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 microinsuranceThe challenges

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

Providing microinsuranceThe possibilities

• The cooperative microinsurance modelHistory of organising the poorOperate for the interest of members by membersTrust Ownership and loyaltyPeer pressureSurplus reinvested or redistributed

Providing microinsuranceThe possibilities

• The partner agent modelNo-risk fee for microinsurance providerBetter coverage for policyholderAccess to new marketPooling of risks between informal and formal

sector

Providing microinsuranceThe possibilities

• The donor agent modelAccess to expertiseFinancial sustainabilityGuiding 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 expertiseFinancial assistancePartner-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