Question

kindly, describe Importance of introducing micro takaful schemes.
must be 2000 words.

Answer 1

Micro Takaful insurance is considered an important incentive for the protection and financing of micro enterprise and low income families. Therefore, it encourages banks to finance these micro enterprises.

Micro Takaful insurance mainly supports protecting micro enterprises by using Micro Takaful insurance to aid in financing these enterprises which results in higher return on investment and growth in developing countries.

Micro-insurance defined: “Risk-pooling products that are designed to be appropriate for the low-income market in relation to cost, terms, coverage, and delivery mechanisms”.

MicroTakaful refined: “A mechanism to provide Shariah-based protection to the blue collared, under-privileged individuals at an affordable cost."

Micro Takaful insurance should be the corner stone for development in developing countries since it provides the availability to finance catastrophe victims and supporting micro enterprises mainly in agriculture industry. Also, it targets the people living in isolated areas or in difficult living circumstances by supporting them in facing the risks they face, and as a result, it is an effective tools for facing poverty in developing countries.

Sturcture and Business Models of Microtakaful

Khan (2011) defines microtakaful as "a mechanism to provide shariah-based protection to the blue collared, under-privileged individuals at affordable costs. Microtakaful is a takaful scheme for the low-income earners. All the takaful products like takaful education, takaful fire, pension and so forth can be delivered to poor people with some modification, such as low contribution (premium)". In other words, the products of microtakaful are actually similar to takaful but they are modified to fit the needs of the poor (Haryadi, 2007). As it has been mentioned earlier, in practice, microtakaful operation cannot be separated from IMIs since microtakaful aims to support Islamic microfinance scheme offered by Islamic Microfinance Institutions (IMIs). Therefore, microtakaful operators have to collaborate with IMIs. This collaboration basically benefits all parties. For the client, in case he died, his family will be released from his liability since it is covered by credit life microtakaful policy. IMIs also get benefits from this collaboration since microtakaful scheme reduces IMIs’ exposures to credit risks. This is because the function of microtakaful is to secure repayment of financing to IMIs in the case whereby the clients are experiencing permanent disability or death. Microtakaful operators also get benefits from this collaboration in the sense that they do not need to spend much money to develop a distribution channel for their products since they can use IMIs’ infrastructure to market their products (Hidayat, 2013a). The operational model of microtakaful is the same as takaful scheme. It can be structuredusing one of the following models (Barwari, 2012):

1. Pure Wakala

2. Pure Mudaraba

3. Hybrid (Wakala & Mudaraba). It is also known as wakalah bil ujrah (Erlbeck et al,2011)

4. Waqf (Khan, 2011)

In all the above four models, there are four common features namely (1) the separation between participants' and shareholders' accounts as reflected in two separate sets of financial statements,

(2) shariah compliant investment strategy,

(3) the existent of shariah supervisory

board and

(4) internal shariah compliance department (Barwari, 2012). In pure wakalah model, the contributions paid by participants are recorded in participants' profit and loss accounts. The contributions (tabarru') are used to settle sales commission, wakala (agency) fees and claims. The wakala fees are the revenues for microtakaful operators. It is normally a fixed percentage of total contributions. The operators must ensure that the fees are able to cover the operating expenses and record a profit. This model is only practiced by few operators.

In practice, pure mudaraba model is also divided into two categories namely, mudaraba model with surplus sharing and mudaraba model without surplus sharing. In both categories, the operators do not earn any fees as their revenues. The operators earn revenues from their shares in investment outcomes (as mudarib). However, in mudaraba model with surplus sharing, the operators might get extra revenues from their shares in the underwriting surplus.

