta *ni/ersit of (griulture and enolog !. %. Bo3

#1$10-#0100 Mom4asa- EN(.

el6 0712$157$78 071 200707 Email6 :;uatmom4asa 4eing studied was6 legal and regulator framewor;' unetial praties wile te dependent /aria4le

4eing studied was performane of Islami insurane.

e first o4:eti/e of te stud was te legal and regulator framewor; and out of te seondar findings it was

found out tat te saria 4oards were onsidered to a/e a strong autorit on te performane of Islami

insurane and also it defines te e3tents and limits of its operations.

e seond o4:eti/e of te stud was' unetial pratie as sown tat due to te fle3i4ilit of te insurane

mar;et on allowing intermediaries to plas mat ma;ers some of te agents and 4ro;ers a/e used tese

a/enues to e3ploit ustomers ene affeting te performane of te insurane ompan>s.

Key!ords: Islami insurane' Non-finanial performane' a;aful

"# IntroductionIslami insurane also famousl ;nown as a;aful is one of te fastest growing setor in te finanial mar;et in

te world ' wi is largel dri/en 4 te need of a/ing saria ompliant produts in te mar;et tat are free

from interest ?i4a"' gam4ling Masir" and unertaint @arar".e first modern da e3periment wit

Islami insurane started in Sudan' in 19A9 4 te faisal Islami 4an;. (nwar' 200#" were 4 te 4an; saria

super/isor 4oard appro/ed te endea/or and in Januar 19A9 te Islami insurane ompan was esta4lised as a

pu4li ompan under te ompanies at 1925' ene due to te imperati/e onept ta;aful grew reognition and

spread all o/er te world.

(ording to (:mal' 2010"'In 200# te were 1A9 ta;aful ompanies and in 2010 te num4er of ta;aful grew to

200 and te main spread of Islami finane and ta;aful as 4een in te Middle East and part of (sia' (fria and

Europe. In addition' ta;aful grew at a ompound annual growt rate of $9 o/er 2005 and 200# in terms of

glo4al premiums wi was estimated tat te glo4al premiums stood at 5.$ 4illion in 200# and #.9 4illion in

2010' ene pro/ing enoug tat te demand of an alternati/e mode of insurane is igl demanded in temar;et(:mal '2010".

+owe/er' te e3istene of ta;aful is still in its tender stages of de/elopment ene for te industr to see more

growt and to tri/e it sould address te issues of apitali=ation' ompetition from on/entional insurane'

de/elopment of uman resoure' re-ta;aful re-insurane" and a/ing saria ompliant a/enues for in/estment

funds (u4' 200A". So as to 4e a4le to ontinue its e3pansion strategies witout faing serious rises and

tere4 aCuiring greeter mar;et sare.

e enan insurane mar;et is among te largest and most de/eloped in (fria aording to te assoiation on

ena insurane 2011"' te ena penetration mar;et in 2011 was $.02 perent as ompared to last ear were

it reorded a penetration of 2.A perent ' ene ma;ing ena an appealing mar;et for insurane ompanies to

in/est in . e insurane mar;et in ena is regulated 4 te 4 te I?(" Insurane regulator autorit wi

is a statutor go/ernment agen esta4lised under te insurane at ap 7#A te main duties of te regulator

autorit is to regulate ' super/ise and de/elop te insurane industr in ena.


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In addition ' at te end of 2011 tere were 75 operating insurane ompanies in ena ' were 22 ompanies

wrote of non Dlife insurane 4usiness onl ' 9 wrote life insurane 4usiness onl wile 17 were omposite were

4 te wrote 4ot life and non-life 4usiness (ssoiation of ena insurane' 2011" .

e Islami insurane in ena as reported tremendous growt and appetite for its saria omplaints produts

despite 4eing in operation for :ust a sort wile in te mar;et. e Islami insurane does not appeal not :ust tote Muslim population 4ut also to te non-Muslim wo appreiates saria-ompliant produts tat are an

alternati/e to on/entional insurane.

a;aful insurane of (fria ltd also ;nown as I( is te first saria- ompliant insurane ompan in east and

entral (fria' te ompan was founded in 200# and was formall liensed in 2011 and urrentl it as 7

4ranes all o/er ena spreading from Nairo4i till Mom4asa te rationale 4eind te foundation of a;aful is

to pro/ide ris; management and finanial seurit 4ased on etial priniples and /alues a;aful (fria' 2011".

