1. 11 th Harvard University Forum on Islamic Finance CHALLENGES AND OPPORTUNITIES IN DEVELOPING MICROTAKAFUL IN MUSLIM MAJORITY COUNTRY: A CASE STUDY OF INDONESIA RADITYA SUKMANA, Ph.D The author is the head of master degree program in Islamic economics at Universitas Airlangga, Indonesia. momyadit@gmail.com And SUTAN EMIR HIDAYAT, Ph.D The author is an assistant Professor and academic advisor for Islamic finance at University College of Bahrain. sutan@ucb.edu.bh or st_emier@yahoo.com.sutan@ucb.edu.bhst_emier@yahoo.com

2. Presentation Outlines Introduction Structure and Business Models of Microtakaful The Importance of MSME in Indonesia Challenges in Developing Microtakaful in Indonesia Opportunities in Developing Microtakaful in Indonesia Conclusion

3. Introduction Objective of Islamic finance  maslahah (Hidayat, 2010). Achieved? The need of the poor? The importance of Islamic microfinance  supported by microtakaful Microinsurance is positively correlated to economic growth (Back and Webb, 2003; Lim and Haberman, 2003; Erlbeck et al, 2011). Microtakaful works very well for the poor people in Indonesia (Erlbeck et al, 2011) Microtakaful in Indonesia is still less developed (Ingram and Mc Cord, 2011).

4. Objectives of the Study  This paper aims to provide the challenges and opportunities in developing Microtakaful in Indonesia  Library study based method is adopted. It is a kind of qualitative research approach.

5. Map of Indonesia 5 (Bank Indonesia, 2013; Indonesian Statistical bureau, 2013) : 1.Total Population 230 million (2011) 2.Five biggest islands: 1.JAVA 2.KALIMANTAN 3.SUMATERA 4.SULAWESI 5.PAPUA 3.Member of G20 4.% muslim = 85% 5.Biggest economy in the Muslim world 6.Exchange rate (Rupiah-Rp) USD 1 = Rp 11.000

6. Structure and Business Models of Microtakaful AspectsWakala Mudaraba with suplus sharing Mudaraba without surplus sharing HybridWaqf Takaful operator's share in investment profits Fee as a percentage of total investments Profit share Fee as a percentage of total investments Takaful operator's share in underwriting surplus Not availableProfit shareNot availableProfit shareNot available Operating expensesBorne by shareholders which are compensated by upfront charge of wakala fees Borne by shareholders and no fees Borne by policyholders and charged at year end Borne by shareholders which are compensated by upfront charge of wakala fees Microtakaful business models are the same as Takaful business models (Haryadi, 2007; Erlbeck et al, 2011; Khan, 2011; Barwari; 2012).

7. The Importance of MSME in Indonesia (Ministry of Cooperation www.depkop.go.id,retrieved 2012)www.depkop.go.id,retrieved NoIndicatorUnitYear 2010 Numbers of UnitUnitNumbersShare 1MSMEsUnit53,823,73299.99 2MicroUnit53,207,50098.85 3SmallUnit573,6011.07 4MediumUnit42,6310.08 Number of LaborPerson (unit)NumbersShare 1MSMEsPerson99,401,77597.22 2MicroPerson93,014,75990.98 3SmallPerson3,627,1643.55 4MediumPerson2,759,8522.7 Contribution to GDPRp BillionNumbersShare 1MSMEsRp Billion3,466,393.357.12 2MicroRp Billion2,051,87833.81 3SmallRp Billion597,770.29.85 4MediumRp Billion826,745.113.46

8. Challenges in Developing Microtakaful in Indonesia (Ascarya and Yumanita, 2005; Rosengard, 2007; Ingram et al, 2011; Ernst & Young, 2013; Hidayat, 2013b; Ya’u, 2013)  Regulation  No mandatory policy (Motor Vehicle Accident and Health Insurance Policies)  Awareness of the microtakaful  Less awareness on the existence of microtakaful  Human resources  Difficulties for microtakaful providers to get the best talent.

9. Opportunities in Developing Microtakaful in Indonesia (Siebel, 2008; Patel, 2008; Nugroho, 2009 ; Bhatty, 2011; Bank Indonesia, 2012; Ernst & Young, 2013) Economic growth – 2013 (5.8%) – More domestic demand Population – Rank 4 th (237 Million) in the world after China, India and USA – 60% of the population (around 140 million) is in the productive age (15 to 54 years old) Number of Muslim in Indonesia – 85% is Muslim – Mostly in western part of Indonesia The growth of Islamic banking and finance Industry – 30% growth annually – > 60% financing is given to MSME

10. Conclusion  Being the largest Muslim country, Indonesia has opportunities to develop microtakaful industry.  However, there are certain challenges that must be overcome.

11. THANK YOU

12. Definition of the MSMEs 12 Table 8.3 (Based on the interiew by IMFI practitioner NoClassificationRange of given financing 1Super microLess than USD 100 2MicroUSD 100 - USD 500 3SmallUSD 500 – 5000 4MediumUSD 5000 – USD 20,000