ISSUES IN REGULATION AND SUPERVISION OF
MICROTAKĀFUL (ISLAMIC MICROINSURANCE)NOVEMBER 2015

ABOUT THE ISLAMIC FINANCIAL SERVICES BOARD (IFSB)The IFSB is an international standard-setting organisation which was officially inaugurated
on 3 November 2002 and started operations on 10 March 2003. The organisation promotes
and enhances the soundness and stability of the Islamic financial services industry by
issuing global prudential standards and guiding principles for the industry, broadly defined
to include banking, capital markets and insurance sectors. The standards prepared by the
IFSB follow a lengthy due process as outlined in its Guidelines and Procedures for the
Preparation of Standards/Guidelines, which includes the issuance of exposure drafts andthe holding of workshops and, where necessary, public hearings. The IFSB also conducts
research and coordinates initiatives on industry-related issues, as well as organises
roundtables, seminars and conferences for regulators and industry stakeholders. Towards
this end, the IFSB works closely with relevant international, regional and nationalorganisations, research/educational institutions and market players. For more information
about the IFSB, please visit www.ifsb.org.

ABOUT THE INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS (IAIS)The IAIS is a voluntary membership organisation of insurance supervisors and regulatorsfrom more than 200 jurisdictions in nearly 140 countries. The mission of the IAIS is topromote effective and globally consistent supervision of the insurance industry in order todevelop and maintain fair, safe and stable insurance markets for the benefit and protectionof policyholders and to contribute to global financial stability. Established in 1994, the IAIS
is the international standard-setting body responsible for developing principles, standards
and other supporting material for the supervision of the insurance sector and assisting intheir implementation. The IAIS also provides a forum for members to share theirexperiences and understanding of insurance supervision and insurance markets. The IAIS
coordinates its work with other international financial policymakers and associations ofsupervisors or regulators, and assists in shaping financial systems globally. In particular,
the IAIS is a member of the Financial Stability Board (FSB) and the Standards Advisory
Council of the International Accounting Standards Board (IASB) and a partner in the Accessto Insurance Initiative (A2ii). In recognition of its collective expertise, the IAIS is routinely
called upon by the G20 leaders and other international standard-setting bodies for input on
insurance issues, as well as on issues related to the regulation and supervision of the global
financial sector. For more information about the IAIS, please visit www.iaisweb.org.

THE IFSB TECHNICAL COMMITTEE
Chairman
H.E. Dr. Ahmed Abdulkarim Alkholifey – Saudi Arabian Monetary Agency (until 1 April 2015)
Mr. Osamah Shaker –Saudi Arabian Monetary Agency (from 2 April 2015)
Deputy Chairman
Mr. Mu’jib Turki Al Turki – Qatar Central Bank

Mr. Haseeb Ullah Siddiqui

Members*
Islamic Development Bank

Mr. Lotfi S. Zairi(until 1 April 2015)
Mrs. Aysha AlJalahma(until 28 February 2014)
Mr. Hussain Ali Sharaf(until 1 April 2015)
Mrs. Ebtisam Al Arrayed(from 2 April 2015)
Mr. K.M. Abdul Wadood(until 4 March 2014)
Mr. Md Nasiruzzaman(until 20 October 2014)
Mr. Chowdhury Md. Feroz Bin Alam
(until 31 August 2015)
Ms. Mahani Mohsin(until 1 April 2015)
Ms. Rashidah Sabtu(from 2 April 2015)
Mr. Tarek El-Sayed Fayed

Islamic Corporation for the Insurance of Investment
and Export Credit (ICIEC)
Central Bank of Bahrain

Dr. Agusman(until 12 March 2015)
Dr. Dadang Muljawan(from 13 March 2015)
Mr. Edy Setiadi(until 26 March 2014)
Mr. Ahmad Buchori(from 27 March 2014)
Mr. Morteza Setak(until 1 April 2015)
Mr. Hamidreza Ghaniabadi(from 2 April 2015)
Dr. Ali Salehabadi(until 20 October 2014)
Dr. Ali Saeedi(from 2 April 2015)
Mr. Arafat Alfayoumi

Bank Indonesia

Mr. Talal Al Zemami(until 1 April 2015)
Mr. Bakarudin Ishak(until 1 April 2015)

Central Bank of Bahrain
Central Bank of Bahrain
Bangladesh Bank
Bangladesh Bank
Bangladesh Bank
Autoriti Monetari Brunei Darussalam
Autoriti Monetari Brunei Darussalam
Central Bank of Egypt

Bank Indonesia
Indonesia Financial Services Authority
Indonesia Financial Services Authority
Central Bank of the Islamic Republic of IranCentral Bank of the Islamic Republic of Iran
Securities and Exchange Organization, Iran
Securities and Exchange Organization, IranCentral Bank of Jordan
Capital Market Authority of KuwaitBank Negara Malaysia

Mr. Mohd Zabidi Md Nor(from 2 April 2015)
Mr. Zainal Izlan Zainal Abidin

Bank Negara Malaysia

Dr. Bashir Aliyu Umar
(until 20 October 2014)
Dr. Yakubu A. Umar
(until 4 August 2015)
Mr. Saleem Ullah(until 20 October 2014)
Mr. Yavar Moini(until 1 October 2015)
Mr. Ahmed Ali Al Mamari(until 1 April 2015)
Mr. Tan Keng Heng
(until 13 November 2014)
Mr. Ethan Goh Cheng Hing(from 14 November 2014)
Dr. Badreldin Gorashi Mustafa

Central Bank of Nigeria

Securities Commission Malaysia

Central Bank of Nigeria
State Bank of Pakistan
State Bank of Pakistan
Capital Market Authority of Oman
Monetary Authority of Singapore
Monetary Authority of Singapore
Central Bank of Sudan

Mr. Mehmet Siddik Yurtcicek(until 15 September 2015)
Mr. Ahmet Bicer(from 27 March 2014)
Mr. Bircan Akpinar(until 1 April 2015)
Mr. Eser Sagar(from 2 April 2015)
Mr. Khalid Omar Al-Kharji

Banking Regulation and Supervision Agency of
Republic of Turkey
Central Bank of Republic of Turkey

Mr. Prasanna Seshachellam(until 11 August 2015)

Dubai Financial Services Authority, United ArabEmirates

Capital Market Board of Turkey
Capital Market Board of Turkey
Central Bank of the United Arab Emirates*In alphabetical order of the country the member’s organisation represents

THE IAIS EXECUTIVE COMMITTEEChair
Mr Felix Hufeld – Bundesanstalt für Finanzdienstleistungsaufsicht, Germany
Vice Chair
Mr Takashi Hamano – Financial Services Agency, Japan
Vice Chair
Mr Kevin M McCarty - Florida Office of Insurance Regulation, USA

Mr Keith Chapman

Members*
Australian Prudential Regulation Authority

Mr Bernard Dupont

Office of the Superintendent of Financial Institutions,
CanadaMs Cindy Scotland

Cayman Islands Monetary Authority, British West
IndiesMr Carlos Pavez Tolosa

Superintendencia de Valores y Seguros, Chile

Mr Junbo Xiang

China Insurance Regulatory Commission

Mr Gabriel Bernardino

European Insurance and Occupational Pensions
Authority
Autorité de Contrôle Prudentiel et de Résolution,
FranceGuernsey Financial Services Commission

Ms Sandrine Lémery
Mr William Mason
Mr T S Vijayan

Insurance Regulatory and Development Authority,
India

Mr Taeguk Jin

Financial Supervisory Service, Republic of Korea

Ms Norma Rosas Rodriguez

Comision Nacional de Seguros y Fianzas, Mexico

Mr Hassan Boubrik

Mr Damian Jaworski

Direction des Assurances et de la PrévoyanceSociale, Morocco
Superintendencia de Banca, Seguros y
Administradoras Privadas de Fondos de Pensiones
del Peru, Peru
Komisja Nadzoru Fiansowego, Poland

Mr Khalid S. Althieb

Saudi Arabian Monetary Agency

Ms Keng Yi Lee

Monetary Authority of Singapore

Mr Jonathan Dixon

Financial Services Board, South Africa

Mr Daniel Schydlowsky

Mr Peter Giger

Eidgenössische Finanzmarktaufsicht FINMA,
Switzerland

Ms Victoria Saporta

Bank of England, United Kingdom

Ms Julie Mix McPeak

Tennessee Department of Commerce andInsurance, USA

Ms Susan Donegan

Vermont Department of Financial Regulation, USA

Dr Peter Braumüller

Financial Market Authority, Austria

Mr Alberto Corinti

Istituto per la Vigilanza sulle Assicurazioni, Italy

Mr Michael McRaith

Federal Insurance Office of the United States
Department of Treasury, USA*In alphabetical order of the country the member’s organisation represents

ISSUES IN REGULATION AND SUPERVISION OF MICROTAKĀFUL (ISLAMIC MICROINSURANCE)JOINT WORKING GROUP
Chairman
Mr Arup Kumar Chatterjee – Asian Development Bank
Deputy Chairman
Mr Ehsan Diljore – Islamic Corporation for the Development of the Private Sector (ICD)
Members*
Mr Wasim Ahmed Abdulwahab
Ms Serap Gonulal
Mr Luc Noubissi
Dr Ronald Rulindo
Mr Makhzani Mustaffa Ng(until 19 August 2015)
Dr Hamim Syahrum Ahmad Mokhtar(from 20 August 2015)
Mr Azeddine Benali
Mrs Bello Medinat Oluwatoyin
Mr Gokhan Karasu
Mr Sabbir Patel

Islamic Development Bank
The World Bank
Conférence Interafricaine des Marchés d'Assurance(CIMA), Gabon
Indonesia Deposit Insurance Corporation
Bank Negara Malaysia
Bank Negara Malaysia
Direction des Assurances et de la Prévoyance Socials(DAPS), Morocco
National Insurance Commission, Nigeria
Prime Minister Undersecretariat of Treasury, Turkey
International Cooperative and Mutual Insurance
Federation, United Kingdom*In alphabetical order of the country the member’s organisation represents

SECRETARIAT, ISLAMIC FINANCIAL SERVICES BOARD
Mr Jaseem Ahmed

Secretary-General

Mr Zahid ur Rehman Khokher

Assistant Secretary-General

Mr Ehsan ZaheedConsultant

Mrs Kartina Md Ariffin

Member of the Secretariat, Technical and Research

Mr Mohammed Farouq Abdul Jalil

Member of the Secretariat, Technical and Research

SECRETARIAT, INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORSMr Conor Donaldson

Member of the Secretariat

Mr Peter van den Broeke

Member of the Secretariat

ABSTRACTIn their initiatives to enhance the regulatory best practices for financial inclusion, the Islamic Financial
Services Board (IFSB) and the International Association of Insurance Supervisors (IAIS) have jointly issued
Issues in Regulation and Supervision of Microtakaful (Islamic Microinsurance). The purpose of this paper
is to provide insights to the regulatory and supervisory authorities and industry players on the types ofissues that arise from Microtakaful practices.
Both of these standard-setters obtained data from the industry on the existing practices of Microtakaful
providers by sending out survey questionnaires to relevant regulatory and supervisory authorities as wellas Microtakaful providers. In addition, a literature review was done to enhance the paper by adding
successful examples from various jurisdictions for the benefit of other jurisdictions.
This paper studies the various types of Microtakaful model, the supervisory framework, and prevalentissues faced by Microtakaful providers and regulatory and supervisory authorities. In addition, for the benefitof jurisdictions that are new to Microtakaful, examples are given for practical illustration.
It is intended that this paper will provide guidance and understanding to regulatory and supervisory
authorities on how effective supervision may be accomplished for the Microtakaful sector specifically. It is
hoped that further work will be done by both the IFSB and the IAIS in promoting the development of aprudent and transparent Islamic financial services industry. The future work may include introduction ofstandards and guidelines for Microtakaful that are consistent with Shari’ah principles, and recommending
them for adoption.

Keywords: Microtakaful, Regulation, Takaful, Financial Inclusion

TABLE OF CONTENTSABBREVIATIONS ....................................................................................................................................... iii
A.

INTRODUCTION .................................................................................................................................. 1
I. Background to the Joint Work between IFSB and IAIS .......................................................... 1
II.

B.

Objectives of this Paper ..................................................................................................... 2

ABOUT MICROTAKĀFUL ................................................................................................................... 3
I. Models/Types of Microtakāful .................................................................................................... 5(a)Wakālah Model .............................................................................................................................5(b)

Wakālah–Muḍārabah Model .......................................................................................................6(c)

Wakālah–Waqf Model..................................................................................................................6(d)

Cooperative Model .......................................................................................................................6
Differences between Takāful and Microtakāful ................................................................ 7

II.

C.

(a)

Types of Microtakāful Providers .................................................................................................7(b)

Types of Participants ...................................................................................................................9(c)

Product Features and Contributions ..........................................................................................9(d)Distribution Channels .................................................................................................................10(e)Consumer Education .................................................................................................................11(f)

Operations ...................................................................................................................................11

III.

Differences between Microtakāful and Microinsurance ................................................ 12IV.

Survey Findings on Industry and Regulatory Practices of Microtakāful .................... 12SUPERVISORY AND REGULATORY FRAMEWORK FOR MICROTAKĀFUL ............................... 14
I. Corporate Governance ............................................................................................................. 14(a)Interests, Roles and Responsibilities of External Microtakāful Stakeholders....................14(b)Interests, Roles and Responsibilities of Internal Microtakāful Stakeholders .....................17(c)

Application of IAIS’ Insurance Core Principles.......................................................................25

II.

Financial and Prudential Regulation ............................................................................... 26(a)Sharī`ah Compliance Requirements........................................................................................26(b)

Requirement for Separation of Funds .....................................................................................27(c)

Sharing of Surplus ......................................................................................................................27(d)Solvency and Capital Adequacy Framework .........................................................................28(e)

Risk Management Framework .................................................................................................30(f)

Investment Framework ..............................................................................................................31(g)

Underwriting Requirements ......................................................................................................31

i

(h)
III.

Application of IAIS’ Insurance Core Principles.......................................................................32
Transparency, Reporting and Market Conduct .............................................................. 32(a)

Customer Education and Awareness ......................................................................................32(b)Consumer Protection .................................................................................................................33(c)

Consumer Recourse and Complaints .....................................................................................34(d)

Reporting to RSAs......................................................................................................................34(e)

Application of IAIS’ Insurance Core Principles.......................................................................35

IV.

Supervisory Review Process ........................................................................................... 35(a)

Licensing Requirements ............................................................................................................35(b)

Application of IAIS’ Insurance Core Principles.......................................................................36D.

PROPOSAL FOR FUTURE WORK ................................................................................................... 37

E.

DEFINITIONS ..................................................................................................................................... 40

REFERENCES............................................................................................................................................ 43ii

ABBREVIATIONSAAOIFI

Accounting and Auditing Organization for Islamic Financial Institutions

BOD

Board of directors

IAIS

International Association of Insurance Supervisors

ICP

Insurance Core Principles

IFSB

Islamic Financial Services Board

ILO

International Labour Organization

JWG

Joint working group

MBA

Mutual benefit association

MFI

Microfinance institutions

MP

Microtakāful provider

MRF

Microtakāful Risk FundNGO

Non-government organisation

PRF

Participants’ Risk Fund

RSA

Regulatory and supervisory authorities

RTO

Retakāful Operator

SB

Sharī`ah Board

SHF

Shareholders’ FundTC

Technical CommitteeTO

Takāful Operator

TU

Takāful undertakingiii

A. INTRODUCTION
I.

Background to the Joint Work between IFSB and IAIS

1. The Islamic Financial Services Board (IFSB), in its inaugural Seminar on Regulation of Takāful held
in Jordan on 10–11 January 2005, adopted several recommendations. One of these was that the IFSB
should play “an active and complementary role to that of the International Association of Insurance
Supervisors (IAIS) by issuing prudential and supervisory standards for Takāful that would safeguard theinterests of the consumers and the soundness and the stability of the financial system as a whole” (IFSB &IAIS, 2006).
2. Pursuant to this recommendation, a joint working group (JWG) was established by the IFSB and IAISin 2005 to produce an issues paper on the applicability of the existing IAIS Core Principles (ICPs) on the
Takāful sector and the regulatory and supervisory standards to be developed by the IFSB on Takāful. ThisJWG prepared a paper titled “Issues in Regulation and Supervision of Takāful (Islamic Insurance)”, which
was issued in August 2006, providing background information on Takāful as well as an analysis of theapplications of ICPs to the Takāful industry.
3. In this paper, four major themes were outlined to address the regulatory and supervisory issues within
the Takāful industry: corporate governance;
 financial and prudential regulation;
 transparency, reporting and market conduct; and the supervisory review process.