Another difference is in mudaraba model without surplus sharing all operating expenses are borne by policyholders' funds not by shareholders' funds as practiced in the wakala and mudaraba with surplus sharing models (Barwari, 2012). This model is practiced by takaful and microtakaful operators in Malaysia. Hybrid model or wakalah bil ujrah is the most widely used model by microtakaful operators in practice (Erlbeck et al, 2011). This model is practiced in the Middle East, Indonesia and some companies in Malaysia. This model is a combination of wakala and mudaraba models. Wakala contract is used for underwriting activities while mudaraba is used for investment management activities (EY, 2012). In this model, microtakaful operators receive a wakalah (agency) fee which is a fixed percentage of gross contribution and share of investment profits as well as underwriting surpluses (Erlbeck et al, 2011). The share of the operator in the underwriting surpluses is regarded as a performance incentive fee for good underwriting performance. In order to earn the incentive fee, prior approval from the shariah supervisory board (SSB) of the company is a must (Barwari, 2012). In this model all operating expenses are borne by shareholders.

The last model is waqf model which is practiced in Pakistan. A waqf model is actually a combination of wakalah and waqf. In this model, shareholders of a microtakaful company establish a waqf fund by making initial contribution (Khan, 2011). In family takaful, contributions of the participants are divided into two parts: one as donation (waqf) to the takaful fund and the other for investment. Waqf is actually the retention of a property for the benefit of a charitable or humanitarian objective, or for a special group of people such as members of donor’s family. Waqf becomes a separate entity which has the ability to accept or transfer ownership. The ownership of the waqf property is transferred from the person creating waqf forever.

In addition, according to waqf principles, a donor can also benefit from the waqf. In microtakaful sceme based on waqf model, the beneficiaries of the waqf are the creator of the waqf and their families. In this model, operational costs like claims are met from the takaful fund. Underwriting surplus belongs to the takaful fund and kept as a reserve or reinvested to the benefit of the waqf. For investment purposes, a mudarabah contract takes place between the takaful fund and the company working as mudarib. The investment profit is shared between the company and the fund. In this model, the microtakaful operator's sources of income are the waqf management fee paid from the waqf fund, a share in the investment profit as mudarib or a service charge as investment agent (Barwari, 2012).

A co-operative insurance alternative called takaful is helping to plug the gap in low income islamic countries where the uses of commercial insurers are forbidden,under shariah law.

MICROTAKAFUL SCHEMES-IMPORATANCE

•Microfinance can help people improve.

•Microtakaful will help them sustain their financial wellbeing.

•Feeling of togetherness & security.

•Opens avenues for joint efforts for mutual benefits.

•Cooperative approach and outlook.

•Result – migration of individual level.

•Society benefits at large.

The importance of micro Takaful insurance:

There is an urgent, necessary and immediate need for Micro Takaful Insurance where a large portion of those who are below the poverty line live in Muslim countries and nearly 50% of the developing countries are located in countries with predominantly Muslim . These countries characterized by low insurance penetration (which represents the ratio of insurance premiums to GDP), adding to that the religion plays an important and central role in the lives of the poor, and finally Takaful insurance in general, and by subsequently Micro Takaful insurance comply with the roles and teachings of Islam . Keep in mind that micro Takaful insurance is so important that any funding can’t be done without it, so it fills the existing gap in microfinance with respect to the need for the availability of security/ collateral needed for poor segment on one hand- which represents an impediment to access to finance - and to provide adequate security to financing institutions against the risk of default on the other hand. Micro Takaful insurance encourage financial institutions to finance this category and thus contribute to the reduction of poverty on one hand and turning a large number of the unemployed poor and destitute segment to a working-one and well-off on the other hand. This will reduce the pressure on the state to provide financial assistance to this category forever. So micro Takaful insurance will helps to guarantee loan financiers and works to spread the culture of social responsibility and limit the economic risks and help to eradicate poverty. The benefits of micro Takaful insurance The main benefits of Micro Takaful Insurance are :

1. Micro Takaful insurance help guaranteeing loans to financiers.

2. Micro Takaful insurance help reducing the cost of insurance and therefore low income people can afford its premiums.

3. Benefiting from the advantage of other insurance services (risk control and loss reduction).

4. Policyholders would participate in surplus in the event of it accomplished.

5. Limits the wasted economic energy of a large segment of society.

6. Helps in spreading the culture of social responsibility.

7. Contributes to the reduction of poverty and even improve the standard of living for the poor and low-income people.

8. Reinforcing cooperation and solidarity and its reference in all transaction would be the principles of Islamic law (Shari’ah), therefore it would be an alternative to traditional insurance.

