Microinsurance, cooperatives and Takaful

    Microinsurance,

cooperatives and Takaful

 DFID Workshop May 22nd 2006

      Overview of presentation

• Insurance and Poverty Alleviation

• Why is conventional insurance not allowed in Islam

• Principles and models of Takaful

• The possibilities for microtakaful

    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

“Insurance is being recognized

    as an important tool for

      poverty alleviation”

     Providing microinsurance

             The challenges

• Coverage

• Regulation

• Moral hazard and Fraud

• Adverse selection

• Education and trust

• Technical expertise

• Affordability

• Retention

• Sustainability

    Providing microinsurance

           The 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

    Providing microinsurance

           The 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

    Providing microinsurance

           The possibilities

• The donor agent model

 Access to expertise

 Financial sustainability

 Guiding hand

 Why is conventional insurance

       not permissible in Islam?

• Uncertainty (Gharar)

• Gambling (Maisir)

• Interest (Riba)

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

 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

          Principles of Takaful

• Solidarity and joint guarantee

• Self reliance and self sustaining for community well being

• Assist those that need assistance

• Community pooling system

• Shari’ah approved investments and products

               “Bear ye one another’s burden”

   Takaful models in practice

• Not for profit model

• Ta’awuni model – “cooperative insurance”

• Al Mudharabah model – profit sharing

• Al Wakala model – agency agreement

    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)

The Global Takaful sector

    Source: Bhatty (2001)

”A cooperative and mutual scheme providing

 Shariah approved products and investments

 is permissible under Islamic Law”.

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 Shari`ah 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…..”

Providing Takaful to the

 low-income sector

  The need in Muslim countries

• Social services inadequate or unavailable

• Large sectors of poverty in many Muslim countries

• Over half of world’s 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

“Takaful is the second most

important social institution to

counter poverty and

deprivation”

             Omar Fisher,1999

     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

 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

                      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

   Thank you

www.icmif.org/takaful