4. Based on these themes, the IFSB has in subsequent years produced the following standards andguidelines:(a) IFSB-8: Guiding Principles on Governance for Takāful (Islamic Insurance) Undertakings[December 2009];(b) IFSB-11: Standard on Solvency Requirements for Takāful (Islamic Insurance) Undertakings[December 2010];(c) GN-5: Guidance Note on the Recognition of Ratings by External Credit Assessment Institutions(ECAIs) on Takāful and Retakāful Undertakings [March 2011]; and(d) IFSB-14: Standard on Risk Management for Takāful (Islamic Insurance) Undertakings[December 2013].
5. In July 2013, the IFSB participated in the IAIS Financial Inclusion Subcommittee meeting held in
Manila, Philippines. 1 A proposal was put forward during this meeting for a second joint initiative to be
conducted between the IAIS and the IFSB, similar to the first issues paper initiative in 2006. Bothorganisations subsequently agreed to prepare a paper focusing on regulatory issues prevailing in the
1 The IAIS has since 2006 worked on its “access agenda” by way of the IAIS–Microinsurance Network Joint Working

Group and the Access to Insurance Initiative. Three papers on microinsurance have since been developed:(a)“Issues in Regulation and Supervision of Microinsurance” (June 2007); (b) “Issues Paper on the Regulation andSupervision of Mutuals, Cooperatives and other Community-based Organisations (MCCOs) in Increasing Access to
Insurance Markets (October 2010); and (c) “Application Paper on Regulation and Supervision Supporting Inclusive
Insurance Markets” (October 2012).

1

Microtakāful sector and its role in enhancing financial inclusion. It was also agreed that a JWG – comprising
members from both organisations – would work on this project.
6. Recognising the issues that the Takāful sector’s regulatory and supervisory authorities (RSAs) face inrelation to enhancing and strengthening the role of Microtakāful institutions, the Technical Committee (TC)of the IFSB, in its 32nd meeting held in Basel, Switzerland, recommended that the IFSB Council approve
preparation of a paper in this area. Consequently, the Council of the IFSB, in its 24th meeting held in Brunei
in March 2014, approved the development of a research paper on Microtakāful as part of the IFSB’s 2014
Workplan.

II.

Objectives of this Paper2

7. Taking into consideration the fact that there is currently a lack of studies on the operations of theMicrotakāful sector and associated regulatory issues, the objectives of the joint initiative are:(a) to identify the current practices and models used for offering Microtakāful products, and thechallenges and potential issues arising from Microtakāful transactions;(b) to review the current regulatory framework for the Microtakāful sector in various jurisdictions andsuggest initiatives to strengthen the framework and thus enhance financial inclusion through the
Takāful sector; and(c) to provide guidance to the RSAs on establishing an enabling environment for the overall
development and growth of the Microtakāful sector.

2 In the nomenclature of the IFSB, this paper is to be considered a Research Paper; and in that of the IAIS, an Issues

Paper

2

B. ABOUT MICROTAKĀFUL
8. Research conducted in 2010 suggests that in Muslim-populated countries, such as Indonesia (207
million), Pakistan (160 million), India (151 million) and Bangladesh (132 million), which have been classified
by the World Bank as lower-middle and low-income countries, insurance penetration is low due to thecontradictions between insurance principles and Sharī`ah principles (Erlbeck, 2010).
9. Microtakāful is widely known in the industry as Takāful for low-income populations. In general Takāful
terms, “low-income” means that section of the population that is customarily not eligible and not invited toparticipate in any of the Takāful plans of any Takāful Operator (TO). This group’s ineligibility is attributed tomembers’ inability to meet the basic financial and underwriting requirements set forth by Takāful regulation,
for reasons relating to medical history, hazardous occupation, irregular income, insurable interest, andvarious other considerations that fall within the purview of prudential regulation of exclusive finance. An
important cause is the unavailability of suitable insurance products that fit the needs of this specific groupof customers in combination with their lack of awareness and understanding of the usefulness of insurance
to manage the risks in their private and professional lives. Another contributing factor is the lack of expertise
and will of TOs to make the investment that is needed to reach these markets.
10. With the financial industry’s focus shifting towards inclusive finance, major initiatives have been
undertaken worldwide to include this low-income population in the financial system, to ensure that they areas privileged as the high-income population. The industry sees the need for this low-income group to beenabled to participate in the various products and plans offered by banks and insurance/Takāful companies,
as well as any other facilities offered by these financial institutions. The condition of this segment of society
makes it more vulnerable to financial losses; therefore, there is a great need for it to have some sort offinancial protection. Microinsurance/Microtakāful is therefore an important tool to protect it from financial
losses, and to help it break the cycle of poverty.
11. From the perspective of the Takāful industry, more TOs have started shifting their focus to include thelow-income segment in line with the financial inclusion agenda of their respective governments. For
example, in 2014, under the Malaysian government’s Bantuan Rakyat 1 Malaysia (“BR1M”) programme,
an initiative to help low-income earners to reduce their financial burden has been launched.3 The initiative
has brought all of the TOs operating in Malaysia together to provide an i-BR1M scheme for people earninga monthly household income US$1119 and below (Takaful Ikhlas, 2014).4
12. Various definitions of Microtakāful have been applied to categorise this group of low-income
participants. For example, jurisdictions may categorise these participants based on their minimum annual
income, product features, the location of potential participants, or their distribution channels.

3 According to the IAIS, microinsurance does not include government social welfare, as this is not funded by premiums

relating to the risk, and benefits are not paid out of a pool of funds that is managed based on insurance and risk
principles (IAIS, 2012). However, the aforementioned scheme may not fall under this category of government social
welfare, as it involves the normal underwriting process although the contribution is paid by the Government of Malaysia.
Furthermore, “The Landscape of Microinsurance in Asia and Oceania 2013”, a briefing note published by Munich Re
Foundation, describes this form of scheme as social microinsurance, whereby its premiums are fully or largely
subsidised by the government and underwritten by insurers.
4
i-BR1M is a one-year Takaful plan that provided protection to recipients in BR1M categories of households/families.
i-BR1M aims to ease the burden of the recipient and/or recipient’s families in the event of his or her death (accidental
and non-accidental) or accidental total permanent disability. The i-BR1M contribution is borne entirely by theGovernment of Malaysia. Furthermore, i-BR1M is managed by a Takaful Operator consortium.

313. While in certain jurisdictions Microtakāful products are focused on low-income earners, in some otherjurisdictions they are targeted specifically at low-income Muslims. One research paper defined Microtakāful
as “a concept developed for deprived people in Muslim countries” (Gor, 2013). In Africa, Microtakāful isdefined by Takāful Insurance of Africa as “a mechanism to provide Sharī`ah-based protection to the bluecollared, under-privileged individuals at an affordable cost” (Takaful Insurance of Africa, 2012). While otherdefinitions of Microtakāful are cited in numerous academic papers, the objective nevertheless remains thesame: to include in the financial system certain sections of the population who, under normal circumstances,would be excluded.
14. For the purposes of this paper, Microtakāful shall be defined to be consistent with the definition ofTakāful as provided in IFSB-8 (IFSB, 2009a), taking into account the core principles embedded in theconcept of mutual assistance:
Microtakāful is the Islamic counterpart of microinsurance,5 and exists in both Family and Generalforms. It is a joint-guarantee initiative, whereby a group of participants agree among themselves tosupport one another jointly for the losses arising from specified risks, under the core principles ofTabarru’ (donation), TaÑāwun (mutual assistance) and Prohibition of Ribā (usury). Microtakāful isgenerally offered to [the] low-income and under-privileged segment of the population (which is usually
excluded from the general Takāful terms and conditions) by various entities which are regulated andsupervised by regulatory and supervisory authorities of Takāful/insurance or any other competentregulatory and supervisory authority under the national laws of any jurisdiction.
15. Given the evolving nature of Microtakāful, the definition shall be subject to periodic review for
appropriateness as the Microtakāful industry grows and matures.
16. While the distinction between Microtakāful and Takāful is made based on the inclusivity and exclusivityof the financial system, it is worth reiterating that, conceptually, Microtakāful does not differ from Takāful. It
is a subset of Takāful. It exists under the premise that microinsurance 6 does not meet the basic principlesof Sharī`ah, where elements of Riba (usury), Maysir (gambling) and Gharar (uncertainty) are prohibited.7
However, due to the exclusivity nature of Takāful products, the specific regulation of Microtakāful has notbeen given much attention by the regulatory and supervisory authorities despite the new development ofpromoting inclusive finance in the financial industry. This might be due to the mere fact that little experienceor empirical data is available for prudential regulation to take place effectively without dampening the growthfor inclusiveness.
17. Sections B.I–B.III of this paper aim to provide basic background information on (i) the types ofMicrotakāful models that are currently being used in the industry, (ii) key differentiating elements between
Takāful and Microtakāful, and (iii) the differences between Microtakāful and microinsurance. Section B.IV
will highlight the findings of the survey conducted by both the IFSB and the IAIS for the purpose of thispaper.

5 The IAIS has defined “microinsurance” as insurance that is accessed by low-income populations, provided by a variety

of different entities, but run in accordance with generally accepted insurance practices (which include the ICPs) (IAIS,
2012). The IAIS also uses the term “inclusive insurance” for all insurance products that are aimed at the excluded orunderserved insurance market. In practice, the term “microinsurance” is often used interchangeably. Where the term
is used in this paper, it is considered to mean inclusive insurance.
6 The IAIS published “Issues in Regulation and Supervision of Microinsurance” in June 2007, entailing definition of
microinsurance and the issues and challenges in regulating the sector.
7 IFSB-8: Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings states that the concept of
Takaful is significantly defined by Tabarru’ commitment, Ta`awun and prohibition of Riba (usury).

418. Section C then draws upon the various Microtakāful (and, in some scenarios, microinsurance) issues
and challenges that have also been observed in the Takāful/insurance industry from a regulatory
perspective. This section divides the issues on regulation of Microtakāful into four segments: (i) corporate
governance; (ii) financial and prudential regulation; (iii) transparency, reporting and market conduct; and(iv) the supervisory review process. In addition, where appropriate, examples of practical situations facedby some RSAs that have initiated regulations on Microtakāful/microinsurance will be provided to giveinsights into various approaches that have proven to be either successful or unsuccessful in regulating
Microtakāful.

I.

Models/Types of Microtakāful

19. In following the due process of development of this paper, the JWG undertook a survey8 to attain anunderstanding of the various models used to develop Microtakāful products. While two models – Wakālah
and cooperative – were popular with the survey respondents, this paper provides various other Microtakāfulmodels that are known to be used in certain jurisdictions that did not respond to the survey.9(a) Wakālah Model
20. Under a Wakālah model, the Microtakāful provider (MP) and the participants form a principal–agent
relationship whereby the MP acts strictly as a Wakīl (agent) on behalf of the participants, to manage therisks as well as the investment of the contributions. In return for the service rendered by the MP as Wakīl,
the MP receives a management fee, called a Wakālah fee, which is usually a percentage of the contributions
paid. The Wakālah fee must be pre-agreed and be expressly stated in the Microtakāful contract. For theMP, the Wakālah fee is intended to cover the total sum of: (i) management expenses, and (ii) a margin ofoperational profit to the MP. In this respect, an MP will be profitable if the Wakālah fee it receives is greaterthan the management expenses incurred. It does not directly share in the risk borne by the Microtakāful
Risk Fund (MRF) or any of its investment profit or surplus/deficit.
21. In addition, the Wakālah model may permit the MP to receive part of its remuneration as Wakīl in theform of a performance-related fee. A performance-related fee, as agreed in the Microtakāful contract, istypically related to the underwriting result of the MRF. The underwriting result arising in the MRF, after
payment of the Wakālah fee, including any performance-related element, and after crediting any investment
income, is attributable to the participants collectively.

8 Two sets of survey questionnaires (set A for market players and set B for supervisory authorities) were sent to the

IFSB’s and the IAIS’ member countries to be completed between 10 July and 15 August 2014. A total of 25 institutions
responded, with ten indicating their non-participation due to the absence of Microtakāful in their jurisdiction. The
remaining 15 participating respondents were made up of six regulatory authorities and nine Microtakāful providers. The
low participation rate was believed to be due to the fact that Microtakāful is still not popular in many jurisdictions of the
IFSB’s and IAIS’ member countries, as compared to its conventional counterpart, microinsurance.
9 The mutual model has been used for microinsurance products in the Philippines. Usually, the mutual model is a notfor-profit model applied by the microinsurer. In this model, the microinsurer’s shareholders who are also participants
establish a mutual fund. Participants in a mutual model automatically become owners of the mutual fund at the inceptionof participation. Participants jointly contribute to the mutual fund, which is used to service the claims of member
participants. Similarly to the cooperative model, all management expenses and acquisition costs are paid out of themutual fund. Participants comprise the general assembly of the microinsurer, which is responsible for appointing theboard of directors. Also, participants may either receive a share of the surplus or a reduction in future contributions if
the surplus is retained.

5

(b) Wakālah–Muḍārabah Model
22. In a Wakālah–Muḍārabah model, as commonly practised, the MP acts both as a Wakīl and a Muḍārib
(entrepreneur) to the participants: typically, as Wakīl to manage the underwriting activities of the MRF, andas Muḍārib to manage its investment activities, though the exact relationship and basis of remuneration in
respect of these activities will be specified in the Microtakāful contract. The MP receives a Wakālah fee,
which is usually a percentage of the contributions paid, as described above, and may (where the contract
permits it) receive a performance fee based on the underwriting result. In addition, the MP is remunerated
by a predetermined percentage share in the investment profit.
23. Some RSAs permit extension of the Muḍārabah element of the model to cover also the underwriting
results of Microtakāful operations.10
24. As with the Wakālah model, the residue in the MRF after payment of all contractual obligations,
including profit shares due to the MP, is attributable to the participants collectively.

(c) Wakālah–Waqf Model
25. Under a Wakālah–Waqf model, the MP’s shareholders and potentially also Microtakāful participants
contribute seed money to the establishment of the Waqf MRF. In addition to acting as a Waqif (trustee) tothe Waqf MRF, the MP also undertakes the role of a Wakīl to manage the underwriting activities. The
Wakālah fee must be pre-agreed and be expressly stated in the Microtakāful contract.
26. The residue in the MRF after payment of all contractual obligations, including profit shares due to the
MRF, is attributable to the Waqf fund.

(d) Cooperative Model
27. In a cooperative model, the MP’s shareholders and the participants establish a cooperative MRF outof which all management expenses and acquisition costs are paid. There is, however, a difference between
the Saudi and Sudan cooperative models. In the Saudi model, the MP applies the Wakālah contract to its
Takāful scheme, hence entitling itself to a Wakālah fee. It also takes a share of the underwriting surplus
from the cooperative MRF. In contrast, the Sudan cooperative model does not allow the sharing of any
surplus between the MP and the participants; instead, the surplus belongs solely to the participants.
Furthermore, the Sudan model applies the Muḍārabah contract to its Takāful operation; hence, it isremunerated via a predetermined share of investment income for being a Muḍārib. Another importantfeature of this model is that the participants have their own representatives appointed by them on the boardof directors (BOD).

10 Many scholars disagree with the MP taking any percentage of an underwriting surplus under a Muḍārabah contract,on the ground that an underwriting surplus is not a profit, though some consider that a performance fee may bepermitted. In any event, none of the respondents to our survey claimed to be using a pure Muḍārabah model.

6

II.

Differences between Takāful and Microtakāful

28. The conceptual similarities between Takāful and Microtakāful are explained in paragraphs 14 - 16.
The following illustrates the differences between them, prior to discussing the need to change the current
regulatory framework of the Takāful industry in order to regulate Microtakāful.

(a) Types of Microtakāful Providers
29. Takāful exists in a highly regulated financial environment, whereby the TOs are required to belicensed prior to being allowed to offer Takāful products to the industry. Among the key requirements to be
fulfilled are the need to: (i) be Sharī`ah compliant in their operational model; (ii) meet minimum capitalrequirements; (iii) have in place a governance framework that addresses the interests of all key
stakeholders; (iv) have in place a Sharī`ah governance framework for ascertaining Sharī`ah compliance at
all times; and (v) have in place an investment and risk management framework for prudential managementof the funds overseen and managed by the TOs – that is, the Shareholders’ Fund (SHF) and theParticipants’ Risk Fund (PRF).11 The current regulations on these TOs are pertinent, since they are profitoriented and competition is stiff between the various TOs. RSAs are responsible for prudential and/or
market conduct supervision to protect the interests of the Takāful participants and might consider that the
profits generated by the TOs are not achieved at the expense of the Takāful participants.
30. Microtakāful, on the other hand, exists in an environment that is not as yet strictly regulated in many
jurisdictions. With the worldwide financial system opening its doors to financial inclusion, RSAs in various
jurisdictions remain elusive when it comes to regulating the MPs. This elusive approach has led to theexistence of MPs that may or may not be licensed by the Takāful/insurance RSAs to offer Microtakāful
products to participants. Hence, some of these MPs may not fulfil the regulatory and supervisory
requirements of normal TOs. Three types of MPs have been identified to provide Microtakāful products tothe participants.
(i) The first type of MP is the TOs themselves. These are formal institutions that are regulated by the
RSAs of Takāful/insurance in their own jurisdictions. Governed by Takāful regulations, these licensed TOs
create products that are specifically targeted at the low-income population. Although some of theseproducts may or may not follow the same guidelines as normal Takāful products, they nevertheless go
through a thorough product development process required by the RSAs using a proportional approach.12
Although some TOs do not specifically term their products as “products for low-income earners” orMicrotakāful products, several TOs started this initiative when plans with annual contributions of just US$3
started to be offered to rural populations.13 Many TOs in the industry have since taken up the challenge to

11 IFSB-8: Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings recommends six guiding

principles as a reference for the establishment of a TO’s governance framework. IFSB-11: Standard on Solvency
Requirements for Takaful (Islamic Insurance) provides seven key features to be followed in constructing a solvency
structure for TOs. IFSB-14: Standard on Risk Management for Takaful (Islamic Insurance) Undertakings provides key
elements for constructing a risk management framework for TOs.
12 The IAIS’ “Application Paper on Regulation and Supervision Supporting Inclusive Insurance Markets” (October 2012)provides guidance on proportionate approaches to be used for inclusive finance. The proportionality principle works
two ways: (1) for low-risk activities, simpler and less burdensome guidelines are used; and (2) for complex and riskier
activities, more sophisticated methods and techniques will be used.
13 Syarikat Takaful Malaysia has, since its incorporation in 1984, offered inexpensive funeral expenses group plans to
the poor. This initiative is followed by Etiqa Takaful Bhd, also in Malaysia when the organisation started in 1993. These
products are also made available to the rural population. Since 1998, Amana Takaful of Sri Lanka has been providing
coverage to cottage industries and the self-employed in that country, with a focus on people running small businesses.

