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. LOW INCOME

 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 means guaranteeing each other Or joint guarantee.  It originates from the Arabic word means guaranteeing each other Or joint guarantee. Kafalah,

ORIGIN OF TAKAFUL? o Takaful 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? o This 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., 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

Wakalah Model

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.

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