$# %iterature e&ie!

(ording to Islami inanial Ser/ies Board and International (ssoiation of Insurane Super/isors 200"'

te origin of a;aful an 4e traed to se/eral praties from anient (ra4 tri4al ustom and te ompanions of

te !ropet' for instanes under te ustom of (l-(Cila' 4lood mone" Fere4 it was mutuall agreed among

te tri4es tat if a person is ;illed unintentionall 4 a person of a different tri4e' te auser>s paternal tri4e will

ta;e te responsi4ilit to ma;e a mutual ontri4ution for te purpose of paing te 4lood mone to te /itim>srelati/es. +ene tis sstem was a4le to reate a pool of funds were 4 it would 4e anneled to te oppressed

/itim to 4e indemnified.

+ene pratiall ta;aful onept is 4ased on te idea of mutual o-operation' responsi4ilit' assurane'

protetion and assistane 4etween groups of partiipants.

Below is a s;et ela4orating te onept of a;aful

igure .16 Gonept of a;aful

Soure6 Mod' 2011"

$#" %egal and egulatory Frame!ork

@o/ernments all o/er te world a/e alwas felt te urge and te need to gi/e 4road guideline for te

de/elopment of insurane industr 4eause insurane in/ol/es ta;ing mone from mem4ers of te general pu4li

were 4 in return for a promise of pament on te ourrenes of some inident or some future e/ent ene if

te was no meanism in plae to e; tis ;ind of sstem ten unetial and unprinipled person migt 4e

tempted to ollet premiums and di/ert tem witout 4otering to onor teir promises wi te first adene leading to te pu4li to lose fait (lie and )u' 200"


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o address tis situation te go/ernment of ena enated te insurane (t ap 7#A were 4 all te insurane

ompanies a/e to adere to te legal regulation 4eing plaed 4 it te reason for te state regulation of te

insurane industr is to maintain sol/en' eCuit' ompetene and man more.

Islami insurane in ena are not a separate entit at all 4ut instead te are still defined 4 te insurane at

ap 7#A 4ut te are also regulated 4 te saria ad/isor ounil ;now as S(G. In addition all Islamiinstitution tat offer saria produts and ser/ie to te pu4li must 4e regulated and go/erned 4 a religious

4oard tat ats as an independent 4oard omprising of solars wit speiali=ed ;nowledge of Islami

transation and man more.

(ording to te institute of Islami 4an;ing and insurane'2012" e role of te saria super/isor 4oard is to

re/iew te ta;aful operation' super/isor its de/elopment of Islami insurane produts and determine te saria

ompliane of tese and in/estments mostl te saria super/isor arr teir own independent audit and ertif

tat noting relating to an of te operations in/ol/es an element tat is proi4ited 4 te saria ene in a wa

limiting te full potential of te performane of te ompan for instane 4ased on te saria regulation Islami

insurane are not allowed to insure an organi=ation tat sells alool or to4ao as teir ore main 4usiness.

(noter aspet of te legal and regulator framewor; limiting te performane of Islami insurane in ena is

te issue of insurane premium finane' were4 tis is a failit gi/en eiter 4 a 4an; or an insurane

ompan were 4 lients an 4e a4le to afford te insurane premiums 4 paing in installments o/er a periodof a ear were 4 tese installments as a sligt margin of interest wi is inurred ene 4ased on te

fundaments of ta;aful an issue relating of interest is proi4ited ene limiting its performane.

e ommerial insurane and ompan law in ena and most of te ountries are mostl fasioned and a

ostumed on te western pattern of doing 4usiness ene tese laws ontain pro/isions tat limit te sope of

Islami insurane terefore reating a neessit for speial laws to 4e introdued to aid tis sort oming so as to

ena4le te Islami insurane to ompete side 4 side wit on/entional insurane

or instane' aording to te enan insurane (t Gap 7#A setion 1111"' its state tat

He older of a poli of life assurane on is own life ma' wen effeting te poli or at an time 4efore te

poli matures for pament' nominate te person or persons to wom te mone seured 4 te poli sall 4e

paid in te e/ent of is deat6 !ro/ided tat' were te nominee is a minor' te poliolder ma appoint' in te

manner presri4ed' an person to reei/e te mone seured 4 te poli in te e/ent of is deat during te

minorit of te nominee

+ene' Islami insurane proi4its te appointment of te nominee 4ut instead te 4enefit sould 4e distri4uted

