Microfinance, Takaful (Islamic Insurance) and their use in Live Stock &

Dairy Sector

Prof. Dr. Mian Muhammad AkramHead of Department of Economics, Govt. College of Science,

Wahdat Road, Lahore

MICROFINANCE

DEFINITION OF 'MICROFINANCE‘A type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services. Ultimately, the goal of microfinance is to give LOW INCOME    people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance.

All human activities are subject to risk of loss from unforeseen events. Insurance has existed since at least 215 BC. Practiced in various forms for over 1400 years.

WHAT IS TAKAFUL?

WHAT IS TAKAFUL?

It originates from the Arabic

word 

means guaranteeing each other Or

joint guarantee.

It originates from the Arabic

word 

means guaranteeing each other Or

joint guarantee.

Kafalah,

ORIGIN OF TAKAFUL?ORIGIN OF TAKAFUL?

oTakaful originated within the ancient Arab tribes as a pooled liability that obliged those who committed offences against members of a different tribe to pay compensation to the victims or their heirs.

ORIGIN OF TAKAFUL?ORIGIN OF TAKAFUL?

oThis principle later extended to many walks of life, including sea trade, in which participants contributed to a fund to cover anyone in a group who suffered mishaps on sea voyages.

Risk and Insurance

Risk and uncertainty are fundamental facts of life.

All human activities are subject to risk, which may lead to financial or physical losses to him.

Insurance is a device to cover the losses arise due to occurrence of some undesired event.

Definition of Insurance

Insurance is an economic device whereby the individual substitutes a small certain cost (premium) for a large uncertain financial loss (the contingency insured against) that would exist if it were not for the insurance.

CLASSIFICATION OF INSURANCE BUSINESS

By Type of Products

i) Life insurance

ii) General insurance

iii) Liability insurance

Advantages of Insurance

Safeguard against sudden losses and assurance of smooth functioning of business activitiesImprovement in the saving habits in the society and making funds available for productive investmentsHelp of individuals in case of unforeseen financial Loss

Major Arguments Against Insurance

Element of Riba (Interest)

Element of Qimar (Gambling)

Element of Gharar (Uncertainty, Doubt, Risk)

Unlawful appropriation of others’ property

Violation of law of inheritance in case of life insurance.

Rulings of Collective Fiqhi Bodies about Insurance

Islamic Research Institute of Al-Azhar Uni.

Council of Grand Ulama of Saudi Arabia

Majlis Tahqiqat-e-Shari'yah Lucknow, India

Islamic Fiqh Academy of Rabita al-Aa'lam-e-Islami

Al Majma’ Al-Fiqhi Al- Islami of OIC

Council of Islamic Ideology, Pakistan

Establishments of Islamic Insurance (Takaful) Companies

In 1979, the first Islamic Insurance Company was established in Sudan – the Islamic Insurance company of Sudan. After that many Islamic Insurance companies started business under the title of Takaful.

There are about 85 companies presently undertaking Takaful business in 25 countries of the world. A broad estimate of the total Takaful industry in 2005 is approximately US$3 billions for both life and non-life business.

Definition of Takaful

The word Takaful means joint guarantee. The objective of Takaful is cooperation and mutual help among the members of a defined group.In a practical sense Takaful can be visualized as a method of joint guarantee among a group of members or participants against loss or damage that may inflict upon any of them. The members of the group agree to guarantee jointly that should any of them suffer a catastrophe or disaster, he would receive certain sum of money to meet the loss or damage. All members of the group pool together their efforts to support the needy.

WORKING OF THE TAKAFUL

BUSINESS: The Malaysian Case

Takaful Business is based on the concepts of Mudarabah and Tabarru. Involvement of these two Islamic forms of business eliminate the elements of Riba and Gharar from the insurance contract

In Family Takaful each Takaful installment is divided and credited into two separate Accounts namely, the Participants' Account(PA) and the Participants’ Special Account(PSA). A substantial proportion of the installments is credited into the PA solely for the purpose of savings and investment.

The balance of the installments is credited into the PSA as `tabarru' for Sharikah Takaful Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before the maturity of the contract.

The amount accumulated in the PA is invested in various business according to Islamic financing techniques, and the resultant profits are divided between the company and the participants according to the agreed upon ratio, e.g., 30-70.

The participant's share is calculated according to their individual share in the PA, and credited into their respective accounts, the PA and the PSA.

Mudarabah ModelPROFITS

ATTRIBUTABLE TOSHAREHOLDERS

COMPANY'SADMINISTRATION &

MANAGEMENTEXPENSES

INVESTMENT BYCOMPANY

PROFITSFROM

INVESTMENT

TAKAFULCONTRIBUTION PAID BY

PARTICIPANT

GENERALTAKAFUL

FUND

GENERALTAKAFUL

FUND

OPERATIONALCOST OFTAKAFUL

OPERATIONALCOST OF TAKAFUL

OPERATIONALCOST OFTAKAFUL

SHARE OFSURPLUS FOR THE

PARTICIPANT

SURPLUS(PROFIT)

SHARE OFSURPLUS FORTHE COMPANY

40% (Example Only)

60% (Example Only)

COMPANY

TAKAFUL CONTRACTBASED ON PRINCIPLE OF

AL-MUDHARABAH

PARTICIPANT

Wakalah Model

PROFIT / LOSSATTRIBUTABLE TOSHAREHOLDERS

TAKAFUL ADMIN & MARKETINGEXPENSES 25% TO 35%

INVESTMENTBY FUND

PROFITS FROMINVESTMENT

TAKAFULCONTRIBUTIO

N PAID BYPARTICIPANT

GENERALTAKAFUL

FUND65% TO 75%

GENERALTAKAFUL

FUND

OPERATIONAL COSTOF TAKAFUL /RETAKAFUL

OPERATIONAL COSTOF TAKAFUL

OPERATIONAL COSTOF TAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANT

SURPLUS(PROFIT)

100%

COMPANY

TAKAFULCONTRACT BASEDON PRINCIPLE OF

AL-WAKALAH

PARTICIPANT

60%

SHARE OF PROFITFOR THE COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY

Takaful and Microfinance

The Takaful system and entrepreneurship development can be two key agents in the process of economic development, poverty alleviation and development of livestock and dairy development.

Takaful and Microfinance

This can be proceeded by investment in this sector. Provision of microfinance by the Helping Hand, Islamic Banks and Takaful companies to the poor peasants for purchase of Livestock.Risk can be safeguarded by HH through provision of funds to the Takaful Companies.

Takaful and MicrofinanceBesides that Takaful companies can also provide the finances to the livestock & dairy sector by using different modes of investment.

Islamic microfinance is used by Islamic Bank Bangladesh, Muslim Aid and some other Islamic Non-government organisations to promote entrepreneurship as a tool to combat poverty.

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