Micro Takaful by Shabir Patal
MIR MicroTakaful
The Missing Link in Takaful
While the development of the global takaful industry has been widely reported, its focus has mainly
been on the middle to high income group, with many of the world’s poor still missing out on its benefits.
MiddleEast Insurance Review examines the approach behind providing low-cost takaful to poor Muslim
communities, and what has been practised so far in this aspect.
L
arge sectors of poverty within many Muslim
countries indicate a demand for low-cost takaful There is “a noticeable lack of microinsurance in
schemes. After all, as pointed out by Mr Sabbir North Africa and Middle East. In no other region is
Patel, Senior Vice President of the International Coop- the lack of microinsurance so evident”
erative and Mutual Insurance Federation (ICMIF) at the The Landscape of Microinsurance
Asian Conference on Microinsurance last year, over half (The Microinsurance Centre) –
the world’s lowest developed countries have a majority quoted by ICMIF at the Asian Conference on Microinsurance, 2007.
Muslim population.
donor agencies to sponsor training programs and facili-
The Approach tate the transfer of know-how from developed markets to
According to Mr Patel, microtakaful schemes overcome their technical deficiencies and strengthen local
should involve NGOs, zakat funds and donor competence, he added.
agencies, and obtain support from the taka-
ful sector in the form of technical expertise In the Absence of Microtakaful
and financial assistance. Microtakaful can As stated by Mr Patel, “the basic fundamentals underly-
adopt the partner-agent model practised in ing the takaful concept are very similar to co-operative
microinsurance, whereby a microinsurance (or and mutual insurance principles, to the extent that the
Mr Sabbir Patel
microtakaful) provider may become an agent for co-operative and mutual insurance scheme investing in
an established insurance company to gain access Islamic compliant products is one that is accepted under
to technical expertise. Islamic Law.” Since the co-operative and takaful concepts
Under this approach, the microfinance institution are so similar, “there is no real obstacle for the more
(MFI), as the takaful agent, sells policies to its client established co-operative movement to assist the takaful
on behalf of the insurer in exchange for a commission. movement to provide insurance products to low-income
The MFI is also responsible for product servicing, which communities.”
involves verifying claims and submitting claim requests. The well-run or genuine co-operative is in a better posi-
The insurer “manufactures” the product and provides the tion to provide affordable and sustainable microinsurance
actuarial, financial and claims-processing expertise, and cover, he noted. Its benefits include dedicating substantial
absorbs all the insurance risks. resources to research, health promotion, and loss preven-
In an ICMIF paper, “Takaful & Poverty Alleviation,” tion; and a structure which makes it easier to win the trust
Mr Patel said: “The policyholder benefits by increased ac- of the members.
cess to a wider range of products with increased coverage In addition, under the co-operative philosophy, any
and greater sustainability; and the partnering insurance surpluses from the scheme are returned to the members
company has access into a new market without taking in the form of dividends, lower premiums, loss prevention
extensive marketing, distribution, or administration costs. activities, and additional coverage.
More importantly, the partner-agent model facilitates However, he added, in order to effectively provide
the pooling of risks between the formal and informal insurance to the poor, it must strictly adhere to the fol-
sectors.” lowing:
Where a partner is not available, the microinsurance
(or microtakaful) provider may consider approaching • Good corporate governance;
• Proper form of accounting and transparency;
Partner-Agent Model • An open, voluntary and non-discriminating member-
ship;
• A high degree of autonomy and self-reliance;
Partner Agent
• Clear focus or objective to hold members together, such
Product as access to affordable insurance products;
sales • Ensuring that everybody has access to, and can afford
Product Policyholder
manufacturing to join the cooperative.
Product
Co-operatives providing microinsurance include
servicing CARD MBA in the Philippines, Sanasa Insurance Co in
Service Sri Lanka, Centre D’Innovation Financière in West Africa
provider and Columna of Guatemala.
Let us now take a look at some microtakaful and micro-
Source: Brown and Churchill (2000)
insurance initiatives for Muslims around the world.