4ased on te onept of Islami ineritane ;nown as faraidIslami ineritane"were 4 ea mem4er of te

famil is alloated a speified portion wi is gi/en upon deat were as opposed to gi/ing te full amount to

one nominee (=aman' 2009"

$#$ 'nethical Practices Affecting Com(any Performance#

Intermediaries plas a /ital role in te insurane industr in ena 4eause most of te insurane transations

are mostl done troug te intermediaries wo are usuall te agents and 4ro;er wo 4id te 4uer and te

insurer togeter to form a mutual ontrat

In ommerial insurane mar;et te intermediar plas te role of te mar;et mar;er or mat ma;er were4

te elp 4uers to identif teir o/erage and ris; management needs and 4 mating 4uers wit appropriate

insurane Gummins and ,oert 2005"' in addition te intermediaries assist in sanning te mar;et' negotiating

and anal=ing wi insurane ompan as te finanial strengt to underwrite te ris; and elp teir lientselet from ompeting offers.

+ene no one an den te /ital ontri4ution of te intermediaries in te insurane industr in te part te pla

on pro/iding wide range of ser/ies to te lient on te 4ealf of te insurer ene from te wide range of

ser/ie 4eing offered 4 te intermediaries usuall te remunerate temsel/es from a sstem ;now ommission

4ased pa were4 for instane if a lient purase a motor insurane o/er and pa premiums usuall a portion

of it lets sa 10 of te premiums goes to te 4ro;er and te rest goes to te insurane ompan.

+ene' wit te premium-4ased ommission intermediaries a/e de/eloped some unetial praties in te

mar;et so as to 4e a4le to gain more ommission from te insurer ene undermining te performane of

insurane ompan in ena' aording to +enri' ranois Geon 200"' some ritis 4elie/e tat su was

of rewarding insurane agents and 4ro;ers is one of te underling ause of unetial 4ea/iors 4eause it leads

to rise of onflits 4etween agents and lients interest.

e ommission 4ased selling sstem would generate a 4iases to o/er-sell produts tat e/en te lients are notinterested at all sine te mode of remuneration puses a ustomer to in/est irrespeti/e of te 4est oie of te


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lient. In addition some of te unetial praties most ommonl pratied in te mar;et aording to (lie

and )u 200" are as follows-

wisting- tis is te at of ad/ising te poliolder to anel teir insurane poli and ange insurers and

intermediaries wit te moti/e and aim of ma;ing additional sales were 4 tis migt affet te ompan

performane and also it losses te ustomer disount were te poli applia4le to an annual 4ases.Gurning- tis is te at were 4 te intermediaries enourage poliolders to inrease applia4le poli limits

or ange o/ers wit te aim of a/ing inreased ommission wi is unetial

,upliation of o/er D tis is te at were4 te intermediaries ma ad/ie te lient to ta;e poliies wi

o/er needs tat are alread atered for 4 similar e3isting poliies wit te sole aim of inreasing ommission.

Non-remittane of premiums Dtis is te at were4 te intermediaries ollet premiums on 4ealf of an insurer

and te sould pass to te insurer in due time witout dela 4ut mostl ou will find out tat te intermediar

migt sta wit te premium wit it in su a long time ene limiting te ompan performanes.

)#*ethodology And +ata +escri(tion

e results of tis stud are learl e3plained in tis setion. Mirosoft e3el software as 4een used to o4tain

te test results. e software as 4een osen 4eause it>s one of te most on/enient and effiient data

management program wi as te following 4enefits to te researers as 4eing user friendl' effiient datamanagement and also good at reporting and deploment of data into information.

In addition te researers distri4uted 75 Cuestioners to its respondents 4 email and ard op and out of te 75

Cuestioners issued to its respondents to 4e filled out $1 were returned full filled out and 17 were not returned at

all

)#" ,ffects f %egal And egulatory Frame!ork#

e ta4le 4elow sows te effets of legal and regulator framewor; on ompan performane.

