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
Shariah approved investments and products
Bear ye one anothers burden

Takaful models in practice

Not for profit model

Taawuni 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 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

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