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MIR MicroTakaful
Bangladesh the partners or clients of LKMS from debt in the event of
The birthplace of Grameen Bank, the poster boy death. Under the partner-agent model, LKMS represents
of microfinance, this Muslim-majority country traces their partners/clients or policyholders, ATK is the insur-
the beginning of its microinsurance industry as far back as ance provider and Takmin Working Group functions as
20 years, although it was pursued more vigorously about the mediator or agency between LKMS and ATK.
nine years ago. In fact, the growth in the life insurance Last year, ATK partnered with the National Alms
industry is due largely to the microinsurance schemes Board (Baznas) to develop a microtakaful scheme for
now offered by all private-sector life companies. alms receivers. The covers cost Rp50,000 (US$5) and
Bangladesh’s first microinsurance product, Grameen will consist of reciprocal assistance funds managed by
Bima or village insurance, was launched by Delta Life ATK and donation funds managed by Baznas. The latter
in 1988. Subsequently, it introduced an urban micro- distributes Rp2,500 from each policyholder’s premiums
insurance scheme, Gono Bima, which offered a similar to worthy receivers. The policies pay out Rp5 million for
endowment product. Today, microinsurance comprises death resulting from natural causes and Rp25 million for
40% of Delta Life’s portfolio. those caused by accidents.
According to Managing Director Das Deba Prashad, Mr Agus Edi Sumanto, President Director of ATK,
microinsurance schemes in Bangladesh are aimed not just said: “Only member cards, death certificates and letters
at providing risk cover but also at pooling the savings from the police proving that the deceased died due to
of the poor. Hence, such plans are modelled to provide accidents are needed to make a claim. The claim would
cash, compared to those in other countries which are then be processed within 14 days and the payout would
mostly renewable term insurance plans covering death be distributed by Baznas to the deceased’s heirs.”
and disability risks only. Jordan
Indonesia In 2007, Microfund for Women, an organisation
The world’s most populous Muslim-majority na- that funds women entrepreneurs in Jordan, launched
tion is also arguably the most developed in terms of a loan insurance product covering death, total or partial
microtakaful. The earliest beginnings can be traced to disability through a compulsory premium of 0.11% on
2006, when Germany’s Allianz introduced a microinsur- all disbursed loans. This scheme is offered in partnership
ance version of its takaful policies in the country. After with Jordan Insurance.
a 16-month-long pilot phase, a credit life programme, Lebanon
“Payung Keluarga” (meaning “Family Umbrella”) was
introduced in January this year, featuring extended op- Established in 1997, the Agricultural Mutual Fund
tions. Through this scheme, Allianz has insured over of Lebanon provides health insurance coverage for
42,000 micro-credits, covering debtors of seven partner costs not covered by the government social security fund
MFIs against natural and accidental death for an aver- (the government covers 85% of hospital fees). Said to
age premium of US$0.66. It also provides extra payout be provided in the “spirit of takaful”, the fund covers
to the family. 5,000 needy families and has preferential agreements
Under Payung Keluarga, MFI partners are able to with healthcare providers which provide discounts of up
insure the spouse of the debtor. Because many mi- to 50%. It operates in 180 villages in southern Lebanon
crobusinesses in Indonesia are jointly run by spouses, and hopes to expand membership to other parts of the
several MFI partners who finance these businesses have country.
requested such joint-life coverage. Moreover, the MFI One of the main difficulties facing the fund is the
can adapt the amount of extra payouts to the needs of possibility of the government withdrawing its health
their customers. While very poor customers with micro- subsidies. Currently, for three months each year, the
credits under US$100 may require high extra payouts, government provides no support, and the fund covers
better-off customers may be better served with lower all costs during this period. The scheme has managed to
or no extra payouts whereby they save the premium for survive on the goodwill of the community and dedication
protection they already obtain from other sources. of the employees. However, it is in need of technical sup-
To keep premiums low, Payung Keluarga is a compul- port to increase coverage, provide additional products,
sory product. To reduce complexity, the MFI centrally and access reinsurance.
decides on the product benefits on behalf of their cus- Malaysia
tomers. However, the customers receive detailed product
explanations from the loan officers of the MFI. Microtakaful schemes are slowly increasing in one
Domestic insurance providers have also jumped onto of the world’s most advanced takaful markets. In
the microtakaful bandwagon. In late 2006, PT Asuransi April 2007, Takaful Ikhlas launched a microtakaful
Takaful Keluarga (ATK), Takmin Working Group and scheme in conjunction with the Farmers Welfare Fed-
Shariah microfinance institutions (LKMS) collabo- eration of Malaysia, an NGO looking after the needs of
rated under the partner-agent model to launch Takaful destitute farmers. The compulsory scheme, funded by
Micro Sakinah, a Shariah-compliant credit insurance the government, provides immediate death expenses of
programme for micro businesses and poor families in RM500 (US$140) for a premium of RM1.80, covering
Bogor. 100,000 members. A voluntary personal accident death
Claiming to be “different from most credit life insur- and disability scheme provides a capital protection of
ance”, Takaful Micro Sakinah was designed mainly to free RM 10,000.
