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