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DEVELOPING MICROTAKAFUL IN INDONESIA1

Agus Haryadi2

1 The article is presented on The 2nd International Convention on Takaful and Retakaful, Kuala Lumpur, 23 November 2006 2 Head of Group, “Takaful Mikro Indonesia” (Takmin), Working Group of Peramu, Bogor, Indonesia

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Shadaqah/Charity

Poor People

Shadaqah/Charity

Poor People

Poor People

Poor People

Shadaqah/Charity

Qard

h/Loan

Financin

g

Poor People

Shadaqah/Charity

Qard

h/Loan

Financin

g

Poor PeoplePoor PeoplePoor People S

hadaqah/Charity

Qardh/Loan

Saving/in

vestm

ent

Financin

g

Poor People

Shadaqah/Charity

Qardh/Loan

Saving/in

vestm

ent

Financin

g

Poor PeoplePoor PeoplePoor People

A. INTRODUCTION

Stages to Poverty Alleviation

Nowadays, the utilization of zakah

fund to empower the poor

has taken very important

role in our society.

Therefore the fund is pooled and distributed by Baytul

Maal as charity to this mustahik to support their living and case of emergency

such as sickness. However that is a short term solution and

somehow will not really

change the status of the

poor. The Baytul Maal is

also practicing to revolve

the zakah fund into micro

enterprise programs where the poor can apply for

Qard Al-Hasan as their micro enterprise capital. It is hoped that with the

control and supervision from the Baytul Maal,

the poor can develop the business and will

become independent up to the stage that they

will return the Qard Al-Hasan to the Baytul

Maal. For bigger business activity, Micro

Financial Institution (MFI) such as Baytul Maal

wa Tamwil, Islamic Cooperative and Islamic

Rural Bank will play their roles by giving

financing to the poor and it is expected that after the business is developed,

they will make some savings or investments at MFI. However, the possibility of

having risks such as death, sickness, accident, fire both Baytul Maal and MFI

will not be responsible for the whole recoverage. They might have some

support but without certainty of time and amount. From the stage of being

dependent, independent and entrepreneurship, the poor can turn to the early

stage if their risks are not bearable. Therefore, there must be an effort to

Shadaqah/Charity

Qard

h/Loan

Poor People

Shadaqah/Charity

Qard

h/Loan

Poor People

Poor People

Poor People

Shadaqah/Charity

Qard

h/Loan

Saving/In

vestm

ent

Financin

g

Risk

Sharin

g

Poor PeoplePoor PeoplePoor People

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share the risks that eventually will secure the poor at sustainable welfare

position.

In this case, there are three institutions involved in the above poverty

alleviation program. They are Baytul Maal as an institution of trust fund,

responsible for pooling public fund as zakah, infaq, shadaqah and waqf and

distributing them to the mustahik. The second institution is MFI as a

commercial institution offering financial services such as investment and

financing. At KBMT level, their limit of financing is around USD 50-1.000, for

Grameen Model and Islamic Rural Bank; their limit is less and above USD 100

respectively. The third institution which has a role to share the risks of both

the poor and MFI is called Microtakaful. It will offer benefits for MFI for

securing its revolving fund and for the poor to secure the payment to the MFI in

case of disability and death as well as additional benefit for the decease

family. In addition, the Microtakaful can also offer them with other investment

products to make their life more secured such as for education, pension.

Even Microtakaful is the takaful scheme for low-income people, in Islamic

perspective, however Takaful on its own is not the solution to the poverty

problem; it has to be recognized as an important component of any poverty

alleviation strategy. Without protection against losses and natural perils many

individuals will fall back into poverty (back to the early stage in case for the

poor), which is not solving the real and long term problem of poverty

alleviation. Takaful can provide the safety net for communities to achieve

sustainable development of their standard of living, providing a basis for

families to look to the future with a sense of security and optimism3.

3 Takaful and poverty alleviation by Sabbir Patel. ICMIF

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COPING MECHANISMSCOPING MECHANISMS

Poor PeoplePoor People BetterBetter--off persons:off persons:

illness,death,disasters,

loss of property

,and loss of income

earning capacity.

the better-off have access

to sophisticated insurance

schemes and often have a .

financial buffer to overcome

temporary set-backs,

on self-insurance:

Mostly informal

and time-honoured

group based support systems.

These are based on

savings or on borrowing models.

essentially the same as the risks facedessentially the same as the risks faced

COPING MECHANISMSCOPING MECHANISMS

Poor PeoplePoor People BetterBetter--off persons:off persons:

illness,death,disasters,

loss of property

,and loss of income

earning capacity.

the better-off have access

to sophisticated insurance

schemes and often have a .

financial buffer to overcome

temporary set-backs,

on self-insurance:

Mostly informal

and time-honoured

group based support systems.

These are based on

savings or on borrowing models.

essentially the same as the risks facedessentially the same as the risks faced

B. OVERVIEW OF MICROINSURANCE

1. What is Microinsurance?

Under conventional insurance, insurance for the poor is called microinsurance.