Ta.le ": ,ffects of legal and regulatory frame!ork

,ffects of legal and

regulatory frame!ork

Fre/uency Percentage 0

It redues fle3i4ilit 12 $9It promotes sol/en 7 1$

It limits ompetition 10 $2

It promotes eCuit 5 1

e respondent were as;ed to omment on te effets of legal and regulator framewor; on ompan

performane and te result indiated tat $9 perent of te respondent ommented tat legal and regulator

framewor; limits te fle3i4ilit of ompan performane' followed 4 $2 perent felt tat te legal and

regulator framewor; limits ompetition te ompan performane. In addition' 1 perent of te respondent

ommented tat te effet of legal and regulator framewor; is tat it promotes eCuit and similarl 1$ perent

ommented tat it promotes sol/en.

+ene' te result implies tat te legal and regulator framewor; does to a large e3tent affet te Islamiinsurane ompan 4eause it limits te fle3i4ilit and ompetition of te ompan ene ma;ing it ard for

tem to ompete in te mar;et.

)#$ ,1tent of legal and regulatory frame!ork

e figure 4elow sows to wat e3tent te legal and regulator framewor; influenes te performane of Islami

insurane in ena.


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Figure $: ,1tent of legal and regulatory frame!ork

e respondents were as;ed to omment on te e3tent te legal and regulator framewor; affets te

performane of Islami insurane ompan>s and ma:orit of te respondent 5 perent" said tat to a large

e3tent ' followed 4 19 perent wo were neutral and last 4ut not least 1 perent wo said te e3tent of it is

minimal.

e results impl tat to a large e3tent te legal and regulator framewor; strongl influene te performane of

Islami insurane in ena.

)#) ,ffects of 'nethical (ractices on com(any (erformance

e pie art 4elow sows te effets of unetial pratie on ompan performane

Figure ): ,ffects of unethical (ractices on com(any (erformance#

e respondent was as;ed to e3press teir opinion on te effets of unetial praties on ompan performane.

(nd Ma:orit of te respondent ommented tat 1A"' of te effets of unetial praties leads to delas in

pament of laims witin te organi=ation followed 4 2 wo ommented tat unetial praties destros

te ompan reputation followed 4 19 wo ommented tat it lowers te pu4li trust.

is implies tat unetial praties a/e a /er uge impat on te ompan performane and an negati/el

affets te ompan image' reputation and' laims settlement.)#2 +ifferent Ty(es f 'nethical Practices Affecting Com(any Performance#

e 4ar grap 4elow sows te unetial praties affeting ompan performane.

0

2

4

6

8

10

12

14

16

1820

Large extent Neutral Minimal extent

Frequency 20 6 5

Percentage % 65% 19% 16%

55%26%

19%

Effects of unethical practices on company

performance

Delays in ayment !" claims

Destr!ys t#e c!many reutati!n

L!$er t#e ulic trust


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Figure 2: +ifferent ty(es of unethical (ractices affecting com(any (erformance

e respondents were as;ed to omment on te different tpes of unetial praties tat affet te ompanperformane and 52 of te respondent ommented on non- remittane of premiums followed 4 1 on te

dupliation of o/er ' followed 4 2$ on twisting and last 4ut not least 10 on urning.

is implies tat non remittane of premium is a ma:or praties tat affeting ompan performane 4eause if

a ompan ollets inadeCuate premiums from te intermediaries it will mostl fae diffiult in paing its

laims on time.

2# Conclusion

is paper attempted to fill te wide gap in Islami insurane literature 4 e3amining te non-finanial fators

tat influene te performane of Islami insurane in ena. In tis stud' tree fators were osen and

anal=ed as to determine teir influene on te insurane performane6 4elow are te fators.

7.1 )egal and regulator framewor;

7.2 *netial praties

e results indiated tat all te a4o/e fators ad a 4ig influene on te Islami insurane performane in ena.

uture ' to pro/ide an in-dept finding is tat emploee ompeten was onsidered to a/e a strong influene onte performane of Islami insurane in ena ' followed 4 legal and regulator framewor; and last 4ut not least

unetial praties.

ese results' ommuniate a ruial indiator tat ommerial insurane in ena sould fous on all te fators

in order to grow and sta4ili=e te industr.