7

provide Microtakāful products to the low-income population by modifying their underwriting requirements
through the creation of simple and easily comprehensible products. These products are developed with theconscious mindset to uphold the Maqasid14 of Sharī`ah within the population (Vejzagic & Smolo, 2015).
Example: Since 2001, Prime Islami Life Insurance Ltd in Bangladesh has launched several products (itsMonthly Small-Savings Assurance Plan, Prime Islami Deposit Pension Scheme and Kalyan-Bima Two
Payments Deposit Pension Scheme) aimed at the poorest members of society. These products werecreated for agricultural and factory workers, small traders and housewives, as well as for self-employedworkers. Such people are not able to make a large annual contribution but are able to contribute US$2
monthly (ICMIF Takaful, 2014c).
(ii) The second type of MP consists of the institutions regulated by formal entities other than RSAs of
Takāful/insurance, under laws other than the Takāful/insurance law in their jurisdictions. These are formal
institutions that may or may not exist to generate profits. Their main source of income is notinsurance/Takāful activities. They may or may not be licensed, but nevertheless they are regulated. Suchorganisations range from Zakah and Sadaqah collectors, to many other types of charity-driven institutions
or associations whose main reason for being is to provide for low-income earners and the poor. These MPs
may also be government agencies that work together with TOs to come up with Microtakāful products; orthey may be microfinance institutions (MFIs) that provide loans to the low-income population, and whose
Microtakāful products are just side products that are bundled together to cover the loans provided by these
MFIs.15 Products offered by these formal entities are usually driven by state or national initiatives to promote
financial inclusion. Contributions from this second type of MP may come from the participants themselves,from Zakah or Sadaqah funds, from donations, or even from the national budget, to provide Microtakāful
protection for the low-income segment of the population. The regulations that govern their activities may
not be as stringent as the regulations imposed by the RSAs of TOs.
Example: An example of a government-driven initiative is the Microtakāful scheme launched together with
the Farmers Welfare Federation of Malaysia (a non-government organisation, or NGO). The product,developed by Takāful Ikhlas in 2007, was funded by the Malaysian government with contributions of as low
as US$6 per annum. It provides an immediate death benefit of US$140 and covers 100,000 members(Mokhtar, Sulaiman, & Ismail, 2012).
(iii) The third type of MP is unregistered and unregulated institutions. These are informal entities that are
unregulated by RSAs of Takāful/insurance law, or any other formal entities under laws other thanTakāful/insurance laws. These MPs may be informal groups or community associations that are created toprovide Microtakāful coverage to their own members. Some of these guaranteed benefits include funeral
expenses benefits, or simple death or total permanent disablement benefits. The participants in these MPs
are not protected under any type of legal settings.
Example: In Malaysia, especially in rural areas, members of the community often establish a funeral
expenses fund where annual contributions of as little as US$1.40 are collected from members of the village.
Such groups are unregistered and based on good faith, with the collectors being appointed by the village’s
mosque.

14 Maqasid of Sharī`ah means the objectives of Sharī`ah. Under Islamic jurisprudence, the five main objectives ofSharī`ah to protect the interests of mankind are: (i) protection of Al-Din (religion), (ii) protection of Al-Nafs (life), (iii)
protection of Nasl (lineage and family), (iv) protection of Al-`Aql (intellect or mind), and (v) protection of Al-Māl (property).
15 In Sri Lanka, this practice is widespread due to the absence of the licensing requirement on MPs.

8

(b) Types of Participants
31. Takāful participants are regular income earners. More often than not, they are average and aboveaverage income earners. Although different jurisdictions may define “basic infrastructure” differently fromone another, most of the Takāful participants live in areas with basic infrastructure, including roads,
markets, water and electricity. Their socioeconomic conditions allow them to have easy access to common
financial products offered by the Takāful industry. Takāful participants are also more exposed to various
financial products offered by financial institutions, hence making information asymmetry less of an issue forthem. They are also very much aware of the importance of Takāful products through the various campaigns
carried out by the TOs in these areas, which are easily accessible by intermediaries of TOs.
32. Microtakāful participants are, on the other hand, underprivileged or low-income earners. Many
Microtakāful participants do not enjoy basic amenities. They have less exposure to financial products simply
because of the lack of campaigns carried out by financial institutions in the areas where they live, due tothe lack of basic infrastructure. Under the general financial terms, they may not have access to financial
services due to their socio-economic condition, which may include residing in areas that are unreachable
by the most common means of communication and transportation due to the lack of development. In
general Takāful terms, Microtakāful participants are commonly the group of people who do not fulfil thefinancial and underwriting requirements, due to their inability to meet the basic health and financial criteria
as stipulated by the TO. It has been observed that the profiles of Microtakāful clientele would mostly
coincide with those of microfinance participants. This, however, may extend to include people who do notnecessarily need a loan but are low-income and have insurable risks.
33. Example: Amana Takāful Insurance16 works together with Muslim Aid Sri Lanka to implement Islamic
microinsurance in Sri Lanka through its scheme Micro Insurance Navodaya. (“Navodaya” means “dawn ofa new era”.) Among the targeted groups are garment manufacturing companies, in order to promote
Microtakāful to factory workers who fall within the low-income bracket and are able to pay only US$0.22 amonth. Amana Takāful Insurance also targets workers on tea estates.

(c) Product Features and Contributions
34. Takāful products generally come with various kinds of product features, ranging from simple tocomplicated. Simple product features are products that require minimum explanation and minimum
prerequisite knowledge on the part of the participants prior to participating in the plan. Two examples ofsimple product features are death and total permanent disablement benefits, whereby the MP does not
require extensive and comprehensive explanation to enable the participant to understand the product. The
terms and conditions for participation are also easy to comprehend since the exclusions are minimal.
Complicated product features, on the other hand, require certain prerequisite knowledge on the part of theparticipants and thorough explanation on the part of the MP. A good example is hospital and surgical plans.
The participants need to be able to comprehend the types of hospitalisation and surgical procedures thatare covered under the plan, as well as the limit that they are able to claim under the plan. This requires timeand effort on the part of the MP, with appropriate follow-up clarification for better understanding by theparticipants, especially in understanding the terms, conditions and exclusions that come with such productfeatures. Sophisticated products are made available for Takāful participants since they are generally easily
reachable by Takāful intermediaries through common means of communication and transportation. With
these variations in product features, the contribution amount required of these products will reflect its
16 https://www.takaful.lk/

9

simplicity or sophistication, which does not pose economic constraints on those who can afford theseproducts.
35. Microtakāful products, on the other hand, are in practice generally simpler and easier to understandas compared to Takāful products. Their simplicity is pertinent in reaching out to participants residing inareas that may not be easily accessible by normal means of communication and transportation by the MPs.
Simplicity is also a key consideration in product design, given the economic capability of participants toobtain such coverage for an affordable contribution. It is also worth mentioning that simple product featurestranslate to simple claims procedures and verification, which is a key operational requirement of a
successful Microtakāful initiative. Furthermore, simplicity promotes a positive experience among theparticipants new to Microtakāful schemes, which results in growth of the Microtakāful industry.
36. Example: A credit Microtakāful plan was introduced by Takmin (Takāful Mikro Indonesia) in 2006 asa joint partnership between Takāful Indonesia and Peramu, an NGO. The plan covers participants for theoutstanding balance of their financing. In the event of death or total permanent disablement, the outstanding
financing balance will be settled by Takāful Indonesia. Takmin works together with cooperative bodies that
act like MFIs in Java to provide loans to start-up businesses or to help expand a current business. These
MFIs provide Grameen-style microfinance for women from poor families, with 25–30 women providing
mutual help to each other and the financing provided based on Qarḍ (Mokhtar, Sulaiman, & Ismail, 2012).

(d) Distribution Channels
37. Takāful products are known to have complex and costly distribution channels. Given the range of
products, from simple to very sophisticated, TOs need a range of channels that are able to meet therequirements of different categories of participants. The most common ones are individual agents,
corporate agents, bancasurance bancatakāful and brokers. These distribution channels survive based on
the various layers of the agency and brokerage commission structure. The pricing of Takāful products ishence dependent on the type of distribution channel used to distribute the products to the participants. The
more complex the product channel, the higher the transaction costs will be, as manifested in the contribution
paid by the normal participants who expect better services to be provided by these intermediaries.
38. Microtakāful products, on the other hand, are simple, though challenging, to distribute, due to thesocio-economic characteristics of the participants in certain jurisdictions. The need to remain simple, yetaffordable, makes distribution taxing, as the participants may reside in areas that are unreachable by normalmeans of communication and transportation. Low-cost distribution is essential to a successful Microtakāful
development. Some of the popular distribution channels that have been identified in the industry include
the use of mobile phones. The transactions (exchange of Aqd and payment of contribution) take place via
the deduction of mobile phone credit and by an exchange of a contract that sets out in simple fashion theterms and conditions of the Microtakāful products. Some MPs have indicated that they appoint small
grocery stores or pawnshops as distribution channels, since they are frequently visited by Microtakāful
participants. There are also instances where distribution channels are provided by government, or by
associations providing social welfare initiatives that are tied up together with the MP’s products. Such simple
distribution channels, with few agency layers to share commissions, help to drive down the transaction
costs for distribution of Microtakāful products. It is also the case that trust plays an important role in the useof certain types of distribution channel. Where products are distributed via local mosques, religious groups
or trade unions, the participation rate seems to be higher. An example of how this works is the appointmentof the mosque as the agent of the MP, in which the mosque collects the monthly contribution from the local
Muslim community. The contribution will then be transferred to the MP. In the event of death or total

10

permanent disablement, the MP will provide claims payment to the beneficiary of the deceased through themosque. Another channel that is slowly being adopted by Microtakāful participants is MFIs. Through productbundling, Microtakāful products are automatically attached to the products of the MFIs and distributed bythat means.
39. Example: Takmin (Takāful Micro Indonesia) works together with an NGO, Peramu, to empower thepoor in Indonesia through Microtakāful products. Peramu works closely with Baytul Maal Wat Tamwil
Cooperative to distribute Microtakāful products in Bogor, Indonesia (Haryadi, 2006).

(e) Consumer Education
40. Takāful objectives and values are widely understood by middle-income earners, who lead Muslim
consumers in terms of their purchasing power. The significant level of awareness among middle-income
earners can be attributed to the development of Islamic finance, as well as to governments’ direct
involvement in supporting the conducive atmosphere and enabling environment for growth of the Takāful
industry. This is especially true for countries such as Malaysia, Pakistan and Nigeria, where the RSAs haveissued various guidelines and frameworks particularly for Takāful market players.
41. Microtakāful objectives and values may not be well understood by the target market itself. This is dueto the low level of education and financial literacy of that market, which makes it incognisant of the risks
that may cause it further suffering and financial losses. More often than not, potential Microtakāful
participants see no value in paying a contribution for future benefits that may or may not be paid to them.
This phenomenon has led to weak demand for Microtakāful products. Lack of awareness andunderstanding of Microtakāful has also opened doors to deliberate mis-selling of Microtakāful products byirresponsible agents, which has further damaged the reputation of Microtakāful. Some studies havesuggested that awareness programmes could be conducted by mosques, Musallas and Zakah institutions,as they are within reach of the aforementioned target market.
42. Example: The collaboration between Amana Takaful and Muslim Aid has contributed to thedevelopment of Microtakāful and Takāful understanding among the low-income segment in Sri Lanka.
Muslim Aid specialises in providing Sharī`ah-compliant microfinance services to the financially
underprivileged, making it the best platform for dissemination of such information. Dissemination of
information is done through regular meetings and awareness programmes that coincide with dates of
payment of microfinancing, which has given the aforementioned institutions an opportunity to interact
directly with low-income earners. This initiative has boosted the demand for Microtakāful in Sri Lanka(Lanka Business News, 2010).

(f) Operations
43. Takāful Operators’ operations are usually lengthy, due to their complex structure. In certain countries,
potential participants would have to go through agents in order to participate in a Takāful scheme. Usually
it would take a few days for the applications to be processed and approved by the TOs. Claims management
also goes through the same lengthy process. Although TOs are required to ensure that claims management
is conducted amicably, they have a set of processes and procedures that they must follow in order for themto pay the claims made by participants or their beneficiaries. This lengthy process is designed to prevent
fraudulent claims or payment of invalid claims that may affect the TOs’ funds.

1144. Microtakāful Operators’ operations are less complicated than those of TOs. The process ofsubscribing to Microtakāful schemes has been made simple, putting such schemes within reach of
potential Microtakāful participants. Furthermore, just like the TOs, MPs are required to ensure that claims
are processed and paid promptly and without unnecessary delays. However, the claims management
process still has a proper mechanism in place for controlling fraud. In practice, some MPs transfer theirprocessing and approval of applications and the claims process to their NGO or government agency
partners.
45. Example: In Malaysia, Etiqa Takaful and Angkatan Koperasi Kebangsaan Malaysia (a government
agency) launched the Tabarru’ Koperasi scheme, which covers death and total permanent disability formembers aged up to 80 years. The scheme is open only to members of the cooperative, and to membersof cooperatives that are overseen by Angkatan Koperasi Kebangsaan Malaysia (Angkatan). The
contribution for this scheme ranges from just US$1.30 to US$6.80 per year, and pays a death benefit of up
to US$5159. The operation of this particular scheme has been simplified, in the sense that participating
cooperatives manage applications and claims for their members (ICMIF, 2014a).

III. Differences between Microtakāful and Microinsurance
46. The differences between Microtakāful and microinsurance are the same as the differences between
Takāful and insurance. The absence of Sharī`ah non-compliant elements – namely, Riba, Maysir andGharar in Takāful, as explained in IFSB-8 – is also reflected in the product features and contractual
relationship between the MP and its participants. This makes Microtakāful products more appealing to thosesections of the population that are conscious of the religious implications of their participation in the financial
services offered by various types of financial institutions. In Pakistan, for example, the majority of the
population is Muslim. While the principle of mutual cooperation is “acceptable”, in this country many believethat the principles set forth in the conventional insurance mechanism are against their faith and beliefs. On
the other hand, they accept that the principles in Microtakāful promote cooperation among members of thecommunity and serve the people better (Khan, 2013).
47. The core principles of Takāful, as outlined in paragraph 14 of IFSB-8, are equally applicable to
Microtakāful.17

IV. Survey Findings on Industry and Regulatory Practices of Microtakāful
48. In an effort to understand the Microtakāful sector better, the IFSB and the IAIS undertook a survey on
Microtakāful in the third quarter of 2014. This section provides an analysis of the survey responses, bearing
in mind that the number of responses received may not be sufficient to form any concrete conclusions as
to the nature of the Microtakāful industry. However, the analysis served as guidance in developing theremainder of this paper.