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MIR MicroTakaful
Morocco Sri Lanka
Microfinance activities emerged in Morocco at the Amana Takaful Insurance (ATI), the first taka-
beginning of 1990s to finance micro enterprises and ful provider in the country, has added microtakaful
serve those who have been excluded from the traditional products to its portfolio, in collaboration with NGOs and
banking system. Al Amana is the largest MFI in the coun- MFIs. Last year, it introduced Navodaya (meaning “dawn
try in terms of the portfolio of outstanding loans and is of a new era”), aimed at providing death and disabilities
aiming, by next year, to serve half a million clients in urban covers for factory workers, at a cost of LKR1 (US$ 0.01)
and rural areas by providing access to an array of financial (see article on “Helping the Poor in Sri Lanka”). According
services and products, including insurance. to ATI, Navodaya is a stepping stone in microtakaful and
more such products are being developed.
Helping the Poor in Sri Lanka
As a developing country, Sri Lanka has its fair share of the under privileged who live
far below the poverty line. Mr Ehsan Zaheed, CEO of Amana Takaful Insurance
(ATI), explains the scheme it introduced to help alleviate the burdens of this group.
A s a microtakaful provider, ATI faces many challenges
in its quest to eliminate poverty in Sri Lanka. These
include:
disaster. Through the cover, ATI secured
the recipient’s liability to the MFI or the NGO.
In addition, ATI also grants the recipient or his/her
family with an amount of money to help them overcome
• The concept of insurance is misunderstood by the
the setback they have faced.
general public. This is due to lack of awareness on how
In a different approach, ATI engaged various garment
an insurance cover could help them at a time of loss or
manufacturing companies to promote microtakaful to
calamity. For microtakaful especially, recipients view the
factory workers who fall into the lower income bracket.
insurance as a scam to take their money.
Under the “Navodaya” product, covers include:
• Welfare is seen as a source of income and dependency
on it has increased. • Death covers due to accidental or natural causes;
• Inculcating the message of microtakaful as a cushion to • Hospitalisation cover;
fall back on during a time of need and is not a excuse to • Marriage and child birth covers.
claim fraudulently (moral hazards).
The microtakaful covers offered by ATI have been
• The insurance cover is taken with the intention of
successful because beneficiaries are able to enjoy the
making a profit by claiming more than what has been
benefits of insurance without the burden of high investment.
contributed.
ATI’s role of a silent partner working together with the
• Establishing the trust and credibility of the microtakaful
employer, the MFI and the NGO has also worked.
provider.
The primary cause for these issues is the lack of Overcoming Challenges
education or knowledge on how to overcome poverty. The biggest hurdle ATI faced was in the collection of
premiums or contributions, particularly during the initial
The Approach stages as the consumers of microtakaful products were in
ATI took the opportunity to bring microtakaful to the rural areas, spread over wide areas and difficult to locate.
market by tying up with NGOs, microfinance institutions Using the network already established by NGOs, MFIs
(MFIs) and its own internal sales force. and companies, ATI incorporated premiums to the grants
In microtakaful, success depends on the credibility and which the recipient received. This was the ideal collection
trust you build up within the community. This is a sensitive method which did not hassle the recipient as the NGO or
issue as most communities are not receptive to those they the MFI was paying on behalf of them. Meanwhile, private
are not familiar with. companies were encouraged to use microinsurance as an
ATI overcame this by tying up with NGOs who were employee retention scheme.
already present in the country and operating microfinance The next hurdle was in claims and claims management.
projects. Most of these projects dealt with training in basic The effective handling of claims requires a system which is
cash management and managing small businesses such as easy to access. The distribution channels were sought to
manufacturing of soap and yogurt, weaving, and making of provide settlement services. Now, once relevant documents
garments and hand bags; and thereafter providing necessary are submitted to the NGO, the MFI or the employer will
capital to the trainees to start their own ventures. dispense the benefits immediately.
ATI was the risk management or investment protection Microtakaful is a lifeline for the under-privileged and,
specialist who covered recipients of the grants through the at the same time, a profitable proposition for insurance
NGO. The cover is able to secure the financial obligation companies. Insurers can also look at the opportunity to
of the recipient and family in the event of a tragedy or a create new markets for existing products.
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