The main characteristics of micro Takaful insurance: Takaful insurance is characterized as a mutual insurance as well as its commitment to Islamic Shari’ah/law, but micro Takaful insurance in addition to that is characterized by the following:

1. It focuses and concentrates on the poor and marginalized segment that is capable for production, but is not able to get the funding.

2. It targets a segment that represents a large segment of society that is dangerous to it and can be converted into positive and productive factor.

3. It needs and can benefit from grants, donations and Zakat.

4. It saves for the state a large part of aids and subsidies provided to this segment of society, which does not change its status and need help on an ongoing basis, but it will be turned into a productive and selfreliant by benefiting from micro Takaful insurance and consequently from micro finance.

5. It meets the urgent need for Islamic countries, which is located mostly within the poorer countries as it helps her cope and reduce poverty states.

6. Its premium does not depend on just the cost as it is subsidized.

7. It is often available and easily accessed by targeted segment, and it understands and takes into account the nature of this segment .

The main conditions to be met in micro Takaful insurance:

1. Simplicity: its products should be designed to suit different categories of this group.

2. Cost: it must be reasonable for financial capabilities of this group.

3. Ease: it must be easy to be accessed to for all categories of this segment.

The importance of micro Takaful insurance for micro finance

Micro Takaful Insurance represents lifeblood of micro finance, and we will clarify the relationship between them as follow:

The relationship between micro insurance and micro finance: Takaful insurance market is a promising one, especially if we take into account the existence of nearly one billion borrowers in the micro finance system, which is targeted by micro Takaful insurance. It is clear that both micro finance and micro insurance are contributing in fighting poverty, reducing its effects and achieving security and development where:

-Micro finance: increase productivity, creates new jobs and composition of assets.

-Micro insurance: raise awareness, protect assets and manage them in well manner and indemnify losses when they occur.

Micro Takaful insurance: Its future, success requirements and challenges The future of micro Takaful insurance: Takaful insurance is one of the economic services sectors that is expected to experience exponential growth in the coming years in most of the Islamic and Arab countries, at rates ranging between 20-25%, especially with a fertile environment for the growth of the sector which is characterized by abundant population and an increasing demand for Islamic products . The micro insurance (Commercial or Takaful) is a promising market for the insurance sector that has to increase insurance awareness and introduce new products that fit this category, as is incumbent on the social responsibility of insurance companies towards this category. There is no doubt that there is great hope in micro insurance (Commercial or Takaful) resulting from the concerted efforts and participation of both governmental and private sector, all other not for profits organizations that are interested in small and micro enterprises, the assistances provided by governments and international supporting institutions, grants, donations and Zakat to help this poor and important category at the same time.

The requirement for the success of micro Takaful insurance:

There are a set of requirements which must be met for the success of Micro Takaful Insurance, the most important are :

1. Establishing an unofficially Micro Takaful Insurance System away from the administrative complexities

2. Interacting and communicating with the funder or donor (government, public or private) to raise awareness of the problem of the poor and low-income people

3. Takaful sector has to do an important and pivotal role at least in the following areas: -Provide technical expertise -Provide financial assistance -Cooperation with Micro Takaful and Commercial Insurance providers and other agencies that deal with this layer

4. Issuing Micro Takaful insurance legislation to establish the legal framework for its practice

5. Establishing an independent regulatory body to control, organize and develop Micro Takaful Insurance.

6. Provide the necessary governmental support.