The three core principles cited in IFSB-8 are Tabarru’ commitment, Ta`awun and the prohibition of Riba.
(1) Tabarru’ commitment is a type of Islamic financial transaction that is fundamental to Takaful schemes. It is theamount contributed by each Takaful participant to fulfil obligations of mutual help and to pay claims submitted by eligible
claimants. (2) Under the concept of Ta`awun, or mutual assistance, participants agree to compensate each othermutually for the losses arising from specified risks. As Takāful has often been perceived as a form of cooperative or
mutual insurance, the initial objective is not to gain profit but to assist one another mutually, under the principle ofTa`awun. (3) Conventional insurance business involves the element of Riba. Hence, it is important that investments inboth the Takāful funds and the shareholders’ funds are Riba-free types of investment.
17

12

49. When the survey was sent out, it was intended to target institutions providing Microtakāful products.
While the survey was sent to 64 institutions/RSAs, only 25 respondents provided feedback. Contributing to
the low response was the non-offering of Microtakāful products, with 10 of the 25 respondents stating “nonofferings” as their main reason for not participating in the survey.
50. Based on the limited information provided by 15 participating respondents, the survey results indicatedthat, while Microtakāful is still not as widespread as normal Takāful products, a few institutions have alreadytaken steps to provide coverage to the low-income population via low-contribution and simple products –most commonly, death, total permanent disablement and credit Takāful. Although the infrastructure forMicrotakāful administration is not fully in place for many of these 15 institutions, steps have been taken to
ensure that products and claims administration procedures have been simplified to provide ease oftransactions for participants.
51. From a regulatory perspective, the survey results indicate that there is currently no specific regulation
on Microtakāful in place. Where the MPs are non-TOs, there may not be a specific regulation to oversee
their operational framework. Where MPs are TOs, they may be required to adhere to the existing regulations
and guidelines that relate to normal TOs. These include the requirements for licensing and for appointing
intermediaries, solvency requirements, and the separation of the MRF and SHF.
52. To preserve the interests of participants, MPs are required to have a similar governance framework,
the key organs of which are the BOD, Sharī`ah Board (SB) and senior management. Three RSAs indicatedthat, where conflict arises, the same rectification mechanism that is already in place for normal TOs will be
used for MPs.
53. While the findings provide certain insights into what is currently going on in the industry, the amountof information acquired through the survey exercise may not be indicative of what the majority of MPs are
currently doing or not doing. Nevertheless, the survey could provide a means to highlight all the potential
areas requiring the attention of the regulators of MPs.
54. To quote a paragraph from the IAIS paper “Issues in Regulation and Supervision of Microinsurance”(June 2007), “Regulators and supervisors in emerging market jurisdictions have little experience or
empirical data to support their role in creating an ‘inclusive’ insurance market that works effectively for theupper as well as the lower income segments, with the latter being the focus of microinsurance. This lack ofdata exemplifies the fact that the RSAs of MPs may be encountering similar challenge in regulating theMicrotakāful sector”18 (International Association of Insurance Supervisors, 2007).
55. The following section aims to highlight the issues and challenges of Microtakāful in the areas of (i)corporate governance; (ii) financial and prudential regulation; (iii) transparency, reporting and market
conduct; and (iv) the supervisory review process. Appropriate examples may be cited from relevant sources
to provide a better understanding of the issues, challenges and opportunities that are engulfing theMicrotakāful sector.

18 When the IAIS conducted its survey of members in 2006, only 35 institutions provided feedback.

13

C. SUPERVISORY AND REGULATORY FRAMEWORK FOR MICROTAKĀFUL

56. The previous section provided background on Microtakāful and outlined how it differs from Takāful.
This section looks at the issues and challenges arising from prudential regulation of Microtakāful practices
in the industry. Relevant examples of the specific issues faced in various jurisdictions are highlighted in thissection to illustrate how they may be handled effectively. Specific reference is also made to some of thework that has been done by the IAIS on microinsurance, specifically on the proportionate application of
ICPs to the regulation of microinsurance. The relevance of these ICPs to Microtakāful is highlighted.

I.

Corporate Governance

57. The corporate governance structure of an MP is as important as the corporate governance structureof any financial institution. MPs are responsible for upholding not only their economic obligations to theparticipants, but also the principles of Sharī`ah. Issues pertaining to the governance structure of MPs arethus highlighted in this section.
58. Similar to Takāful, various stakeholders play key roles in sustaining the Microtakāful sector. These
stakeholders include the Microtakāful participants, government agencies, RSAs, the SB, and especially theMPs, which may be formal or informal entities.

(a) Interests, Roles and Responsibilities of External Microtakāful Stakeholders(i)Government

59. The welfare of low-income members of society is highly dependent on the social security services ofthe state government of each particular jurisdiction. In many jurisdictions, social security provides
subsistence to individuals with inadequate or no income. In developed nations such as the United States
and the United Kingdom, the social security system is well planned and covers all qualified citizens. In otherparts of the world, coverage may not extend to all low-income earners. For example, in Indonesia, which
has a population of over 220 million, only 17% of the working population is covered under the contributorysocial insurance (International Labour Organization, 2015). The rest of the population in the informal
economy relies on local mutual support arrangements. In Pakistan, there are two types of social security
programmes; one provides benefits to needy Pakistani Muslim citizens, the other to needy Pakistani citizens(U.S Social Security Administration Office of Policy, 2006). Similar to Indonesia, Pakistan’s social security
programme covers employed citizens only. Family labour and self-employed persons are excluded fromthese schemes.
60. There have been efforts to expand the scope of coverage in these mentioned countries throughvarious outreach programmes such as that conducted by the International Labour Organization (ILO) in
Indonesia. Various initiatives have been taken to expand the scope of coverage for social security. The
ILO, for example, formulated the National Employment Guarantee Programme for Indonesia to help
alleviate situations of poverty, unemployment and underemployment, particularly among youth and in rural
areas, as well as to create productive assets and services for the economy (National Planning Agency &International Organisation , 2005).

14

61. This outreach programme is an example of how state governments of various jurisdictions may include
populations in rural areas that are not easily accessible by normal means of transport, where access tobasic amenities is limited, and where low-income earners are generally excluded from participating in eventhe simplest forms of financial services. Under such a programme, governments would use taxes andcontributions collected from the higher-income segment of the population to provide for the basic needs ofthe low-income segment.
62. While it is still uncommon for many government agencies to provide Microtakāful coverage to thelower-income segment, for the simple reason that few Microtakāful products are being offered by the
majority of formal MPs, there may be a need for these agencies to create awareness among low-income
earners, educating them on the need to have basic coverage to protect their loved ones in the event of theirdemise. In addition, these government agencies may need to work together with formal MPs to design
simple protection schemes that are not detrimental to the financial condition of the formal MPs but at thesame time help to widen the scope of financial services so that they include the low-income population.
Another viable option would be for the government to work together with established grassroots
organisations. Such collaboration helps to build these organisations’ capacity to deliver Microtakāful
products to their members.
63. Comprehending the roles and functions of RSAs and regulators of other formal entities in regulating
the Takāful industry is crucial, especially when the stability and soundness of the industry is key to thesustainability of MPs. This will ensure that the products offered to the low-income segment will be successful
and not detrimental to the survival of any of the key stakeholders.
64. Lack of cooperation between government and MPs might lead to conflict. An example would be when
the contribution provided by the government is insufficient to cater for the solvency requirements of theMPs, especially if these MPs are TOs that need to fulfil the regulatory solvency requirement under theirTakāful/insurance law. Since claims are paid from the risk funds of the MPs, insufficient contributions maylead to a high claims ratio of the MPs. This, in turn, may affect other participants of the MPs, especially if
the MPs lump the contribution of Microtakāful products together with the contribution of normal Takāful
products.
(ii)

Regulatory and Supervisory Authorities

65. Regulatory and supervisory authorities of MPs that are TOs play a key role in understanding the natureof Microtakāful participants prior to regulating the Microtakāful industry, since literacy, financial stability andaccessibility may be constraints on participation by the low-income population. This thorough understanding
will facilitate the role of RSAs in helping to expand the scope of Takāful coverage to the low-income
population via Microtakāful products. Some of the areas in which RSAs may play a supporting role include:(a)
introducing proportionate regulatory and supervisory requirements (which cover corporate
governance, financial and prudential regulation, market conduct, and the supervisory review
process) for both low- and high-risk Microtakāful participants;(b)providing an avenue for all stakeholders of Microtakāful to interact and understand their differing
roles and functions. These stakeholders include government agencies, charitable organisations,MPs, the central Sharī`ah advisory board, intermediaries and potential participants;(c)providing accessible channels of communication/recourse for Microtakāful participants in casesof misrepresentation/fraud;(d)ensuring that products developed by MPs actually address the needs of the low-income
segment;

15

(e)
(f)

(g)

(h)

(i)

(j)

ensuring that the MPs entering the market are there for the long term, and not for short-term
gains, to demonstrate the value of Takāful;understanding the demographic nature of Microtakāful participants through the development of
separate mortality and morbidity tables which capture all the insured and uninsured population,
understanding the risks that revolve around them which may be uncommon among the insured
population, understanding the nature of occupation of these participants, and assessing whether
the barriers to their participation are real or arise from misperceptions of financial products;
outlining a different mechanism for monitoring intermediaries, which may include nonconventional intermediaries such as pawn shops, small grocery stores, mobile-phone service
providers, etc.;
closely monitoring the financial condition of formal MPs to ensure that the offerings ofMicrotakāful products are not made at the expense of the stability and soundness of the MPs,
and that any risks taken by TOs to include the high-risk, low-income population will not affect
the Takāful industry in the long run;
identifying the various types of MPs that offer Microtakāful plans in their jurisdictions which may
or may not be regulated by these RSAs, for the purpose of understanding the risks that theseMPs might pose to financial stability; andunderstanding the regulations of other jurisdictions that have been established for
microinsurance/Microtakāful, prior to coming up with its own regulations to suit the local
requirements and adaptability.19

66. In jurisdictions where Microtakāful initiatives are government-funded programmes, the question arises
as to whether these RSAs should be held responsible for programmes that they cannot prudentiallysupervise effectively. This is a delicate area, especially if the programme is subsidised by the government
or funded by charity. The MPs themselves might not be able to fully enforce the imposing of underwriting
requirements on participants. The possibility will then arise of RSAs being in conflict with the government.
To ensure the success of government-funded Microtakāful programmes, cooperation between thegovernment and RSAs plays a key role. The RSA would act as a facilitator of the scheme, a moderator in
the event of conflicts, and a protector in upholding participants’ rights.
(iii) Retakāful Operators
67. Licensed MPs that are regulated by RSAs have access to services provided by Retakāful Operators(RTOs). In circumstances where RTOs are required to provide coverage for Microtakāful products of MPs,
a comprehensive understanding of the nature of Microtakāful participants is crucial to ensure that these
RTOs are aware of the types of risks involved where Microtakāful participants are concerned.

19 The Republic of South Africa in 2011 issued its “South African Microinsurance Regulatory Framework” to facilitate amore conducive financial environment for financial inclusion. The framework, which was developed by the National
Treasury, had the following aims: (a) to extend access to a variety of good-value formal insurance products appropriate
to the needs of low-income households, thereby supporting financial inclusion; (b) to facilitate formalised insurance
provision by currently informal providers, and in the process promote the formation of regulated and well-capitalised
insurance providers and small business development; (c) to lower barriers to entry, which should encourage broader
participation in the market and promote competition among providers, further supporting poverty alleviation througheconomic growth and job creation; (d) to enhance consumer protection within this market segment through appropriate
prudential and business conduct regulation, improved enforcement of regulatory transgressions, and consumer
education interventions targeted at understanding insurance and its associated risks and benefits; and (e) to facilitate
effective supervision and enforcement, supporting the integrity of the insurance market as a whole.

16

68. Just like the TOs, the licensed MPs are exposed to the risk of insolvency of the MRF due to highclaims, poor underwriting and insufficient contributions. MPs that are involved in government-funded
Microtakāful initiatives whereby the contributions are subsidised by the government are at particular risk.
Since it is the MP’s fiduciary duty to ensure that claims are paid, it is essential that Retakāful arrangements
are in place in initiatives such as these. RTOs must have the capacity to underwrite risks that are relatively
new to them.
69. Difficult circumstances may arise when an MP is not licensed under any jurisdiction’s Takāful orinsurance law. MPs may not have access to Retakāful/reinsurance services, hence limiting their ability to
expand the scope of coverage.
(iv) Regulated MPs (by regulators of formal entities other than RSAs)
70. Entities that are not regulated by the RSAs, but which may be regulated by other regulators of formal
entities such as the Zakah, Waqf and other types of charitable entities, may sometimes be involved in
Microtakāful initiatives. When this happens, the products sold may not be required to go through the same
stringent product development process they would have undergone had an RSA been required to provide
approval. This may pose a challenge to the various stakeholders of the Microtakāful schemes, especially
the Microtakāful participants. No specific requirements for clients’ protection might be imposed; hence,
participants are more susceptible to mis-selling and other misconduct by Microtakāful intermediaries.
The regulator of formal entities responsible for supervising non-Takāful-related entities has an essential
role in ensuring that entities attempting to replicate Takāful products for the benefit of the low-income
population do not do so at the expense of the participants themselves. These regulatory agencies may wish
to consider defining the requirements in their respective laws prior to allowing non-Takāful entities to offer
Microtakāful products.

(b) Interests, Roles and Responsibilities of Internal Microtakāful Stakeholders(i)

Takāful Operators

71. In expanding the product offerings to include the low-income population, the TOs may need to take acomprehensive approach so as to better understand the new segment of the target market. It is crucial forthese TOs to consider the interests of all stakeholders and identify the gaps that may arise when high-risk,
low-income groups are offered Takāful products.
Shareholders: The shareholders of Microtakāful operators need to be assured that the Microtakāful
products offered to the high-risk segment will not jeopardise the profitability of the TO. This may be done
through profitability tests of Microtakāful products, comprehensive stress tests, and various other tests that
may assure the shareholders of the sanctity of operation. Furthermore, the shareholders have to be in thismarket for the right reasons, taking a long-term, capital investment approach and being willing to substitute
some of the expected financial returns with social objectives. Additionally, proportionate pricing forMicrotakāful products needs to take into consideration the need for the MPs to stay solvent and stable,
while at the same time remaining competitive in the market. The TOs need to fully understand the types ofrisks they are exposed to when offering products to the low-income segment of the population so that theshareholders will not suffer from poor returns on their investments.

17

Sharī`ah Board: The TOs need to ensure that the Microtakāful product offerings meet the requirements
set out by the SB. In addition, the intermediaries used to distribute the products, and the mechanisms bywhich the products are sold, should meet at least the basic Sharī`ah requirements set forth for TOs whereby
transparency and disclosure of information is key to transferring rightful information to the relevant parties.
The SB may also play a role in ensuring that the Microtakāful products are truly inclusive and reach thevulnerable members of society as propagated under the principles of Takāful.

RSAs: The TOs need to ensure that the basic requirements pertaining to the product development
process, fulfilment of regulatory requirements and monitoring of the financial condition of the institution as
required by the RSAs are followed strictly. Any cooperation done with entities non-regulated by RSAs of
TOs (e.g. Sri Lanka deregulated its insurance sector to allow for new providers such as the MFIs to provide
Microtakāful products) should be monitored and not compromise the stability of the Takāful industry.

Government and Charitable Agencies: Any kind of cooperation or partnership that is conducted
between the TOs and the government or charitable agencies should be clearly spelled out and be notified
to the RSAs that are in charge of supervising these TOs.

Distribution Channels: The TOs need to ensure that their distribution channels observe, and explain
properly to the participants and potential participants, the Microtakāful principles and never mislead theminto expecting that Microtakāful is no different from conventional microinsurance. Since these channels are
key to ascertaining that the products reach their target markets, TOs need also to ensure that proper
remuneration is in place.
(ii)

Board of Directors

72. As custodians of public funds, MPs are governed by active and dedicated BODs that have been
entrusted by their shareholders with protecting the interests of Microtakāful stakeholders. IFSB-8
emphasises the establishment of a governance framework by the BOD, with the BOD overseeing its
implementation.
73. Prior to their appointment, members of the BOD are required to go through “fit and proper”
assessments. Such assessments are conducted at least annually to ensure that the members remain fit
and proper to oversee the MPs’ operations at all times. The “fit and proper” criteria encompass the following(Laws of Malaysia, 2013):


probity, personal integrity and reputation;competence and capability; andfinancial integrity.

74. The BOD is expected to establish various committees which include, but are not limited to, the audit
committee, nominating committee, remuneration committee, risk management committee. This same
expectation is also recorded in Central Bank of Malaysia’s Guidelines on Directorship for Takaful Operators.
Furthermore, IFSB-8 suggested that the BOD establish an additional committee, namely the governancecommittee, to focus primarily on protecting the interests of the Microtakāful participants (IFSB, 2009a).
75. Another important role of the BOD is to approve all policies and procedures of MPs relating to Sharī`ahmatters. The BOD should be able to appoint a Sharī`ah advisory firm to oversee the Sharī`ah aspects ofthe business (IFSB, 2009a). Such approval would only be granted to the management upon consultation

18

with the SB. Furthermore, the BOD maintains its oversight of the performance of the senior managementof the MPs in managing their affairs and business activities. The BOD also has the authority to reduce
surplus distribution, or to retain surplus in the MRF if it believes building up reserves is more beneficial(Archer, Karim, & Nienhaus, 2009). Such decisions made by the BOD may need to be conveyed to theMicrotakāful participants through proper channels to get them to be more engaged and better understandthe value of Takāful.
76. The Sharī`ah Governance Framework20 states that the BOD of MPs is responsible for establishing asound and robust Sharī`ah governance framework. Such a framework specifies the following (BNM, 2010):
 the BOD’s oversight of the Sharī`ah compliance aspects of MPs’ operations; establishment of a Sharī`ah board; establishment of Sharī`ah governance functions which include Sharī`ah research and secretariat,
Sharī`ah risk management, Sharī`ah review and Sharī`ah audit;
 establishment of internal Sharī`ah risk management, review and audit processes; and issuance and dissemination of Sharī`ah resolutions to relevant stakeholders.
77. The Islamic Financial Services Act 2013 emphasises that the responsibility for overseeing theimplementation of Sharī`ah governance does not lie only with the SB, but also with the BOD. It further
explicitly requires the BOD to have due regard to any decision of the SB pertaining to any Sharī`ah issue
in respect of the execution of the business, affairs or activities of MPs. “The board of directors shall have
due regard to any decision of the Sharī`ah committee on any Sharī`ah issue relating to the carrying on ofbusiness, affairs or activities of the institution.” Additionally, a specific legal provision catering to the Takāful
business states that, in the event there is a conflict between the interests of the participants and theshareholders, the BOD must give priority to the interests of the participants. “The board of directors of alicensed Takāful operator shall, in the event of conflict between the interest of the Takāful participants andthe shareholders, give priority to the interest of the Takāful participants.”
78. Also, the Guidelines on Directorship for Takaful Operators issued by the Central Bank of Malaysia
state that the appointment of BOD members does not threaten the interests of participants, Microtakāful
claimants, customers or creditors of MPs. The guidelines stress that the members of the BOD should not
behave in a manner that may cast doubt on their fitness to hold their respective positions in the BOD which
may lead to decisions and actions that are detrimental to the interest of MPs and their participants (BNM,
2004).
79. The composition of the BOD is pertinent to ensure that a sufficient number of members is always
present to give proper direction and guidance to the management of the MPs. The Central Bank of Malaysia
has stipulated that this number should be no less than five directors. It discourages having more than eight
directors, but allows up to ten with the condition that the additional two are independent non-executive
directors (BNM, 2004). The BOD is encouraged to include among its members at least one member of the
SB. The purpose of such an appointment is to create a tie between the BOD and the SB to facilitate
understanding and appreciation of Sharī`ah among the members of BOD in its decisions and resolutions(BNM, 2010).

