MicroTakaful - Transforming People’s Livelihoods
The Takaful sector is growing fast as an emerging, promising, and high potential market compared to conventional insurance in different countries of the world, including Islamic and non-Islamic countries.
The promising global Takaful business is expected to reach more than USD 50 billion by year 20201,
according to a UAE academic report, which represents a drastic growth compared to the current global figures estimated at USD 25 billion in year 2015 by Ernst & Young. Takaful is primarily concerned with around 23% of the world population, which is considered as Muslim, and is meant to overcome the cultural barriers to the development of insurance among Muslim populations.
However, the Takaful sector has been focusing on the middle to high income groups, with a large figure of the world’s poors still missing out on its benefits
and inadequately serviced by both the private insurance market and Takaful because, simply, their coverage is unaffordable, inaccessible, or even unavailable altogether. As a natural consequence, Takaful is missing large socio-economic categories.
In fact, in a world where 1 billion persons live in extreme poverty with less than USD 1.25 a day, the
Muslim populations are concerned with widespread financial exclusion, most particularly in Asian and African countries.
These unmet needs of low income persons include a variety of financial services including credit, savings, insurance, asset accumulation and money transfer.
Therefore, MicroTakaful will be made specifically available for sections of the population not eligible for Takaful,
given a range of parameters and factors such as income, occupation, health, etc or logistical underwriting and financial considerations. By doing so, MicroTakaful enables financial inclusion.
The non-poor confront essentially the same risks (death, illness or injury, loss of property and natural disaster) faced by the poor, but they have access to formal insurance or Takaful schemes,
bearing in mind that the impact of these risks is less severe to them. However, the significant majority of people living in poverty have very limited or absolutely no access to basic financial services including insurance or Takaful. Without access to formal insurance or Takaful schemes, most poor people manage risk with their own means by using informal mechanism “selling assets, making out/off pocket payment or borrowing”. This could leave the poor even more vulnerable to future risks. This is the essence of the problem microinsurance and microTakaful both try to resolve. Thus, microtakaful and microinsurance work as an effective tool for poverty alleviation.
Numerous international and Arab examples can be named as MicroTakaful products.
A simple example can be given in Bangladesh, where a company recently launched a group MicroTakaful products in addition to its existing three individual saving linked products. The product is unique in that it offers double the sum assured on death, contributes towards funeral costs and provides a monthly income to a nominee. In Sudan,
Shiekan company is working with the central bank of Sudan to provide low-income farmers with affordable insurance coverage,
while Takaful Pakistan is one of the operators in Pakistan who are providing microTakaful health products in partnership with a micro finance institution.
We can also see the development of MicroTakaful in countries with a sizeable or majority non-muslim population like Aman Takaful in Sri Lanka,
which has a partnership with Muslim aid microfinance programme to provide affordable coverage for credit life, hospitalization and medical charges. In addition, there are companies that provide death and disability cover for low income earners.
The Arab world started offering similar products. In Jordan, independent microfinance institutions are offering financial services and insurance products like health and medical hospitalization for women with low income, while the Takaful Emirates Islamic Insurance is offering the “Sehat Plan” which was especially created for lower income workers in the UAE with premium as low as around USD 139. This plan covers risks of injury and illness and protects the workers if certain unforeseen circumstances occur. The plan is bundled with life and disability benefits and is designed for the lower income work force in the UAE. Warba Insurance Company – Kuwait is offering a product aimed at individuals who cannot afford standard life term policies. This product covers death and disability and provides compensation in case of death due to accident, but also covers seven kinds of disabilities and expenses for transferring the remains of the dead to their home country.
As seen in the preceding examples, there is a wide range of microtakaful providers. Thus,
the document jointly issued by the Islamic Financial Services Board (IFSB) and the International Association of Insurance Supervisors in November 2015, under the title “Issues in regulation and supervison of MicroTakaful”, is an attempt to set some commonly agreed standards
for a sound microtakaful industry. However, the formal definition of MicroTakaful according to IFSB makes it clear that MicroTakaful is the Islamic counterpart of Microinsurance where the group of participants agree to join together under Tabarru’ (donation), Taawun (mutual assistance) and Prohibition of Riba (usury).
Structurally, the document mentions the Wakala model (managing in exchange to a fee) and Cooperative models, which are more commonly used. It also addresses the Wakalah-Mudarabah (managing and risk-sharing in exchange to a fee) and the Wakalah-Waqf (managing for a fee and religious endowment) models.
In general, MicroTakaful tends to be less regulated than Takaful as it moves closer to the informal and rural sectors, as well as remote regions,
noting however that the Egyptian Financial Supervisory Authority has recently issued microinsurance regulations.
Finally, MicroTakaful products have to be successfully conceived, designed, marketed, distributed and served with a focus customers underserved by regular Takaful or Insurance.
Similarily to Takaful, the microTakaful model is still being tested, modeled and re-examined and will have different practices per country and region.
MicroTakaful will have to follow closely the best practices of microinsurance, and will also have to meet the same standards as Takaful in eliminating Maysir (gambling), Gharar (uncertainty) and Riba (usury) on a sustainable business basis.
Takaful: Global Challenges To Growth, Performance & Governance, UAE joint report