Microinsurance, cooperatives and Takaful

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Microinsurance, cooperatives and Takaful

• DFID Workshop May 22nd 2006

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Overview of presentation

• Insurance and Poverty Alleviation
• Why is conventional insurance not allowed in
  Islam
• Principles and models of Takaful
• The possibilities for microtakaful

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Can insurance assist poverty alleviation?

• The poor are the most vulnerable
• The impact of losses are more severe
• They have minimum means of recovery
• Success of microfinance schemes show the poor can
  and want to save
• Savings and credit are used unproductively
• The poor need a safety net to escape poverty

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• Insurance is being recognized as an important
  tool for poverty alleviation

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Providing microinsuranceThe challenges

• Coverage
• Regulation
• Moral hazard and Fraud
• Adverse selection
• Education and trust
• Technical expertise
• Affordability
• Retention
• Sustainability

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Providing microinsuranceThe possibilities

• The cooperative microinsurance model
• History of organising the poor
• Operate for the interest of members by
• members
• Trust
• Ownership and loyalty
• Peer pressure
• Surplus reinvested or redistributed

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Providing microinsuranceThe possibilities

• The partner agent model
• No-risk fee for microinsurance provider
• Better coverage for policyholder
• Access to new market
• Pooling of risks between informal and formal
• sector

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Providing microinsuranceThe possibilities

• The donor agent model
• Access to expertise
• Financial sustainability
• Guiding hand

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Why is conventional insurance not permissible in
Islam?

• Uncertainty (Gharar)
• Gambling (Maisir)
• Interest (Riba)

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Earlier forms of Islamic insurance

• Dawania Mutual indemnification amongst officers
  during the rule of Umar Ibn Al Khattab (2nd
  Caliph)
• Diyyah and Aquilah Blood money and concept of
  removing hardship from victims family by payment
  of Diyyah, on a mutual basis, by relatives of
  offender
• Marine Insurance Early second century mutual
  fund to cover robberies and mishaps

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Fiqh Academy Resolution 1985

• Commerical insurance is prohibited
• Alternative contract confirming to principles of
  Islamic dealings is the contract of cooperative
  insurance, which is founded on the basis of
  charitable donation and Shariah compliant dealings

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Principles of Takaful

• Solidarity and joint guarantee
• Self reliance and self sustaining for community
  well being
• Assist those that need assistance
• Community pooling system
• Shariah approved investments and products
• Bear ye one anothers burden

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Takaful models in practice

• Not for profit model
• Taawuni model cooperative insurance
• Al Mudharabah model profit sharing
• Al Wakala model agency agreement

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The Global Takaful sector

• 1979 First Takaful Company established
• 1996 30 Institutions transacting Takaful
• 2002 50 Takaful operators and four Retakaful
  providers
• 2004 80 Takaful operators, 200 Takaful windows
  and 12 Retakaful providers
• Source IBB Solicitors, UK (2005)

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The Global Takaful sector

Source Bhatty (2001)
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• A cooperative and mutual scheme providing
  Shariah approved products and investments is
  permissible under Islamic Law.

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Ruling by the European Council of Fatwa and
Research

• It is well known that in most non-Islamic
  countries there are cooperative and mutual
  insurance companies. There is no harm from the
  Shariah point of view to participate in these
  services. So, it is unlawful for a Muslim living
  in a country where there is such a cooperative
  insurance company to make an agreement with a
  commercial insurance company..

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Providing Takaful to the low-income sector
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The need in Muslim countries

• Social services inadequate or unavailable
• Large sectors of poverty in many Muslim countries
  
• Over half of worlds lowest developed countries
  have a majority Muslim population
• Increasing inequality in Middle East and Gulf
  countries
• Religious considerations are important in
  villages and small communities
• Established Takaful sector neglecting low income
  sector

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• Takaful is the second most important social
  institution to counter poverty and
  deprivation Omar Fisher,1999

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How can microtakaful be provided?

• Establish informal microtakaful schemes
• Encouragement of pro-poor organisations
• Education of government and donor agencies
• Involvement of Takaful sector
• Technical expertise
• Financial assistance
• Partner-agent model

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The Agricultural Mutual Fund of Lebanon

• Established in 1997
• Health insurance
• Available for Muslims and non-Muslims
• 23,000 beneficiaries
• Premium per family is ten dollars a month

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Conclusions

• Insurance has an important role to play in
  poverty alleviation
• Cooperative based microinsurance schemes are an
  effective vehicle to provide insurance to the
  poor.
• There is a need for microinsurance to be provided
  to low income sectors in Muslim countries and
  communities.
• A microtakaful scheme based on cooperative/mutual
  principles is acceptable under Islamic Law

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Thank youwww.icmif.org/takaful