20 The Sharī`ah Governance Framework is applicable to all Islamic financial institutions governed by the Central Bankof Malaysia, inclusive of Microtakāful Operators.

1980. The Sudan cooperative model, on the other hand, requires the composition of the BOD to consist of
one or two representatives of the participants. The representative(s) are appointed by the participants
themselves in the participants’ general assembly. Such a requirement gives the participants more rights
and stronger governance as compared to corporate governance of MPs in other jurisdictions. Additionally,
the shareholders also have representatives on the BOD (Archer, Karim, & Nienhaus, 2009).21
81. Diversity in the qualifications of BOD members is imperative to enable MPs to achieve their corporate
goals and fulfil their fiduciary responsibilities. Consequently, the Central Bank of Malaysia in its Guidelines
for Directorship for Takaful Operators specifies that at least two members of the BOD should be qualified
in the field of finance at university degree level, or have had a minimum of five years’ working experienceat managerial level in the field of finance. In addition, a member of the BOD that sits on the audit committee
must have a university degree or working experience in accounting, auditing and financial reporting. The
Central Bank of Malaysia encourages the appointment of members to the BOD from various relevant
disciplines, including law, accounting and investment management (BNM, 2004). Since the BOD is
ultimately responsible for establishing the Sharī`ah governance framework of MPs, its members are
expected to have reasonable understanding of Sharī`ah and its general application to Takāful. The senior
management of MPs is responsible for providing the necessary training programmes and seminars to the
BOD on Sharī`ah (BNM, 2010).
(iii) Senior Management
82. From a purely corporate governance perspective,22 the senior management of MPs is responsible for
implementing the medium- and long-term strategies designed to create value for the MP’s shareholders. It
is also responsible for implementing policies approved by the BOD, and for assisting the BOD to perform
its duties by ensuring that board members fully understand matters pertaining to Takāful business activities
and operations To ensure the smooth running of MPs’ business activities and operations, the senior
management has to ensure the proper application of technology and systems in conducting day-to-day
activities. Also, as previously mentioned, the senior management needs to provide the BOD with various
training programmes inclusive of Sharī`ah so that it remains abreast of current issues in Takāful. The same
shall be provided to the SB and all relevant staff of the MPs (IFSB, 2009c) (BNM, 2004).
83. From the Sharī`ah governance perspective, the senior management is expected to observe andimplement resolutions and rulings made by the SB. Additionally, in order for the SB to come up with soundrulings and decisions, the senior management has to provide the SB with sufficient information anddisclosures on the matter at hand. The senior management must also ensure that information about
Sharī`ah policies and procedures is readily available to all those involved in the implementation of Sharī`ahgovernance in the MPs. Another important aspect of Sharī`ah governance is reporting of Sharī`ah noncompliance. The senior management plays a major role in reporting of such events to both the BOD and
SB, and, if relevant, to the central bank that governs the MPs (BNM, 2010).
84. The RSA of Nigeria requires the same role as spelled out above to be carried out by the senior
management of MPs. It also imposes on the senior management responsibility for ensuring that the SB is
21 The Sudan cooperative model is unique to Sudan, as it combines proprietorship and mutual insurance. Consequently,

its structure differs from that of the conventional cooperative insurance model whereby the policyholders are also theshareholders.
22 IFSB-14: Standard on Risk Management for Takaful (Islamic Insurance) Undertakings highlights the four main
governance functions, being risk management, actuarial, legal and compliance. The key roles played by these fourfunctions include ensuring that risks are identified and assessed, ensuring prudent pricing and design of products, andensuring integrity and compliance with regulations.

20

remunerated at an appropriate level commensurate with its duties (National Insurance Commission Nigeria,2013).23(iv) Shareholders
85. In practice, the shareholders are represented by the BOD they have appointed to ensure the smoothrunning of the MPs they own. They get to voice their concerns and to monitor the performance of the MPs
through general meetings and annual reports, respectively. There are instances whereby the SB isappointed by the shareholders upon recommendation by the BOD, as seen in the Sudan cooperative model(Odierno,2009; Sulieman,2014) The general assembly is also a platform where general policies and rules
on governance and management are set (Sulieman, 2014). Such a practice may not be suitable for othermodels that exist in the industry, especially in jurisdictions such as Malaysia where the authority of SB
appointment has been awarded and entrusted to the BOD as required by the RSA (BNM, 2010).
86. However, according to Archer, Karim and Nienhaus (2009), “As in any proprietorship, the shareholders
as promoters and owners of the Takāful operator provide the business capital in the form of equity andhave full control of the operations. They have the right to appoint all organs of governance in the company– namely the BOD, external auditors, and the Sharī`ah Board.” They also have full control of the operationsof MPs, which entitles them to decide on matters such as the distribution of any surplus among participants,business strategy, the amount of contribution paid by participants, among others. More importantly, it should
also be the responsibility of the shareholders to provide the MRF with Qarḍ in the event of a deficit. This is
to ensure that the MRF remains solvent and is able to make payments of claims when necessary. The
practice of providing Qarḍ by shareholders to MRF is acceptable to RSAs of Malaysia and Nigeria, andeven by the OIC Fiqh Academy. However, the practice of shareholders being the ultimate authority forappointing governance organs and making all decisions concerning the operations of the MPs may besuitable only for those using the mutual model, where the participants are the shareholders.
(v) Participants
87. Participants in Microtakāful have needs that differ from those of Takāful participants due to theirvarying socio-economic conditions. Their lack of experience with financial services, and their reduced or
total lack of resources of information about the same, make them susceptible to miscommunication leading
to misunderstanding. An obvious example would be their misunderstanding of product features. A 36
Critical Illness Plan that provides coverage for a specific set of listed illnesses may be understood by aparticipant to cover the various stages of illnesses, when in fact it may not necessarily be so. The fine printof the exclusion section of the certificate may not be easily understood by the participants.
88. Apart from the exclusions in Microtakāful products, there may be some confusion about, andmisunderstanding of, the underwriting surplus-sharing mechanism, which may be too technical for theparticipants in Microtakāful. Participants should understand that there is a possibility that the underwriting
surplus may not be distributed to them in the event it is held back as reserves. This may lead to frustrationon the part of participants when a claim arises and benefits are not paid by the MPs. An unfortunate
consequence is decreased confidence in the Microtakāful system, which was created to protect the lowincome segment in the first place. In addition, the demographic spread of participants in areas that are noteasily accessible by common means of communication and transportation may pose difficulties when

23 The Operational Guidelines 2013 Takaful-Insurance Operators, issued by the National Insurance Commission of

Nigeria, are applicable to all Takāful Operators, inclusive of Microtakāful Operators.

21

claims arise. Participants may find the cumbersome claims process not worth the trip to the nearest officeof the MP.
89. Many jurisdictions that have initiated Microtakāful schemes find merit in simplifying the kinds of
documents provided to the participants. To bridge the knowledge gap, Muslim Aid in Sri Lanka conducts a
Financial Literacy Training programme for its members who participate in Microtakāful plans of Amana
Takāful. This programme is aimed at providing the members with a thorough understanding of Takāful,since it is observed that many of its members lack trust in Takāful services and have low understanding of
the importance of Takāful. When Microtakāful products were first launched, many members had the initial
perception that Takāful is a savings option, rather than a protection option. In addition, Amana Takāful
simplified its product literature to enable the Microtakāful participants to easily comprehend the terms andconditions of the coverage. On 9 July 2014, Amana Takāful launched its new mobile application for iPhones
and Android devices. This application, which is made available at no cost, provides Amana Takāful
participants with the means to access their account details online. The application also aims to make theclaims process easier through supporting photos provided by the participants (ICMIF Takaful, 2014b).
90. While easy access to Microtakāful is the aim of MPs, the type of distribution channels used to reachthe participants, if not monitored by the RSAs or regulator of formal entities, may lead to miscommunication.
Consumer protection is hence a feature that needs careful consideration when positioning for an
appropriate communication tool to reach the low-income population.
(vi) Sharī`ah Board
91. The requirement to comply with Sharī`ah principles is as significant for Microtakāful as it is for normal
Takāful products. Many potential Microtakāful participants find Islamic financial products more welcoming
and encouraging as compared to the conventional financial products, due to the absence of Riba, Gharar
and Maysir elements, especially in Takāful. There is hence the need to ensure that the Sharī`ah principles
are adhered to in all aspects of Microtakāful operation. Individual MPs can address such a need byestablishing an internal SB. Certain RSAs in jurisdictions such as Malaysia, Nigeria and Pakistan have set
up central Sharī`ah Advisory Boards to ascertain the Islamic law that governs the business and operational
activities of MPs. In addition to the central Sharī`ah Advisory Board, MPs operating in the aforementioned
jurisdictions are required by their RSAs to establish an internal SB to oversee Sharī`ah matters related totheir business activities and operations. In countries such as Sri Lanka and Kenya, where the MPs operate
in the absence of a central SB at the RSA level, they rely solely on their internal SB. Consequently, the SB
discussed in the following paragraphs refers to an internal SB.
92. While the ideal scenario is one where MPs comply with Sharī`ah principles, it may not be easy orpractical to carry out such a requirement. In a jurisdiction where MPs are not regulated under the same
RSAs as the TOs, or where there is no requirement to have a Sharī`ah governance framework in place, thechallenge will be in ensuring that the products of these MPs are indeed Sharī`ah compliant. If a monitoringmechanism is not in place, the sanctity of Microtakāful products will become easily questionable by the
public at large.
93. For MPs regulated by the RSAs, the SB often ascertains the Sharī`ah compliance of the Microtakāful
products through a similar screening process done on normal Takāful products. The Central Bank of
Malaysia’s Sharī`ah Governance Framework for Islamic Financial Institutions requires all Islamic financial
institutions to have “a robust Sharī`ah compliance function, comprising review and audit functions supported
by risk management control process and internal research capacity” (BNM, 2010). This is complemented
by the Central Bank’s Takāful Operational Framework, which requires all TOs to have in place a22comprehensive product development process that includes certification by the SB prior to offering any typeof product to the market (BNM, 2013).
94. Consistency in Sharī`ah governance is pertinent to the growth of the Microtakāful industry, as it
encourages confidence by participants in the industry. During the product development stage, after a
product design and proposal has gone through a rigorous internal review process, it would be presented to
the SB for its deliberation and approval. When determining the Sharī`ah compliance of a product, membersof the SB should seek to reach a consensus; if that cannot be achieved within a reasonable period of time,then the members should resort to a decision by a simple majority. Additionally, members of the SB mustensure that their opinions and decisions are consistent with those expressed and made on SBs in different
institutions offering Islamic financial services (IFSB, 2009c).
95. The issuance of a Sharī`ah pronouncement should comply with the legal and regulatory framework ofjurisdictions where the MPs operate. The SB should follow and adopt the pronouncements of a central SB
where relevant. If a central SB is not established where the MPs are operating, then the SB should rely on
pronouncements of internationally recognised bodies. Where there is no decision on a particular issue, andthe SB has to come up with its own decision, then such a decision should be documented and publishedso that it can be easily accessed by the industry’s stakeholders (IFSB, 2009c).
96. Apart from approving Microtakāful products, the SB is expected to give binding opinions and decisions
relating to the business and operations of MPs and shall be responsible and accountable for the decisions
made and opinions expressed. The SB plays the role of overseeing Sharī`ah matters pertaining to thebusiness operations and activities of MPs via Sharī`ah review and Sharī`ah audit exercises conducted byinternal units undertaking the Sharī`ah compliance functions. At the end of the financial year of MPs, theSB has the important function of disclosing the state of Sharī`ah compliance of MPs in their respective
financial statements (BNM, 2010).
Other pertinent responsibilities of the SB are as follows (BNM,2010; Billah 2009) : endorsing policies and procedures;
 endorsing and validating documents, including but not limited to Microtakāful certificates, proposal
forms, Aqd forms, product disclosure sheets and marketing collateral; assessing reports and work executed by Sharī`ah review and Sharī`ah audit units; providing written Sharī`ah opinions in the event a central Sharī`ah Advisory Board requires more
Sharī`ah justification on product approvals given to MPs;
 examining and endorsing Retakāful arrangements and contracts; and monitoring investments of MRF and SHF.
97. The composition of SB is crucial in ensuring that the aforementioned roles and responsibilities arecarried out efficiently and effectively. According to the Central Bank of Malaysia, the SB of every individual
MP shall consist of at least five members, the majority of whom hold at least a bachelor’s degree in Sharī`ah.
Diversity in the SB is recommended; therefore, the SB may be comprised of experts from various disciplines
other than Sharī`ah but they shall not form its majority. In addition, the members of the SB shall be personsof acceptable reputation, character and integrity, and be nominated by the nominating committee andapproved by the BOD (IFSB, 2009b; BNM, 2010).
98. The National Insurance Commission of Nigeria, on the other hand, requires the SB to consist of atleast three members. MPs must appoint a minimum of one insurance expert, and two Sharī`ah-qualified

23

scholars (National Insurance Commission Nigeria, 2013). Pakistan takes a slightly different approach. MPs
within the Pakistani jurisdiction do not have to establish an SB, as the appointment of at least one Sharī`ahadviser with expertise in Sharī`ah is sufficient to oversee the Sharī`ah aspects of the MPs’ operational
matters and business activities (Securities and Exchange Commission of Pakistan, 2012). Taking into
account the financial limitations of MPs, a research study suggests that MPs may appoint a minimum
number of three members to establish an SB (Mokhtar, Sulaiman, & Ismail, 2012). This is very much inconsonance with the requirement imposed by the National Insurance Commission of Nigeria.
99. MPs regulated by the Central Bank of Malaysia are required to establish four key Sharī`ah governancefunctions, namely Sharī`ah research and secretariat, Sharī`ah risk management, Sharī`ah review andSharī`ah audit. All these functions report to the SB, ensuring end-to-end Sharī`ah compliance of MPs’
business operations and activities. The Sharī`ah research function undertakes review of product proposals,
research on Sharī`ah issues, and secretarial matters pertaining to the SB. The role of the Sharī`ah risk
management function is to mitigate any possible Sharī`ah non-compliant events by systematically
identifying, measuring, monitoring and controlling Sharī`ah non-compliance risks (BNM, 2010). NigerianMPs, on the other hand, are not required to have their own internal Sharī`ah research function. In fact, theresponsibility for carrying out this task is shouldered by the SB, rather than by a unit established by the
management of MPs. A Sharī`ah compliance unit that executes similar duties of Sharī`ah review as
described in paragraph 96 could act as a secretariat to the SB (National Insurance Commission Nigeria,2013).
100. The Sharī`ah review function is responsible for conducting regular evaluation of the Sharī`ahcompliance of the MPs’ business activities and operations. Such evaluation will be reported to the SB for it
to determine and confirm the Sharī`ah compliance status of a certain business activity or operational matter.
Consequently, the Sharī`ah review function will be involved in the remedial rectification plan in the eventthat a Sharī`ah breach has occurred. Such a rectification plan must be approved by the SB. The Sharī`ahaudit function, on the other hand, carries out periodic assessments of the business activities and operationsof MPs. A comprehensive internal Sharī`ah audit programme is developed to provide independent
assessment of the degree of Sharī`ah compliance employed by the MPs (BNM, 2010).
101. The Operational Guidelines 2013 Takaful-Insurance Operators spell out the responsibilities of the
Sharī`ah compliance unit in great detail. Its responsibilities include ensuring the segregation of Microtakāful
funds, ensuring that the management of the MRF deficit complies with Sharī`ah principles, ensuring thatpayments of commissions and expenses are made from the MRF, and more. Unlike the Sharī`ah
Governance Framework, members of the SB of Nigerian MPs are expected to conduct the Sharī`ah audit
function, with a condition that they are involved in product approval. Alternatively, the SB could appoint anaudit firm to perform this task (National Insurance Commission Nigeria, 2013).
102. In the event that the MP is not capable of having its own internal SB and Sharī`ah governancefunctions, such functions must be outsourced to a third party – namely, a Sharī`ah advisory firm. A Sharī`ahadvisory firm should have sufficient expertise and resources to carry out its work (IFSB, 2009c). In the
Malaysian context, outsourcing of the Sharī`ah governance function is only limited to Sharī`ah audit, whichis also subject to the condition that the MPs are satisfied with the comprehensiveness and scope of theaudit.
103. For MPs regulated by entities other than the RSAs, where monetary assistance is in the form ofgovernment subsidies or charitable donations, compliance with Sharī`ah principles may pose a challenge
if there exists no formal SB to oversee the compliance requirement. For Takāful Mikro Indonesia (Takmin),the partnership between Peramu and Takāful Indonesia obtains the involvement of Baytul Maal, which is a24trust fund institution responsible for pooling funds and distributing them to the poor. Given the nature of
Baytul Maal as a State Treasury in charge of managing the assets of the state in accordance with Sharī`ah
principles, Takmin possesses its own SB and would use a screening mechanism when it comes to the initial
screening of eligible recipients. Baytul Maal needs to ensure that the money distributed for Zakah24 or
Sadaqah 25 fulfils the requirements of the appropriate Asnāf (categories). 26 For the second layer ofscreening, Takāful Indonesia, being the product developer of Takmin Microtakāful products, has its own
internal SB for product development approval. In an arrangement of this type, there is the possibility of aconflict arising between the decisions made by the different SBs, such as by the SB of Baytul Mal and thatof Takāful Indonesia. The issue may arise as to which decision is superior in a Sharī`ah-related matter.
104. For MFIs offering Microtakāful products under no formal supervision of the local RSAs, such as theexample cited from Sri Lanka where deregulation of the insurance sector allows for new MPs, questions
will always arise about the sanctity of Microtakāful products’ compliance with Sharī`ah principles. The MFIs
may be offering the Microtakāful products under their own initiatives and have limited understanding ofSharī`ah compliance requirements. This raises the question of whether Sharī`ah compliance should becompromised for the purpose of expansion of Microtakāful initiatives.