The CGAP Working Group on Microinsurance notes “Microinsurance is the

Protection of low-income people against specific perils in exchange for regular

monetary payments (premiums) proportionate to the likelihood and cost of the

risk involved. As with all insurance, risk pooling allows many individuals or

groups to share the costs of a risky event”.

Moreover, in the last ten years a good deal of pioneering and experimentation

in the field of Microinsurance has been conducted, which resulted in a growing

confidence that insuring poor people is actually possible. As microfinance has

shown that the poor are bankable, Microinsurance is showing that they are

insurable as well4.

2. Coping Mechanisms

People living with poverty from time to time, have developed mechanisms to

deal with risks affecting their lives. The risks faced by better-off persons are

the same with the risk

faced by the poor:

illness, death,

disasters, loss of

property, and loss of

income earning

capacity. However,

the better-off have

access to sophisticated

4 ‘Micro-insurance, an overview of client, provider and support perspectives’, published by Novib, june 2005. Page 4

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insurance schemes and often have a financial buffer to overcome the problems,

the poor usually lack both.

In case of shock, the poor relies on coping mechanisms based on self-insurance:

mostly informal and time-honoured group based support systems. The better-

off with savings or on borrowing manage risks before the event occurs, such as

in the case of marriage or burial funds. The poor however, manage risks after

the occurrence of the event, such as borrowing from family, solidarity groups

or money lenders5.

3. Risk and Impact

DeathIllnessProvertyLoss

Risk EventRisk Event

IMMEDIATE IMPACTIMMEDIATE IMPACT

RESPONSESRESPONSES

SECONDARY SHOCK IMPACTS SECONDARY SHOCK IMPACTS

DeathIllnessProvertyLoss

Risk EventRisk Event

IMMEDIATE IMPACTIMMEDIATE IMPACT

RESPONSESRESPONSES

SECONDARY SHOCK IMPACTS SECONDARY SHOCK IMPACTS

In their field research in East Africa, Cohen and Sebstad identified a general

coping pattern linking direct impact with responses and future impacts. Their

model, which is seen from the perspective of a micro-entrepreneur,

convincingly shows that traditional coping mechanisms still function well if the

5 ‘Micro-insurance, an overview of client, provider and support perspectives’, published by Novib, june

2005. Page 10

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UGANDA ALBANIA

Theft Electricity cut-offs

Health problems Fire

Death of family member Health problems

Price Pluctuations Theft – Car accidents

Fire and other accidents Unfair competition

Natural disasters Natural disasters

Loan repayment Death of family member

WOMAN MAN

School fees Health problems

Health problems Accidents

Funeral School fees

Damage to property Theft – Fire

Theft – Loan repayments Damage to property

Accidents Livestock

Fire – Drought Funerals – Repayments

Old age – Livestock Old age

VULNERABLE HOUSEHOLDS NON-VULNERABLE HOUSEHOLDS

Illness Education

Wedding Business risks

House building Wedding

Death Illness Agricultural risks

Natural disasters House building

Agricultural risks Natural disasters

Other business risks Death

Education

IMPORTANCE->

IMPORTANCE->

IMPORTANCE->

stress level of the risk event is limited (low to medium). If, however, the stress

level is high, the affected family can not hope to overcome the damage and

faces a serious decline of the quality of its life. And as the authors remark, the

very poor have even fewer options. The self-insurance schemes on which they

rely are highly inadequate to deal with major risk events. Overcoming the

damage often leads to future indebtedness6

4. Different Needs and Priorities

Poor people have different needs and priorities. Designing insurance products

for all types of needs will affect any insurance program adversely. An

interesting approach to recognize these differences was presented by the

Microfinance Centre, the main network of Eastern European and Central Asian

microfinance institutions. First it placed insurance needs in the broader

context of all problems faced by a potential group of clients. Then it compared

6 Monique Choen and Jennefer Sebstad, Reducing Vulnerability: The Demand for Microinsurance,

Nairobi, 2003, pages VI-VII, sponsored by MicroSave

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different settings; in the box between Uganda and Albania. This way, level of

problems could be identified.

After differentiating as to settings, the approach allows for looking at variances

across groups. Women may have a different problems ranking than men as

illustrated in the next box, coming from Ghana. Lastly, the approach looks for

differences between groups within the same setting. In this example

differences are presented between vulnerable and non-vulnerable households

in Uzbekistan. Obviously, the micro-insurance schemes will see these

differences when designing the most appropriate policies7

5. Microinsurance Product

Most common types of microinsurance product like credit life, term

life/Personal Accident, saving life, property insurance, endowment life,

agriculture and health insurance. Credit life is a simple product hence its

degree of difficulty is lower than term life or health insurance. Therefore

degree of success offering credit life is higher than offering savings life or

health insurance8

7 Slide show presentation by Michal Matul of the icrofinance Centre for Central and Eastern Europe and

the New Independant States at the KfW Microinsurance Symposium, Frankfurt, Oktober 2004.