3 ecommendations

rom te onlusion of te stud' te following reommendation an 4e reasona4l forwarded for Islami

insurane in ena.

3#" %egal and regulatory frame!ork

e legal and regulator framewor; was found to influene te performane of Islami insurane to a large e3tent

4 influene te fle3i4ilit of its operations ' in/estment and man more ene to sol/e tis issue re/iews of te

e3isting laws and guidelines go/erning te insurane industr sould 4e re/iewed to allow growt of Islami

insurane industr :ust as te on/entional ounterpart.3#$ 'nethical (ractices

*netial praties was found to influene te performane of Islami insurane to a /er large e3tent 4

influening te proess of its laims ' ompan reputation and pu4li trust ene in a endea/or to operate etiall

' insurane pratitioners sould o4ser/e utmost good fait and dislose all material fats in respet of produts at

te time of negotiating for a o/er .

In addition intermediaries sould use onl te rigt metod in persuading lients to 4u teir produts and

ser/ies. e sould dislose all fa/ora4le and unfa/ora4le features of te produt at te earliest stage possi4le in

a 4id to ensure tat a lient ma;es an informed deision

3#) Areas for further research

is resear will ontri4ute to te e3isting literature regarding non-finanial fators influene on te

performane of Islami insurane in ena. +owe/er furter resear sould 4e done on te finanial fators tat

influene te performane of Islami insurane and also to gi/e an in-dept omparison wit te on/entional

insurane in ena.

0

5

10

15

20

&$isting '#urning Dulicati!n !"

c!(er

N!n)

remittance !"

remiums

Frequency

Percentage %


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eferencing

(nwar' +. 200#".Islamic Finance: A Guide for International Business and Investment. *nited ingdom6 @MB.

(:mal' B. 2010". The growing importance of takaful insurance. (sia regional retrie/ed on %to4er

10t

2012 from ttp688www.oed.org8insurane8insurane8711115.pdf

(u4' M 200A". *nderstanding Islami finane6 )ondon6 !u4liser File finane seriesa;aful (fria 2011". The takaful insurance of Africa. ?etrie/ed on No/em4er 20

t 2012 from

ttp688www.ta;afulafria.om.

(ssoiation of ena insurane. 2011"' Insurane industr annual report 2011 retri/ed on april 10t

201$ from

ttp688www.a;insure.om

Islami inanial Ser/ies Board and International (ssoiation of Insurane Super/isors. 200". Issues in

Regulation and Supervision of Takaful6 Islami Insurane retrie/ed %to4er 12t

2012 from

ttp688www.ifs4.org8dos8ta;afulK200.pdf

Mod' '2011" Fundamentals of Takaful6 IBIM' retrie/ed on 2nd

,eem4er 2012 from

ttp688www.islami4an;er.om8ta;aful-4rid-model

(lie' F. and )u' N. 200".Fundamental of insurance:Nairo4i6 !u4lised 4 ollege of insurane.

Institute of Islami 4an;ing and insurane' 2012". Saria super/isor 4oard6 S(B" retrie/ed 1#

No/em4er 2012 from ttp688 www.islami- 4an;ing.om8ta;afulKsariaKsuper/isorK4oard.asp3.tme insurane at ap 7#A retrie/ed on 15 No/em4er 2012 from

ttp688www.;enalaw.org8;lr8fileadmin8pdfdownloads8(ts8InsuraneK(tKKGapK7#AK.pdf

(=aman' I.2009". omination and !i"ah Issues in the Takaful Industr#: IS?( saria onferene retrie/ed

from 21 No/em4er 2012 ttp688www.isra.om.

Gummins' and ,oert' 2005". The economics of insurance intermediaries6 Farton Sool

*ni/ersit of !ennsl/ania retrie/ed on No/em4er 20 2012 from

ttp6884eta.i4awest.om8pdf8Farton20paper200505.pdf

+enri'G. ranois' and Geon'200". The insurance "usiness and its image in societ#6 raditional issue and new

allenges retrie/ed on 20 No/em4er 2012 from

ttp688www.insead.edu8faultresear8resear8do.fmLdid201

The Non- Financial Factors Influencing The Performance of

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