(c) Application of IAIS’ Insurance Core Principles
105. The IAIS’ “Application Paper on Regulation and Supervision Supporting Inclusive Insurance Markets”
provides guidance on how its Insurance Core Principles may be implemented to enhance the inclusivity of
insurance markets. The proportionality principle has been taken to be the appropriate mechanism forapplying ICPs to the microinsurance framework to reflect the nature, scale and complexity of the businessframework. The proportionality principle aims to justify (a) simpler and less burdensome ways of meeting
requirements for low-risk activities, and (b) more sophisticated methods and techniques for more complex
risk situations (IAIS, 2012).
106. For ICPs relating to corporate governance and the interests of microinsurance stakeholders, theapplication of procedural proportionality requirements is found to be relevant in ICP 5: Suitability of
Persons27 and ICP 7: Corporate Governance.28 The former ICP requires that the board members, senior
management, key persons in control functions and significant owners of an insurer must have pertinent
experience and maintain a sufficient degree of knowledge, while the latter provides a corporate governancestructure through which an insurer is managed and controlled. It is worth highlighting that “proportionality”
from the perspective of IAIS does not translate to the introduction of automatic and systematic
simplifications for insurers or intermediaries. The proportionality measure taken by the RSAs should at least

24 Zakah is an obligatory act required by Islam to be performed by every adult and able-bodied Muslim. It is an importantpillar among the five pillars of Islam. Zakah is a part of the wealth and property that Muslims must pay annually, to help
the poor of their community. One of the main purposes of Zakah is to keep those who are wealthy clean, monetarily,
from sin. It is a form of charity that is obligatory for Muslims.
25 Sadaqah, on the other hand, means voluntary charity; it is the opposite of Zakah, which is obligatory.
26
Under the obligatory payment of Zakah, only eight categories of society are eligible to be the recipients of this fund.
They are: (a) those living without a means of livelihood; (b) those who cannot meet their basic needs; (c) Zakahcollectors; (d) new Muslim converts; (e) those wishing to be freed from slavery or servitude; (f) those who have incurred
overwhelming debts while attempting to satisfy their basic needs; (g) those fighting for a religious cause or a cause of
God; and (h) wayfarers and stranded travellers.
27 ICP 5 states: “The supervisor requires Board Members, Senior Management, Key Persons in Control Functions andSignificant Owners of an insurer to be and remain suitable to fulfill their respective roles.”
28 ICP 7 states: “The supervisor requires insurers to establish and implement a corporate governance framework which
provides for sound and prudent management and oversight of the insurer’s business and adequately recognizes andprotects the interests of policyholders.”

25

be suitable, necessary and appropriate to attain the supervisory objectives of a jurisdiction. Most
importantly, the system must remain supervisable.
107. While this proportionality approach may similarly be applied by the MPs of Microtakāful to theirgovernance framework, RSAs need to be aware of the existence of other MPs that are not regulated bythem but, rather, by other formal entities, as well as those MPs that may not be regulated at all. Where
Microtakāful initiatives are subsidised by the government, the ideally supervised environment of the RSAs
may in certain circumstances be jeopardised. This holds true if the MPs are required to participate in anational Microtakāful scheme where pricing is somewhat prescribed by the local authority rather thandetermined by prudent pricing as stipulated by the RSAs.

II.

Financial and Prudential Regulation(a) Sharī`ah Compliance Requirements
108. Microtakāful is launched under the same premise as Takāful, which is to comply with Sharī`ah
principles. It aims to rid the existing insurance system of three main elements: Maysir (gambling), Gharar(uncertainty) and Riba (usury). While it may seem straightforward for MPs simply to follow the requirements
set forth for TOs to ensure that their operational activities are Sharī`ah compliant, the practical approach
may not be as easy as it should be, since the stakeholders vary between MPs and TOs.
109. For MPs that are regulated by the RSAs, the licensing requirement may require them to have aninternal Sharī`ah Board or to comply with the RSA’s SB requirements prior to being offered a licence. For
MPs that are not regulated by the RSAs, the absence of a licensing requirement may accord flexibility tothese providers in terms of ensuring strict compliance with Sharī`ah principles. This might lead to reputation
risk when a breach of Sharī`ah principles is discovered.
110. IFSB-10: Guiding Principles on Sharī`ah Governance Systems for Institutions Offering Islamic
Financial Services provides guidance on the development of a Sharī`ah governance framework which may
be made reference to by MPs wishing to have in place a Sharī`ah operational, screening and review
framework. MPs that are not regulated by RSAs may opt to establish their own internal SB for the purposeof having an internal Sharī`ah review mechanism for all their products, or they may choose to refer to a
local SB which may provide guidance on Sharī`ah compliance issues relating to Microtakāful products.
Whichever SB these MPs wish to put in place, there need to be clear terms of reference regarding its
mandate and responsibility, well-defined operating procedures and line of reporting, plus a goodunderstanding of, and familiarity with, professional ethics and conduct. In addition, the individual mandatedwith overseeing the Sharī`ah governance systems must fulfil acceptable “fit and proper” criteria (IFSB,
2009).
111. A focus group discussion conducted by the Securities and Exchange Commission of Pakistan (SECP)
in 2012 with a group of low-income microfinance customers revealed that, in a country where 96% of its
population are Muslims, the preference for Microtakāful over microinsurance products is the main reason
why the penetration of microinsurance is low in that country (Amjad, 2013). Consequently, in February
2014, the SECP issued the Microinsurance Rule 2014, which is applicable to the Microtakāful industry.
Prior to the issuance of Microinsurance Rule 2014, the SECP established in 2013 a centralised Sharī`ah
Advisory Board. The board will oversee the application of Islamic finance rules to instruments including
mutual funds, pension funds and Takāful. In addition, it will be in charge of recommending accounting and26

investment guidelines apart from undertaking educational activities (Securities and Exchange Commissionof Pakistan, 2013).

(b) Requirement for Separation of Funds
112. In the most commonly used model of Takāful, separation of funds between the Shareholders’ Fundand the Participants’ Risk Fund is a key requirement in fulfilling the Sharī`ah principles. As stipulated in
IFSB-11, “The distinctive rights and obligations between the TO and Takāful participants require a clear
segregation of the PRF [Participants’ Risk Fund] from the TO’s shareholders’ fund” (IFSB, 2010). A similarargument is valid for Microtakāful operations, since, in the absence of misconduct or negligence, the MP is
not contractually accountable for any deficit or loss arising from an MRF. 29 This is also done on the preceptthat the SHF belongs to the shareholders and the PRF belongs to the participants, from which fund claims
and claims-related expenses will be paid.30 Under this principle, failure to separate the fund may render the
Takāful operation non-Sharī`ah compliant. It is thus crucial for MPs to ensure that this key requirement isunderstood comprehensively when choosing the type of Microtakāful model to be used for its operation.

(c) Sharing of Surplus
113. Surplus sharing is an element of Takāful that is still being deliberated upon at length by the Takāful
industry. Well known for its unique payback feature, many industry players still use this mechanism forsharing any surplus with participants as an enticement feature to attract the general public to participate in
Takāful plans. This is especially obvious in General Takāful products, which are renewable annually. It is
usually at the end of the certificate term that any surplus generated from the PRF will be shared between
the participants and the shareholders of the TOs. As envisaged in IFSB-8, any surplus generated from the
PRFs will usually be shared, according to a pre-agreed percentage, between the shareholders and theparticipants. The portion allocated to participants will either be distributed to the participants themselves or
be retained in the PRF to build up the reserves to strengthen the fund for solvency purposes (IFSB, 2009a).
114. According to AAOIFI’s Shari’ah Standards for Islamic Financial Institutions, distribution of surplus canbe in one of the following forms:
 distribution of surplus among participants in proportion to their respective contributions regardlessof whether or not they have made claims during the financial period;
 distribution of surplus among participants who have not made claims during the financial year;

29 While a TU is expected to maintain the separation of funds, the PRF of a TU has to remain solvent to be able to meetits participants’ claims and other financial obligations. The Accounting and Auditing Organization for Islamic Financial
Institutions (AAOIFI) Standards spells out four approaches for dealing with deficits within a PRF:

Cover the deficit from the reserves within the PRF.

Borrow funds from the PRF by way of Qarḍ, which is repaid from future surpluses.
Ask the participants to cover the deficit in proportion to their individual contribution.

Increase future contributions of the participants proportionally.
In dealing with deficit, the common practice is to carry out a hybrid of the first two approaches. The two latter options
on the other hand are not viable. The first of the latter two options is impractical, as TOs or MPs are required to approachevery single participant to ask them to inject additional capital to meet the deficit. The second of the latter two options,on the other hand, contradicts the principle of inter-generational equity.
30 Paragraph 37 of IFSB-11 states: “Some Takaful products may be written in so-called ring-fenced funds, where partof the business is clearly segregated from the rest. In such cases the assets or retained underwriting surplus of thefund may be strictly isolated from the other lines of business so that they can only be used to meet the Takāful andRetakāful obligations with respect to which the ring-fenced fund has been established.”27 distribution of surplus among participants after deduction of claims they have made during thefinancial year; or distribution through any other method approved by the SBs of the respective MPs.
115. Although the issue with regards to surplus sharing remains the responsibility of the SB of eachjurisdiction and is likely also to remain an issue for MPs, it is not this feature that is creating concern among
MPs and their stakeholders. The real predicament is whether the surplus should be distributed to theparticipants or be required to remain in the MRF. One study suggests that there is a strong link between
MPs’ duration (i.e. number of years) of operation and level of surplus in the MRF. Consequently, MPs
operating more than ten years are in better surplus position than MPs operating less than ten years(Mokhtar, Aziz, & Hilal, 2015). Notwithstanding that, in a sector where the obligation to honour claims ismuch higher than the imperative to make a profit out of product offerings, the need to ensure sufficiency of
the MRF places a greater burden on the MPs. This makes it even more crucial for solvency of the MRF to
be observed. To achieve this, some MPs argue that the most appropriate mechanism is to retain any surplus
in the MRF. The objective of surplus retention must be disclosed to participants to ensure that transparency
is observed, especially in practices where participants are not represented in the corporate governance ofthe MPs.
116. However, whether this approach is feasible or practical remains an open question that needs to beanswered by MPs and their RSAs. There needs to be proper judgment on whether it is more viable to retain
a surplus in the MRF (to build the capital strength of the fund) or to distribute it to the Microtakāful
participants (in an attempt to increase their interest in products that have a payback feature). An alternative
practised in certain jurisdictions is to direct the surplus to the general welfare of the low-income group or toenhance the benefits of the product. This practice provides the low-income group with a general sense thatthey are gaining something back through the enhanced benefits and better welfare. Another suggestion isthat it may be more appropriate for any surplus to be ploughed back as Tabarru’ for additional personal
accident cover, since the amount of surplus generated from the small contribution of Microtakāful
participants does not normally count as a form of savings for this low-income population. They would benefit
more if extended coverage were provided (Mokhtar, Sulaiman, & Ismail, 2012).
117. An example of surplus being distributed is the declaration of a surplus by Takāful Insurance of Africa(TIA) in Kenya, whereby all its policyholders, including the Microtakāful participants, received a total of
US$120,000 for the financial year ending December 2012 (Chao-Blasto, 2014). TIA believes that “surplus
distribution is the beauty of Takāful and a testimony to Sharī`ah compliance, fairness and equity of theprocess” (Takaful Insurance of Africa, 2013).

(d) Solvency and Capital Adequacy Framework
118. The nature of the Microtakāful market segment calls for the need to have a different regulatory
requirement. This is intended to ease market participation by the low-income section of the population
which, under normal circumstances, is excluded from the financial system.
119. IFSB–11: Standard on Solvency Requirements for Takāful (Islamic Insurance) Undertakings, issued
by the IFSB in December 2010, lists seven key features to be observed by TOs and RTOs. They are as
follows (IFSB, 2010):(i)

Key feature 1: The solvency requirements for Takāful undertakings (TUs) must adopt a totalbalance sheet approach to ensure that risks are appropriately recognised and consistently valued,
and to identify the interdependence between assets, liabilities, regulatory solvency requirements

28

for PRF and the shareholders’ funds of the TO. However, the total balance sheet approach must
address the clear separation of PRF and the shareholders’ funds of the TO.
(ii) Key feature 2: The solvency requirements should be established at a level such that therespective amounts of solvency resources in the Takāful and shareholders’ funds are adequate
to meet their respective financial obligations as they fall due, bearing in mind that part of theshareholders’ funds may be “earmarked” to cover a Qarḍ facility.31(iii) Key feature 3: The solvency requirements should establish solvency control levels at therespective Takāful and shareholders’ funds, which trigger proper interventions by the TO and thesupervisory authority when the available solvency is less than the solvency control level.
(iv) Key feature 4: The solvency requirements should establish criteria for assessing the quality andsuitability of solvency resources in the Takāful and shareholders’ funds to absorb losses indifferent financial stages of the respective funds.
(v) Key feature 5: The solvency requirements for TUs must have separate risk-adjusted computation
and assessment. The risk management framework must be comprehensive and cover all risks towhich the PRFs and the shareholders’ funds are exposed.
(vi) Key feature 6: The adequacy of regulatory solvency requirements for a TU depends on themaintenance of a sound risk management framework. An essential part of the supervisory review
process is to assess for each undertaking that adequate risk management arrangements are inplace through which the TO can, and does, monitor, measure, report and control the managementof the assets and liabilities in a coherent and integrated manner.
(vii) Key feature 7: Information regarding the solvency requirements for a TU that is material andrelevant to the market participants should be publicly disclosed to enhance market discipline andthe accountability of the TO.
120. While it is ideal for RSAs to require MPs to observe each of the seven key features, the RSAs needto consider the size, complexity and nature of the risks absorbed by MPs into their institution. The issues
that may be prevalent for normal TOs may not be so for MPs. An example would be the requirement tohave two solvency control levels for each of the risk fund and the SHF. For MPs, some of which may not
be under the regulation of Takāful RSAs, this requirement may be burdensome since a higher amountneeds to be set aside to meet the various solvency control levels unless lower amounts are allowed from aperspective of proportionality, as is shown in paragraph 122. The small amount received as a contributionthat has already been set at its lowest level may not allow the MPs sufficient excess to meet two levels ofsolvency requirements. Also, requiring MPs to meet these two levels of solvency would increase the costof providing the Microtakāful products. This is an area that requires careful thought by the RSAs. What is
ideal under a secured financial system may not be so when it comes to a more or less risky group ofparticipants.
121. In considering a separate solvency regime for MPs, it is pertinent for the RSAs to consider theprocedures for dealing with insolvent winding-up of an MP. Furthermore, the legal and regulatory framework
should provide for the determination of the point at which it is no longer permissible for a Microtakaful
undertaking to continue its business.
122. In the Philippines, for example, microinsurance schemes that operate under mutual benefit
associations (MBAs) are allowed by the Insurance Commission of the Philippines to operate under lower

31 In the event the PRF is in a deficit, a Qarḍ facility is drawn down from the SHF and injected into it in order for the TU

to continue its operations. The SHF undertakes to provide Qarḍ to the PRF, although it is expected for a TU to maintainthe separation of funds. Qarḍ is to be repaid out of future surpluses of the PRF. This is the current practice of mostjurisdictions offering Takāful and Microtakāful.