8 Microinsurance Products, Presentation by Craig Churchill at the KFW Microinsurance Meeting, 21

October 2004)

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6. The Five Recommended Products

These short-term, credit-linked products represent building blocks. Beginning

with Credit Life, each builds on the systems and experiences of the previous

product. For example, if an MFI has effective systems to manage a Credit Life

product, it is easy to add Credit Disability, and not too complicated to offer an

Additional Benefit policy. It is anticipated that these products would be

introduced one-by-one over a period of years as the MFI develops expertise,

although of course an MFI need not provide all of them.

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As complexity of these products increases, the value for policyholders increase

too. With Credit Life and Credit Disability, the protection largely accrues to the

MFI since insurance reduces its credit risk9.

Waiting Periods for the Five Products

Credit Life Low None

Credit Disability None

Additional Benefit 1 Loan cycle

Additional Lives2 Loan cycles: must give 6 months

notice of intention to join

Continuation HighNone but must have had the Additional

Benefit Policy

Severity of

Adverse SelectionWaiting PeriodProduct

(Source: Making Insurance Work for Microfinance Institutions, A Technical Guide to Developing

andD elivering Microinsurance, Craig F. Churchill, Dominic Liber, Michael J. McCord, James

Roth. ILO, 2003. Page 84)

7. Microinsurance Delivery Models10

Full service model: Regulated insurers downsizing insurance services like Delta

Life (Bangladesh), which offers a long-term savings product (annuity) with life

insurance and a premium affordable by the poor. Some MFIs also assume the

role of insurers. Most of these offer only basic credit life insurance to protect

their loan portfolios.

9 Making Insurance Work for Microfinance Institutions, A Technical Guide to Developing andDelivering

Microinsurance, Craig F. Churchill, Dominic Liber, Michael J. McCord, James Roth. ILO, 2003. Page 74 10 MicroInsurance Centre Briefing Note #6, Financial Risk Management Tools for the Poor,

Monique Cohen and Michael J. McCord

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Community-based model: Local communities form groups that capitalize and

manage a risk pool for their members.

Provider model: Hospitals and clinics create prepaid or risk pooling coverage

for people at their facilities.

Social protection models: National governments often underwrite cover for

certain risks through social insurance programmes such as with healthcare,

crops and livestock, and covariant risk.

Partnership model: Insurers, with products, are pairing with MFIs and others,

with low-income markets, to provide microinsurance, as AIG does with MFIs in

Uganda.

C. DEVELOP MICROTAKAFUL IN INDONESIA

Microtakaful is the takaful scheme for low-income people. All the Takaful

products like takaful financing, takaful education, fire, pension, etc. can be

delivered to poor people with some modification i.e. low premium

contribution.

Peramu is an NGO concerns on empowering the people with poverty, the team

has experiences to set-up Islamic Microfinance such as Islamic Rural

Bank/BPRS, Baytul Maal wat Tanwil Cooperative/KBMT, and Grameen model in

Bogor. It also has been tightly involved in Baytul Maal Bogor/Trust Fund and

now is setting-up Microtakaful adopting the partner-agent model. In this case,

Takaful Indonesia as a partner will then work together to enter the micro

market.

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For setting up the Microtakaful, Peramu established a working group, named

Takmin Working Group, which is responsible to run Microtakaful program with

pilot project in Bogor. Takmin WG has obtained technical assistant from

Microinsurance expert from the Netherland (Microinsurance Assosiation of

Netherland/MIAN).

The pilot project is expected to give birth to Microtakaful Products, Business

Process, System Operating Procedure, Training and Marketing model.

Furthermore, after the completion of the pilot project, roll-out can be

implemented in other cities in Indonesia in the following year.

ACTIVITIES

Partner with

Takaful

Market Research I

(Qualt. Approach)

System

Development

Product Design

Institutional

System

Appraisal Strategic Planning

Launching

(9 Dec 2006)

Pilot Testing

(1 year)

Market Res. II

(Quant. Approach)

Business Plan Roll Out

Education/Training

System

INITIAL SET-UP (Sept 2005)

Literature Study

Socialization the

Microtakaful idea

to MFIs

Submit Proposal

to donor agency and its appraisal

Technical Assistance &

Commitment from

MIAN (Sept 2006)

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Some Criteria for Successful Microtakaful11

To ensure the success of the Microtakaful, therefore Takaful Indonesia together

with Takmin WG and MFIs will need to look into some criteria as written on the

Microinsurance Newsletter such as the following:

1. Real, integral partnerships with “people’s” organisations

- Takmin WG working together with Takaful Indonesia as a Partner

and MFI as Agent to give access to MFI customers and clients to

participate in the Microtakaful programs. At the same time, it

also set building capacity for MFI as organization.

2. Products decided/agreed on by partner organisations

3. Trust and transparency between the partner and the insurer

4. Simple products

5. Group insurances

6. Minimal marketing costs; avoidance of commissions

7. Risk-only coverage

8. “Automatic” coverage linked to other activities

9. Aggregated premium payments

10. Stream-lined administration

11. Simple claims procedure and verification

12. Rapid delivery of benefit payments

13. A profit-sharing mechanism

11 Source: Microinsurance Newsletter no. 6. March 2005