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A Directive to License a Takaful Operator or Authorize a Takaful Window Operator (Directive No. 874/2020)

National Bank Of Ethiopia874/2020

Summary

This directive establishes the licensing and operational requirements for Takaful Operators and Takaful Window Operators in Ethiopia, ensuring the safety and soundness of the insurance sector and protecting participant interests.

Who's affected

Companies seeking to operate as Takaful Operators or Takaful Window Operators.

Action required

Entities intending to operate as Takaful Operators or Takaful Window Operators must apply for authorization and comply with the outlined requirements.

Key points

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  • Establishes licensing and authorization requirements for Takaful Operators and Takaful Window Operators.
  • Mandates the establishment of a Shari'ah Advisory Council.
  • Outlines specific requirements for operating models, fund management, and financial reporting.
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    • Details procedures for surplus distribution and deficit rectification.
    • Emphasizes disclosure and transparency to participants.
    • Requires compliance with existing insurance business laws and directives.

Requirements

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  • Must be authorized to carry on takaful business as a takaful operator or takaful window operator.
  • Must have a Shari'ah Advisory Council in addition to the board.
  • Shari'ah Advisory Council to consist of three members: one knowledgeable in insurance, one Shari'ah scholar, and one with financial services expertise.
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    • Board to develop and submit Shari'ah oversight policies and procedures to the National Bank.
    • Insurance companies intending to operate a takaful window must apply for authorization and submit a feasibility study.
    • Authorized takaful window operators must establish a separate unit, appoint a qualified head, keep segregated accounts, ensure separation of takaful and conventional business, and display 'takaful window' prominently.
    • Adopt an operating model endorsed by the Shari'ah Advisory Council and approved by the Board.
    • Maintain documentation relating to the operating model, including contracts, fund segregation policies, investment policies, surplus/deficit policies, and qard hasan repayment policies.
    • Submit the operating model to the National Bank at the point of authorization or prior to adopting a new model.
    • Disclose the adopted operating model in proposal forms, participant certificates, and annual financial statements.
    • Segregate the assets of participants from the assets of shareholders.
    • Allocate, establish, and maintain separate takaful funds and bank accounts for family takaful and general takaful business.
    • Manage funds effectively to cover unforeseeable events.
    • Develop a surplus management policy with Shari'ah Advisory Council advice.
    • Ensure surplus distribution is recommended by an actuary/external auditor, endorsed by the Shari'ah Advisory Council, and approved by the Board and National Bank.
    • Surplus distribution must align with the underlying contract, not cause deficits in the participants risk fund, and be based on actuarial principles for fair participant treatment.
    • Profits from the participants' investment fund to be distributed to participants and the takaful operator/window operator as per contract.
    • Takaful contract must specify surrender payment circumstances and calculation basis.
    • Surrender value determination must consider actuarial principles, fair treatment of participants, and market conduct standards.
    • Surrender payments must be made from the appropriate fund.
    • Surrender charges only applicable if clearly specified in the takaful contract.
    • Establish effective policies and procedures to manage operating costs.
    • Commissions and operating expenses paid from shareholders' funds or participants risk fund as appropriate.
    • Claims and re-takaful contributions paid from participants' funds.
    • Direct claims and investment related expenses paid from participants' risk fund, with Shari'ah Advisory Council approval.
    • Remuneration arrangements documented in takaful contracts.
    • Contributions adequate to service the certificate until contract end.
    • Report deficits in the participants risk fund to the National Bank within seven days.
    • Rectify deficits via qard hasan from shareholders' fund if participant risk fund assets are insufficient.
    • Features in deficit rectification policies for the Participants Risk Fund must include qard hasan events, repayment process, surplus distribution while qard hasan is outstanding, remuneration, repayment time period, circumstances for non-repayment, impact on potential participants, and treatment of deficits/surpluses in sub-funds.
    • Qard hasan from shareholders' fund not to be used for losses in the participants' investment fund unless due to negligence or mismanagement.
    • Publish operational model details and underlying Shari'ah principles accurately, adequately, and in clear language.
    • Disclose information on market movements and implications on takaful funds where participants bear investment risks.
    • Ensure consistency in disclosed information.
    • Inform participants of modifications or changes to the operational model or product terms and conditions within seven days.
    • Sufficiently detailed disclosure for material and financially significant changes.
    • Submit quarterly reports to the National Bank in prescribed formats.

Rights and permissions

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  • Participants have the right to fair treatment in surplus distribution.
  • Participants have the right to clear and understandable information regarding the operational model and changes.
  • Participants have the right to have surrender charges clearly specified in the takaful contract.
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    • Participants have the right to have surrender payments made from the appropriate fund.
    • Participants have the right to have contributions adequate to service the certificate until the end of the contract.
    • Participants have the right to receive profits earned on their investment fund according to the underlying contract.
    • Participants have the right to be informed of modifications or changes to the operational model or product terms and conditions within seven days.
    • Participants have the right to understand material changes that are financially significant.

Restrictions

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  • No person shall carry on takaful business unless authorized.
  • Takaful operators/window operators must have a Shari'ah Advisory Council.
  • Shari'ah Advisory Council members have specific expertise requirements.
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    • Operating models must be endorsed by the Shari'ah Advisory Council and approved by the Board.
    • Assets of participants must be segregated from shareholders' assets.
    • Separate funds and bank accounts must be maintained for family and general takaful business.
    • Surplus distribution is subject to recommendations, endorsements, and approvals.
    • Participants risk fund cannot be in deficit after surplus distribution.
    • Surrender charges only applicable if clearly specified in the takaful contract.
    • Commissions and operating expenses must be paid from the correct funds as per the takaful model.
    • Claims and re-takaful contributions paid from participants' funds.
    • Direct claims and investment related expenses paid from participants' risk fund with Shari'ah approval.
    • Remuneration must be agreed upon in takaful contracts prior to signing.
    • Contributions must be adequate to service the certificate until contract end.
    • Deficits in participants risk fund must be reported to the National Bank within seven days.
    • Qard hasan from shareholders' fund cannot be used for losses in participants' investment fund unless due to negligence or mismanagement.
    • Information disclosure must be accurate, adequate, up-to-date, and in clear language.

Objectives

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  • Ensure the safety and soundness of the insurance sector.
  • Establish a mechanism for regulating takaful business.
  • Set requirements and minimum standards for takaful operations.
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    • Protect the interests of takaful participants.

Organizations

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  • National Bank of Ethiopia
  • Shari'ah Advisory Council
  • Board of Directors

Legal references

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  • Insurance Business Proclamation No.746/2012
  • Insurance Business (Amendment) Proclamation No.1163/2019
  • Directive No.SIB/38/2014
Original sourcehttps://justice.gov.et/en/directives/a-directive-to-license-a-takaful-operator-or-authorize-a-takaful-window-operator-directive-no-874-2020/
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