29

minimum paid-up capital. For example, for an existing local insurer to run a business based on a traditional
insurance licence, the minimum paid-up capital required is US$1.7 million, whereas for a new MBA to startoffering a microinsurance plan, the initial paid-up capital required is only US$113,000. This amount,however, is expected to increase annually by 5% of the MBA’s total collected annual premiums, with theultimate aim of acquiring 12.5% of the minimum paid-up capital of a local insurer (Hafeman, 2009). The
Insurance Commission is also the RSA that will determine the assumptions that will be used for the pricingof the microinsurance products. These include the maximum administrative expenses and investment yield,
surrender rates, the minimum surrender benefit, and the minimum amount that needs to go into theguarantee fund. Although the products and premium rates are approved by the Insurance Commission prior
to being offered to the market, there have been cases where the price offered to the microinsurance
participants deviated from the price approved by the Insurance Commission.

(e) Risk Management Framework
123. Another requirement to be considered by the MPs is the risk management framework. IFSB-14:
Standard on Risk Management for Takāful (Islamic Insurance) Undertakings provides a general framework
for TOs containing (IFSB, 2013):







risk policies and strategies;
risk identification;risk assessment, response and control;
control framework;
risk monitoring; andrisk reporting.

124. While putting in place a risk management framework specific to MPs is crucial in enabling the providers
to ensure that all risks that are exclusive to Microtakāful participants are captured and recorded in the risk
register based on the nature, scale and complexity of the business, it may not necessarily be easily
implemented by MPs. MPs that are not regulated by the RSAs may not possess the required expertise toassess the risks and put in place an appropriate control framework. They may not be aware of the risks thatare specific to Microtakāful, such as the risk of Sharī`ah non-compliance and the risks arising from theseparation of SHF and MRF funds (IFSB, 2013).
125. In addition, the various intermediaries involved in the chain of business and the types of possible moral
hazards implicated in providing coverage to the Microtakāful participants may not be captured into the risk
management framework. These intermediaries may include small pawn shops and grocery stores which,under normal circumstances, are not licensed by any RSAs or regulators of formal entities. This is where
the gap is, and mechanisms would need to be developed to capture the kinds of risks that unregulated
intermediaries bring into the financial system.
126. In terms of the types of products offered to the Microtakāful participants, the risk weights carried bythese participants need to be reflected in the pricing of the products. This is normally taken care of if
mortality tables that are approved by the RSAs are used in the pricing, with appropriate expense
assumptions loaded into the pricing mechanism. This is crucial in ensuring the funds are sufficient to meetall possible claims made by Microtakāful participants. However, for MPs that are not regulated by the RSAs,
inappropriate pricing may lead to insufficient MRF, which may eventually lead to inability of the MRF tomeet its claims obligations. There needs to be a mechanism to ensure that these MPs possess the minimum
pricing knowledge for sustainability of the MRF.

30

(f)

Investment Framework

127. Given that MPs are created to provide coverage to Microtakāful participants, appropriate investment
policies are crucial for all their product lines, taking account of the diverse characteristics of the liabilities ofeach category and the acceptable risk tolerance for each category and for the Microtakāful participants.
The investment framework of MPs needs to provide sufficient cash flow to support the immediate needs ofthe funds. In addition, the primary need of MPs is support for their growth; therefore, they need to be
assured that the business has appropriate investment backing along with technical skills to support
downscaling while at the same time improving their low-income market focus.
128. While the investment policies are common in MPs regulated by RSAs, they may not exist in MPs thatare not regulated by the RSAs. Some of these MPs may not be aware that the Microtakāful participants arethose who will bear the investment risk and other associated risks. Since Microtakāful participants are not
involved in the management of the Microtakāful funds, they cannot exercise their rights as owners of thefunds. This is an important aspect that may be overlooked by the MPs. Another important aspect that
requires careful consideration is the process of selecting or purifying assets to achieve Sharī`ahcompliance. An MP that lacks knowledge of the requirements for Sharī`ah-compliant investment return may
not be able to assess if the income received is tainted by being derived from impermissible activities orquestionable sources.

(g) Underwriting Requirements
129. The underwriting requirements for normal TOs usually involve various processes of understanding
and classifying the types of risks absorbed by TOs. This process is to ensure that the risks taken on arerisks that are not detrimental to the survival of the organisation. This process normally involves mortality
and morbidity tables in which statistics, from previous decades, of survival and death of the insured arecompiled and referred to in pricing products. In addition, understanding risks includes making a thoroughbackground check on potential participants prior to accepting them into the pool of risks. This is normallydone when TOs select high-risk participants for a thorough medical check-up. Some of the key criteria inthe underwriting process include health, build, cholesterol, blood pressure, cancer history, tobacco, alcoholor substance use, hazardous activities or occupations, driving history and family history. An individual’s
financial background, as well as types of coverage required, will also be key considerations in theapplication process.
130. While it is common for RSAs to impose strict underwriting requirements on TOs, it may not be practicalto impose similar requirements on MPs. The demographic and educational background differences
between the low-income and average-income participants make the Microtakāful participants more prone
to various kinds of hazardous occupations and sicknesses that may not be commonly found in middleincome earners. At the same time, the limited exposure that they get with regards to maintenance of good
health makes them more susceptible to various health conditions that will lead to higher contributions if they
were underwritten in the same way as the normal Takāful participants. In addition, these participants’irregular income makes financial underwriting a deterrent for them being accepted. It is for this simple
reason that the low-income segment has thus far been broadly excluded from the normal financial products
offered by the existing TOs.
131. For Microtakāful initiatives to be expanded to include the low-income population, the RSAs and otherrelevant authorities may have to encourage a more flexible financial environment in which these potential
clients may go through simplified underwriting requirements while enabling them to be sufficiently assessed.
To offset the risky downside of these participants, RSAs may instead limit the amount and type of coverage31that may be provided to them, provided that this is not done at the expense of product innovation. The arrayof products to be offered should also be limited to those that are simple to understand, so that participants
will not have difficulty in comprehending the coverage being offered.

(h) Application of IAIS’ Insurance Core Principles
132. While the expansion of the Microtakāful industry has not reached the level of coverage enjoyed by its
conventional counterpart (i.e. microinsurance), there is an advantage in knowing that the regulatory
challenges and issues faced by the microinsurance sector are similar. Thus the IAIS proportionality principle
offers good guidance, especially in jurisdictions where regulations of microinsurance, if it exists, may bereferred to while also taking into consideration the specificities of Microtakāful.
133. Under the procedural proportionality of ICP 17 on capital adequacy and ICP 16 on enterprise risk
management, special consideration is given to inclusive insurance markets for the underserved, although
exemption is not an option. However, this requires an approach that reflects the nature, scale andcomplexity of the risks. The absolute minimum bound for the Minimum Capital Requirement may be revised
to a lower level that reflects its lower risk profile as well as more limited need for detailed governance andrisk management. ICP 16 may also be applied by limiting the activities and prescribing specific requirements
focused on the nature of risks undertaken and underwritten and capable of being economically implemented
for small, low-risk, less complex insurers so as to deliver the intent of ICP 16.
134. With respect to ICP on investment (ICP 15), the following factors are worth considering: (a) quality ofrisk management and governance framework, (b) quality of capital resources, (c) comprehensiveness andtransparency of disclosure frameworks, (d) development of relevant investment and capital markets, (e)cost of compliance, (f) competition with other financial services institutions, and finally, (g) the level ofprudence and risk sensitivity of the regulatory solvency requirements.
135. Although these ICPs may be applied principally to Microtakāful, it is crucial for the RSAs of MPs toconsider the specificities of Microtakāful in formulating regulations and guidelines for Microtakāful. This isessential especially when it concerns the compliance with Sharī`ah principles, such as the requirement toensure separation of SHF from the MRF, as well as the Sharī`ah governance framework that is required inoverseeing the operational activities of MPs.
136. The risk of Sharī`ah non-compliance is pervasive in the operations of an MP – for example, its productcycle. Since all Microtakāful products need to be Sharī`ah compliant, the overall product development
process therefore requires consideration of Sharī`ah compliance, including the stages where products are
priced, underwritten, advertised, contracted and finally accepted by the participants. These require carefulconsideration on the part of the MPs and their RSAs.

III. Transparency, Reporting and Market Conduct(a) Customer Education and Awareness137. Educating the low-income population about the importance of financial protection has always been achallenge for insurance companies and TOs. This is especially so when the income stream of the lowincome population is irregular. Some low-income earners may not even have a decent income for a certain
part of the year, especially when they are directly involved in agricultural activities that are easily affectedby weather conditions. For Microtakāful initiatives to grow bigger in an attempt to widen the scope of32

financial inclusion, the RSAs and relevant authorities may wish to play a supportive role in encouraging theMPs to increase their education and awareness activities in areas saturated with low-income earners.
138. Information asymmetry is currently the predicament faced by both the MPs and Microtakāful
participants. The MPs are uncertain of the types and behaviours of risks that they absorb into their financial
system, due to the lack of mortality and morbidity statistics on the low-income population. On the part ofMicrotakāful participants, there is a lack of awareness and understanding of the importance of Takāful
protection. This information asymmetry on both sides of supply and demand has created a gap which, todate, both sides have been unable to bridge. Various types of initiatives may be conducted and supervisedby the RSAs and relevant government agencies to increase awareness among the low-income population.
139. In Indonesia, an awareness programme for Microtakāful is conducted by the Islamic Economic Society(MES) as part of its 2014 initiative to integrate the efforts made by MPs and Baittul Maal wa Tamwil (BMT).32
The Islamic Micro Insurance Business Matching Event was a series of roadshow events held between 2013
and April 2014 in six cities in Indonesia – namely, Batam, Padang, Banjarmasin, Palangkaraya, Medan andCirebon. The objective of the roadshow was to increase BMTs’ awareness of the importance of risk
mitigation through Microtakāful products. MES felt the need first to educate BMTs on the importance ofMicrotakāful so that the information might be transferred to the recipients of BMT funds throughout
Indonesia. From this awareness programme held by the MES, a total of 20 BMTs in Malang, 4 BMTs in
Batam and 41 BMTs in Padang started to increase awareness of the use of Microtakāful products amongrecipients of funds from BMTs (Hamzah, Rusby, & Hamzah, 2013).

(b) Consumer Protection140. The lack of education on financial services and Takāful literacy makes Microtakāful participants
susceptible to various types of possible mis-selling and misinformation on the part of MPs. The productliterature, contract wording, sales illustration, and various other means of information sharing provided by
the current TOs are often lengthy and in a format or language that may not be easily understood by the
Takāful participant. A potential participant needs to know for certain the types of coverage and exclusions
provided by a product plan prior to agreeing to participate in the plan. Furthermore, potential participants
must have some understanding of the structure of the product in order for them to be aware of themechanism for underwriting surplus sharing. However, this may be a challenge for the low-income
population, since they may not have the necessary background to understand the intended meaning of the
product literature.
141. It is important that the RSAs and relevant authorities ensure that the Microtakāful participants areprotected from their own inability to comprehend the product literature. There should be a requirement toensure that the product literature of MPs is written in simplified language(s) that is easily comprehensibleby the low-income population. The intermediaries appointed by the MPs should also comply with certain
codes of conduct to prevent possible types of inappropriate misconduct. Additionally, it is important toprovide proper training to intermediaries so that their delivery of Microtakāful concepts and products to thetarget market is clear and concise. This is to boost the confidence level of the target market in theMicrotakāful industry.

32 Baitul Maal Wat Tamwil is a financial institution in Indonesia that provides a financing facility to small entrepreneurs

to finance their business operations. These small entrepreneurs usually do not have access to the larger banking sector
due to their financial background. BMT, which started its operations in 1992, has since been a source of financing forsmall business institutions and provides an alternative to illegal moneylenders.

33142. Another important aspect of consumer protection with regards to Microtakāful is the user-friendlinessof claims settlement. Since the product design of Microtakāful products is generally simpler than that of
Takāful products, the claims process for Microtakāful products should also be simpler, withoutcompromising fraud control mechanisms.33
143. Amana Takāful of Sri Lanka, in collaboration with Muslim Aid, conducts monthly Centre Meetings for
its participants to discuss Microtakāful. In these meetings, the Microtakāful participants are allocated five toten minutes to share their experiences of the application and claims process. This is to provide ease ofunderstanding to other participants who may not be aware of the processes for applying and claiming from
the MP. It has been reported that, during these meetings, key roles are played by village leaders for effective
and efficient transfer of information to Microtakāful participants, for whom trust seems to be the mainconcern.

(c) Consumer Recourse and Complaints
144. Many jurisdictions already have in place a dedicated complaint channel for Takāful participants. There
are websites, customer services centres, toll-free telephone lines and various other channels that makeTOs easily accessible by the participants. RSAs and the relevant authorities may wish to consider
dedicating a complaint channel to Microtakāful participants wishing to air their grievances over Microtakāfulrelated issues. This channel should be easily accessible by the participants, at minimal or no cost, to ensurethat their welfare is taken care of at all times.
145. In India, Uplift Mutuals34 provides a 24/7 helpline to its policyholders. This helpline is managed by
medical doctors so as to provide microinsurance policyholders with easy access to medical advice over thephone. Uplift Mutuals also sets up branch offices in rural areas, which provide referral and guidanceservices so that microinsurance policyholders can collect referral letters to the nearest health service
provider. In addition to its helpline, Uplift Mutuals organises monthly health camps, where microinsurance
policyholders can receive a preventive check-up on a systematic basis. This is an example of how
consumer recourse and complaints can be easily handled by MPs. The 24/7 helpline, the frequentmeetings, the easy access to service providers, and the monthly health camps provide avenues for
microinsurance policyholders to channel their concerns easily (Microinsurance Learning and Knowledge,2013).

(d) Reporting to RSAs
146. It is common for some MPs to offer only Microtakāful products with the intention of assisting only the
low-income population. This reason has been used to justify why these MPs do not require strict supervisionfrom the RSAs or relevant authorities. However, lack of supervision or reporting is a loophole that can beabused to misuse the pool created to assist the low-income segment. It is hence just as relevant for MPs
to be required to adhere to the type of reporting that normal TOs are required to follow.

33 This has been elaborated on at length in paragraphs 43 to 45.
34 “Uplift Mutuals is the flagship programme of Uplift India Association that brings micro insurance solutions to low

income families on the twin principles of mutuality-solidarity and collective responsibility. Born out of the healthprotection needs of self-help group women in 2003, the mutual model designed by Uplift Mutuals has over 200,000
lives covered in India. It is one of a kind of a programme where low income families share and manage their own healthrisk in a systematic way similar to how insurance works.” – upliftmutuals.org

34147. Instead of requiring the MPs to provide an elaborate report (some jurisdictions may require monthlyor quarterly reporting) of the kind required of the TOs, the RSAs and the relevant authorities may request
simplified but consequential reporting. This simplified reporting should contain the minimum amount of
information needed for the RSAs and relevant authorities to gauge the financial strength of the MP. This isnecessary to ensure that MPs have the capacity to undertake their duties and obligations to the participants.
It is also necessary for the RSAs and relevant authorities to ensure that financial assistance is available toassist the Microtakāful risk fund when it has difficulty in meeting its obligations. Reporting should be donewith the intention to protect the interests of Microtakāful participants.

(e) Application of IAIS’ Insurance Core Principles
148. Under the IAIS’ proportionality principle, microinsurance providers need to comply with therequirements set forth under ICP 18: Intermediaries, ICP 19: Conduct of Business and ICP 20: Public
Disclosure, subject to the requirements being implemented in a manner that considers the nature, scaleand complexity of the business and risks of the microinsurance providers. This means that thesemicroinsurance providers should at least have incentives to service the low-income population and be
effective in carrying out their tasks. They need to be aware that microinsurance policyholders have different
needs in terms of consumer protection than normal insurance policyholders. Their good conduct is pertinent
to promote confidence in insurance markets. It is also essential that the type of information shared with themicroinsurance policyholders is commensurate with their financial and general literacy.
149. From the perspective of supervisory reporting as indicated in ICP 9, there may be a need for additional
guidance to be provided by the supervisors with regards to minimum reporting. This is to ascertain minimum
understanding by the potentially diverse entities that are involved in the inclusive insurance market
innovations.
150. While the transparency, reporting and market conduct of MPs differs marginally from that of
microinsurers, the RSAs of MPs should be mindful of these requirements from the perspective of Sharī`ah
principles. IFSB-9: Guiding Principles on Conduct of Business for Institutions Offering Islamic Financial
Services provides guidelines on the type of information provided to clients, the concepts of conflict ofinterest and of duty, and honesty and fairness from the perspective of Sharī`ah. As quoted in paragraph 4of IFSB-9, “One of the most common unethical practices in modern business is to exploit one’s ignoranceof market conditions.” This holds true for Microtakāful participants, who may not possess the backgroundknowledge of Takāful protection and their rights as participants (IFSB, 2009b).

