“All people and societies – of all races, religions, nationalities, and income levels – face risks and challenges in their lives,” the MiN’s Knowledge Manager Mark Robertson told participants at the recent Takaful Forum. “Insurance and takaful – when done well – can help alleviate some of these risks, address some of these challenges, and build resilience.”
Takaful – which translates as solidarity, or mutual guarantee – could play a significant role in mitigating risk for millions of low-income people in predominantly Muslim countries, where traditional insurance products do not comply with Sharia law. Since many of these countries are also vulnerable to climate change – think Indonesia, Bangladesh, or the Sahel region of Africa – they are also in urgent need of protection. As the 2018 State of Microinsurance report pointed out, “penetration in many of the worst hit countries remains low, especially in many Muslim-majority countries where significant microinsurance penetration is further hampered by an absence of Islamic products…If Muslim-majority countries incorporate takaful-based climate risk insurance into their national strategies to meet SDG13, it could be a real game changer.”
Takaful is similar to mutual or co-operative insurance, and just as microinsurance is aimed at the vulnerable and underserved, so microtakaful focuses on lower-income individuals, households, and MSMEs. There are, however, important differences – takaful is an alternative, Sharia-compliant co-operative system of payment in case of loss. Takaful’s main aim is not to generate profits, but to distribute the risk amongst participants. As the global Muslim population increases, driving more demand for Sharia-compliant financial products, microtakaful could play a significant role in helping low-income families in Muslim countries into financial inclusion.
Despite the differences between the two, we believe that microtakaful can learn from the microinsurance experience (and vice versa). Many of the challenges faced by microtakaful – lack of data, poor product design, affordability, scaling up, distribution, churn, inappropriate regulatory frameworks, and a lack of education and awareness – are all too familiar to the microinsurance space. There is therefore plenty of room for shared experience and knowledge around customer-centric design tailored to serve vulnerable individuals and households and their businesses, as the new MiN briefing note Takaful, microtakaful, and the foundations of inclusion explains.
“With two decades of experience promoting microinsurance in emerging markets, the MiN is in a great position to support the development of microtakaful,” says Robertson. “Both microinsurance and microtakaful can support individual, household, and business resilience, but they can also help develop capital markets – thereby supporting development both directly and indirectly. And, of course, these in turn support the Sustainable Development Goals (SDGs). Microtakaful has huge potential. Most of the countries expected to have a million or more Muslims by 2030 are low- or middle-income countries with low penetration rates. This suggests a need for these products and an opportunity for growth. In particular, microtakaful has the potential to support poverty reduction efforts from within government and public social protection schemes that is not yet fully realised.”
Just as conventional insurance preceded microinsurance, the takaful industry is leading microtakaful development in emerging markets. The MiN’s briefing note observes the market potential is huge: takaful was worth US$ 24 billion in 2019 and is growing at a massive 18 percent a year. “The global Muslim population is expected to increase by approximately 35 percent in the next 20 years…hinting at the potential for both takaful and microtakaful to grow during the coming decade,” the paper notes.
The 2020 Landscape of Microinsurance further underlines this potential for growth. Many of the 30 countries covered by primary research have sizeable Muslim populations, though microtakaful market development varies widely. By taking on board feedback from takaful experts, this year’s Landscape study will distinguish between microinsurance and microtakaful data, with the aim of establishing a more accurate picture. Already, however, the overall picture suggests significant opportunities for reducing the protection gap in Muslim-majority countries.
Many microtakaful products have historically been developed in Southeast Asia and adapted for use in other countries. In Indonesia – where microtakaful products have been offered since 2011 – the regulator has developed a standard microtakaful product that can be sold by all takaful operators and has included microtakaful development in its financial inclusion programmes, encouraging interconnection with digital payments and branchless banking. Meanwhile in Malaysia – one of the most developed takaful markets – the government-funded Takaful Ikhlas scheme was launched in 2013 to assist low-income farmers with funeral expenses. 2017 saw Bank Negara Malaysia introduce the Perlindungan Tenang initiative aimed at encouraging takaful operators to offer short-term financial protection microtakaful products.
In Bangladesh, a pilot microtakaful scheme for self-help groups (SHGs) run by Islamic Relief Worldwide (IRW) in 2015-16 was designed to trigger pre-defined benefits in the event of hazards such as death, disability, hospitalisation, and business loss, including those caused by weather-related events. “The scheme has gone some way to enhancing beneficiaries’ ability to withstand external shocks, without the burden of excessive premiums,” noted the 2018 State of Microinsurance. “90 percent of SHG members have taken up the scheme, demonstrating a clear demand for Sharia-compliant, low-cost, community-based takaful.” More recently, IRW promoted microtakaful in Pakistan to provide a safety net during the COVID-19 pandemic.
“Although the African takaful industry is currently smaller than in some other regions, it is also poised to grow,” says Robertson. “There are a range of players across North and West Africa in particular who are passionately working on expanding takaful cover.” The MiN briefing note singles out Morocco – “increasingly becoming one of the more advanced takaful countries in North Africa” – and Nigeria, where the regulatory authority, NAICOM “has taken a proactive approach to promoting microtakaful as a platform for financial inclusion – especially in the impoverished north, which is predominantly Muslim.”
Late last year, speaking at a sensitisation workshop for MSMEs in Kano state, Aisha Bashir, Head of the Microinsurance Unit at NAICOM and member of the MiN, spoke on the increased demand for tailored microtakaful products in the region. “What we do at NAICOM is segment our customers. They have heard of microinsurance but they don’t want the conventional type, they want microtakaful, [so] we will come up with the microtakaful regulations,” says Bashir. To build on this approach and more, the MiN and Nigerian Microfinance Platform are co-organising a symposium this Thursday, 29 April.
These examples, however, are few and far between. Microtakaful is still in its infancy, poised between immense growth potential and multiple challenges – a familiar story to the microinsurance sector. For microtakaful to play a significant role in tackling financial inclusion and poverty, regulatory frameworks which encourage innovative product development and distribution will be required, yet according to a joint IFSB-IAIS report most regulators have little experience or empirical data to support the development of microtakaful-specific guidelines. Other challenges include differing interpretations of Sharia law and a general lack of awareness and information on global best practices, all of which hinder market development.
It is therefore critical to work towards increasing the information available throughout the ecosystem in order to support the design of customer-centric solutions and develop the global industry, thus enabling microtakaful to play its role in driving inclusion and fulfil its potential in bringing protection to low-income households and businesses in Muslim-majority countries.