Microfinance, Takaful
(Islamic Insurance)
and their use in Live Stock &
Dairy Sector
Prof. Dr. Mian Muhammad Akram
Head 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.
WHAT IS TAKAFUL?
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?

It originates from the Arabic word
Kafalah
,
means guaranteeing
each other
Or
joint guarantee.
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?
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
activities
Improvement in the saving habits in the
society and making funds available for
productive investments
Help 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 Model
PROFITS
ATTRIBUTABLE TO
SHAREHOLDERS
COMPANY
COMPANY'S
ADMINISTRATION &
MANAGEMENT
EXPENSES
TAKAFUL CONTRACT
BASED ON PRINCIPLE OF
AL-MUDHARABAH
INVESTMENT BY
COMPANY
PROFITS
FROM
INVESTMENT
SHARE OF
SURPLUS FOR
THE COMPANY
OPERATIONAL
COST OF
TAKAFUL
PARTICIPANT
TAKAFUL
CONTRIBUTI
ON PAID BY
PARTICIPANT
GENERAL
TAKAFUL
FUND
GENERAL
TAKAFUL
FUND
OPERATIONAL
COST OF TAKAFUL
OPERATIONAL
COST OF
TAKAFUL
SURPLUS
(PROFIT)
40% (Example Only)
60% (Example Only)
SHARE OF
SURPLUS FOR THE
PARTICIPANT
Wakalah Model
COMPANY
TAKAFUL ADMIN & MARKETING
EXPENSES 25% TO 35%
SHARE OF PROFIT
FOR THE COMPANY
MANAGEMENT
EXPENSES OF
COMPANY
PROFIT / LOSS
ATTRIBUTABLE TO
SHAREHOLDERS
40%
TAKAFUL
CONTRACT BASED
ON PRINCIPLE OF
AL-WAKALAH
INVESTMENT
BY FUND
PROFITS FROM
INVESTMENT
60%
PARTICIPANT
TAKAFUL
CONTRIBUTIO
N PAID BY
PARTICIPANT
GENERAL
TAKAFUL
FUND
65% TO 75%
OPERATIONAL COST
OF TAKAFUL /
RETAKAFUL
GENERAL
TAKAFUL
FUND
OPERATIONAL COST
OF TAKAFUL
OPERATIONAL COST
OF TAKAFUL
SURPLUS
(PROFIT)
SHARE OF
SURPLUS FOR
THE PARTICIPANT
100%
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 Microfinance
Besides 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.
THANK YOU