IV. Supervisory Review Process(a) Licensing Requirements
151. Licensing is a tool used by RSAs to control entities that are allowed to conduct Takāful business. It isa mechanism to ensure that unauthorised Takāful transactions do not take place. Through licensing, TOs
will be fully aware of the need to have a sound governance framework for ease of effective supervision by
RSAs of all their Takāful activities.
152. Although MPs should ideally be required to have a licence prior to being allowed to offer products tothe market, it is not always necessarily easy to impose such a requirement since some MPs are notregulated under the RSAs of the Takāful sector. For TOs who offer Microtakāful products, this poses noissue. However, concerns arise when there are entities which are created exclusively for Microtakāful

35

purposes and which may not be regulated by the RSAs or any other regulator of formal entities. Concerns
over the sanctity of these unlicensed entities include the effectiveness of their governance framework andthe validity of their business model. All entities providing Microtakāful plans should meet minimum
requirements of having a proper business plan and evidence of sufficient financial resources to back thebusiness plan. Where the entity does not have the capacity to absorb the risks of Microtakāful participants,
proof of Retakāful backing should be provided.
153. The distribution system of MPs should meet the minimum requirement for conduct of business in whicha code of ethics should be observed strictly. The licensing requirement for intermediaries should beconsidered to be imposed on intermediaries of MPs other than TOs. They should be required to possess
appropriate levels of Takāful knowledge and expertise, integrity and competence. However, it is worthwhile
to note that a requirement that is too stringent will pose a challenge, since many of the Microtakāfulintermediaries do not enjoy the high remuneration package enjoyed by normal intermediaries. On the other
hand, a requirement that is too flexible may put Microtakāful participants at risk of not being protected, since
the intermediaries are not required to follow the strict licensing rules of the RSAs.
154. In Sri Lanka, for example, the Regulation of Insurance Industry (RII) Act requires all MPs to operate
under the supervision of a regulatory authority. There are no special regulatory provisions for
microinsurance/Microtakāful in the jurisdiction. This, in addition to the high administrative costs to register
an insurance/Takāful business in Sri Lanka, has led to the unwillingness of MPs to acquire a licence to offer
just microinsurance/Microtakāful products. However, the realisation that the vision of
microinsurance/Microtakāful extends beyond mere coverage of loan protections has led to implicit
deregulation on the part of the RSA. The RSA has taken into consideration the various characteristics of
MPs in Sri Lanka, the environment in which they operate, and the target population to whom themicroinsurance/Microtakāful products are offered. With these in mind, a circular was issued by the
Insurance Board of Sri Lanka, which allows the microinsurers/Microtakāful operators to appoint MFIs as
their institutional agents. Consequently, many MFIs in Sri Lanka have started to become involved in
distributing microinsurance/Microtakāful products even though they are not permitted by law to conduct
insurance/Takāful business.

(b) Application of IAIS’ Insurance Core Principles
155. According to the IAIS’ “Application Paper on Regulation and Supervision Supporting Inclusive
Insurance Markets”, the overall objective is that informal insurance should be undesirable. Insurance
activities should be conducted by licensed entities. Jurisdictions may decide that some limited activities are
not included in the definition of regulated insurance activities subject to licensing requirements. Whendefining regulated insurance activities and exclusions from the licensing requirements, consideration should
be given to the need for appropriate alternative safeguards to protect policyholders. Alternative
arrangements for microinsurance providers could be as simple as registering the institution (be it a pilot or
informal institution with transitional arrangements35) whereby only identification of the institution and its form
is registered with the supervisor. These informal institutions will hence report to the supervisor (IAIS, 2012).
156. While it may seem practical and simplified, MPs for Microtakāful may need to go through a morethorough licensing process due to the need to ensure Sharī`ah compliance of their operational activities.
This translates to the need for MPs to possess adequate resources with sufficient knowledge to facilitate
effective and efficient application, processing and granting of Microtakāful licence.
35 These are institutions that require time to transition to formal entities that will be regulated by the RSAs of insurancecompanies.

36

D. PROPOSAL FOR FUTURE WORK
157. Microtakāful is a segment of the financial industry that is rapidly gaining acceptance by financial
institutions, and especially by RSAs and government agencies. The realisation that the low-income
population should not be excluded from the financial system is gaining ground, since their contribution to
the economic system of every jurisdiction warrants providing them the opportunity to enjoy similar kinds offinancial services as are available to other income segments. In India, for example, the RSA requires thata minimum target of gross written premium should be written by microinsurance providers, to ensure thatthe insurance industry contributes to the national initiative on financial inclusion. This is reflected in its“Obligations of Insurers to Rural or Social Sectors”, which took effect on 16 October 2002 and stipulates
that insurers which started their operations after 1999 must sell a fixed percentage of their policies to thesocial sector and rural areas. Progress has shown that as many as 25.7% of new life insurance policies
were underwritten and sold in 2012 and 2013. According to the Insurance Regulatory and Development
Authority’s 2012 and 2013 annual reports, all 23 private-sector life insurance companies had fulfilled theirrural-sector obligations (Insurance Regulatory and Development Authority of India, 2002; BusinessStandard,2014) . Another example is Jordan, where the government is planning to revise its Insurance Law
2002 in order to promote microinsurance/Microtakāful, specifically in the licensing conditions forintermediaries (GTZ, 2004).
158. However, making abrupt changes to the current system in an attempt to render it inclusive requires
careful consideration, since this will have an impact not only on the current structure and framework, butalso on the way the financial industry is regulated, the way products are developed and sold, the way
distribution channels are utilised, and, most importantly, on the way these initiatives are perceived by the
public.
159. Takāful is known for its Islamic features, which are free from Sharī`ah non-compliant elements. The
products and services offered by the TOs carry with them not only a financial, but also a religious, obligation
to be fulfilled. There is a similar scenario with Microtakāful. The only difference is the need to ensure thatthe objective of Microtakāful is clarified clearly to participants that have different demographic andeducational backgrounds.
160. For Microtakāful to achieve its target of inclusivity, a concerted effort needs to be made by all the
stakeholders. This paper identifies two important areas as possible directions for future work on
Microtakāful:(a) To identify a successful cooperation mechanism between stakeholders (especially between the RSAs,
government agencies, TOs, RTOs and SB), and to understand the roles and responsibilities of each of the
stakeholders.
(b) To delineate the specific areas to be looked into by RSAs and relevant authorities when regulating theMPs. These significant areas include MPs’ corporate governance strategy and structure, solvency
requirements, underwriting requirements, licensing provisions, fund management framework, consumer
protection, use of digital technology and regulatory reporting.

37

APPENDIXCASE STUDY: PAKISTAN MICROINSURANCE REGULATORY FRAMEWORK(Securities and Exchange Commission of Pakistan, 2014)1.

On 20 February 2014, the Policy Board of the Securities & Exchange Commission of Pakistan(SECP) approved the Securities & Exchange Commission (Microinsurance) Rules 2014
(hereinafter referred to as “the Microinsurance Rules”). The Microinsurance Rules provide
standards for conduct of microinsurance business with specific focus on consumer protection,transparency and disclosure requirements. The same aforementioned Rules are applicable to thebusiness activities and operations of microinsurance providers operating in Pakistan.

2.

In the Microinsurance Rules, the term “Microinsurance” is used interchangeably with
“Microtakāful”, ‘Life Microinsurance” with “Family Microtakāful”, “Non-Life Microinsurance” with
“General Microtakāful”, “Premium” with “Contribution”, and “Insurer” with “Operator”. Specificcategorisation is also made on the type of products that fall under the definition of microinsurance,by which the sum insured may not exceed a certain amount as stipulated in the Microinsurance
Rules.

3.

The type of guidance provided by the SECP to its microinsurance providers is focused on the key
features of a microinsurance policy and they are as follows:(a)Coverage: A microinsurance policy shall cover the insured severally or jointly with theinsured’s family and/or the insured’s assets.

(b)

Period of cover: The term of the microinsurance policy shall state the period of cover, tobe determined by the insurer depending on the type of coverage.

(c)Terms and conditions: A microinsurance policy shall clearly state the sum insured,
benefits and terms of insurance coverage. The manner and frequency of premium
collections shall, if possible, coincide with the cash flow of the insured and may be collecteddaily, weekly, monthly, quarterly, semi-annually, and annually, whichever is applicable.

(d)Effectivity: Except in cases where a microinsurance policy is issued to a group, amicroinsurance policy shall become effective immediately if either the microinsurance
policy has been issued by the insurer or seven working days have passed from the datewhen the first premium has been paid in full by the microinsurance policyholder, whicheveris the earliest.

(e)Claims procedures: A microinsurance policy shall clearly state when, where and how amicroinsurance policyholder can make a claim, the documents required to make suchclaim, the claims process and expected turnaround time for settlement of the claim.

(f)

Dispute resolution: A microinsurance policy shall clearly state when, where and how amicroinsurance policyholder can make a complaint. This should state the contact details of38

both the insurer as well as the alternative dispute resolution mechanism and the insurance
ombudsman.
(g)

Waiting periods: A maximum of six months for death or disability due to natural causes
for policyholders not exceeding the age of 65 years. No waiting period shall be allowed for
accidental death or accidental disability.

(h)Grace period: Except health microinsurance and policies where the premium is paid on afrequency other than an annual basis, a 30 days’ grace period is allowed for suchmicroinsurance policies. If there is a claim made during such grace period, the outstanding
premium shall be deducted from such claim amount.

(i)

Exclusions: All exclusions shall be clearly stated in the microinsurance policy document.
Except in cases where a microinsurance policy is not issued to a group, no exclusions shallbe allowed for pre-existing conditions unless the insurer can clearly justify otherwise to theCommission.

(j)

Deductibles: No deductibles shall be allowed in microinsurance policies unless the insurer
can clearly justify otherwise to the Commission.

(k)

Renewals: For microinsurance policies where the premium is paid on an annual basis, theinsurer shall send notices to the microinsurance policyholder at least 45 calendar days prior
to expiration of the contract. Such notice shall include in clear terms whether the contract
may or may not be renewed and any changes to be made thereon, if renewed.

(l)Premium payment: The microinsurance policy shall clearly state the amount of premiums
to be paid with respect to the policy, where and how to pay such premium, and theconsequences if premiums are not paid.

4.

On Consumer Protection, the microinsurance providers are required to be transparent in theirdisclosure, the language of which must be Urdu. In all circumstances, any technical or legal
terminology should be avoided. The microinsurance providers are also required to observe fair
practices whereby the services provided should be made in a manner that is legal, ethical, nondiscriminatory and free of deception. The microinsurance providers are also required to makethemselves easily accessible to the policyholders by telephone, and through internal complainthandling systems. These requirements are equally applicable for all microinsurance providers’intermediaries.

5.

On Supervisory Reporting, life microinsurance providers are required to report microinsurance asa separate category of business, and provide the SECP with at least the statement of premiums,
statement of claims and statement of direct expenses. For non-life microinsurance providers, themicroinsurance providers are required to provide the statement of premiums, statement of claims,
statement of direct expenses, analysis of claims as well as risk exposure.

39

E. DEFINITIONS
The following definitions provide a general understanding of the terms specific to Takāful and Microtakāful
used in this document. This list is by no means exhaustive.
Corporate
governanceA defined set of relationships between a company’s management, its board of
directors, shareholders and other stakeholders that provides the structure throughwhich:(i)(ii)

the objectives of the company are set; andthe means of attaining those objectives and monitoring performance aredetermined.
In the context of Takāful (TUs) and Retakāful undertakings (RTUs), good corporate
governance should encompass:
(i)

(ii)

(iii)
Liabilities

a set of organisational arrangements whereby the actions of the
management of TUs and RTUs are aligned, as far as possible, with theinterests of its stakeholders;provision of proper incentives for the organs of governance such as theboard of directors, the Sharī`ah Board and management to pursue
objectives that are in the interests of the stakeholders and facilitate
effective monitoring, thereby encouraging TUs and RTUs to use
resources more efficiently; andcompliance with Sharī`ah rules and principles.

The financial obligations of both the Shareholders' Fund (SHF) and the Participants'
Risk Funds/Participants' Investment Funds (PRFs/PIFs) or Takāful Operators’ Risk
Funds. Detailed descriptions are set out below:
(i)

(ii)

Liabilities of the SHF are all financial obligations of those funds, and do
not include technical provisions which are liabilities of the PRFs/PIFs or
TORFs.
Liabilities for PRFs/PIFs and TORFs include financial obligations owed
by the funds, particularly amounts payable to participants in respect ofvalid expected benefits. In addition, PRFs’ and TORFs’ liabilities include
technical provisions in respect of potential liabilities from businessalready written.

Microtakāful
providerInstitutions offering Microtakāful products, including licensed Takāful Operators.

Muḍārabah

A contract between the capital provider and a skilled operator whereby the capitalprovider would contribute capital to an enterprise or activity that is to be managed by
the operator as the Muḍārib (or labour provider). Profits generated by the enterpriseor activity are shared in accordance with the terms of the Muḍārabah agreement,
while losses are to be borne solely by the capital provider unless they are due to theMuḍārib's misconduct, negligence or breach of contracted terms.

Operational risk

The risk of loss resulting from inadequate or failed internal processes, people andsystems, or from external events. For Takāful or Retakāful undertakings, this also
includes risk of loss resulting from Sharī`ah non-compliance and failure of a Takāfulor Retakāful Operator's fiduciary responsibilities.

40

Participants’ Risk
Fund

Provisions

A fund to which a portion of contributions paid by Takāful participants is allocated forthe purpose of meeting claims by Takāful participants on the basis of mutual
assistance or protection.
(i)

(ii)

The amounts set aside on the balance sheet to meet liabilities arising outof Takāful or Retakāful contracts, including claims provision (whether
reported or not), provision for unearned contribution, provision for
unexpired risks, Takāful or Retakāful provision, and other liabilities
related to Takāful or Retakāful contracts (e.g. contributions, deposits andsavings accumulated over the term of Takāful or Retakāful contracts).
Terms, conditions or requirements of a contract, agreement, item ofregulation or standard.

QarḍA loan without remuneration intended to allow the borrower to use the funds for aperiod with the understanding that it would be repaid at the end of the period.

Retakāful

An arrangement whereby a Takāful undertaking (TU), as representative ofparticipants under Takāful contracts, contributes a sum of money as Tabarru’commitment into a common fund maintained by a Retakāful undertaking on a Takāfulbasis (i.e. covering participants of that and other TUs against specified loss ordamage).

Retakāful Operator

Any establishment or entity that manages a Retakāful business, usually, though notnecessarily, a part of the legal entity in which the participants’ interests are held.

Risk management

The process whereby the Takāful or Retakāful undertaking's management takes
action to assess and control the impact of past and potential future events that could
be detrimental to the undertaking. These events can impact both the asset andliability sides of the undertaking’s balance sheet, as well as its cash flow.

Shareholders’Fund

The part of the assets and liabilities of a Takāful or Retakāful undertaking that is not
attributable to participants in the form of a Participants’ Risk Fund, Participants’
Investment Fund or Takāful Operators’ Risk Fund.

Solvency
requirements

The financial requirements that are set as part of the solvency regime and relate to
the determination of amounts of solvency resources that a Takāful or Retakāful
undertaking must have in addition to the assets covering its technical provisions andother liabilities.

Stakeholders

Those with a vested interest in the well-being of Takāful (TU) or Retakāful (RTU) or
Microtakāful undertakings, including:
(i)
(ii)
(iii)
(iv)
(v)

employees;
Takāful participants or cedants under Retakāful arrangements;
suppliers;
the community (particularly the Muslim ummah); andsupervisors and governments, based on the unique role of TUs and
RTUs in national and local economies and financial systems.

41

Tabarru’commitment

The amount of contribution to be relinquished by the Takāful/Retakāful participant as
a commitment for fulfilling the obligation of mutual help and to be used to pay claims
submitted by eligible claimants.

Takāful

The term Takāful is derived from an Arabic word which means solidarity, whereby agroup of participants agree among themselves to support one another jointly for thelosses arising from specified risks. In a Takāful arrangement, the participants
contribute a sum of money as Tabarru’ commitment into a common fund, which will
be used for mutual assistance of the members against specified loss or damage.

Takāful Operator

Any establishment or entity that manages a Takāful business.

Takāful participant

A party that participates in the Takāful product with the Takāful undertaking and has
the right to benefit under a Takāful contract (similar to “policyholder” in conventional
insurance).

Technical
provisions

The value set aside to cover expected obligations arising on Takāful or Retakāful
contracts.

Underwriting

The process of evaluating new applications, carried out by a Takāful or Retakāful
Operator on behalf of the Takāful or Retakāful participants based on an established
set of guidelines to determine the risk associated with an applicantion.

Underwriting risk

Underwriting risk is the risk of loss due to underwriting activities relating to theParticipants’ Risk Fund or Takāful Operators’ Risk Fund. Sources of this risk include
assumptions used in pricing or assessment that are subsequently shown to beincorrect by experience of, for example, claims.

Underwriting
surplus or deficit

The Participants’ Risk Fund’s or Takāful Operators’ Risk Fund’s financial result fromthe risk elements of its business, being the balance after deducting expenses andclaims (including any movement in provisions for outstanding claims) from thecontributions income and adding the investment returns (income and gains on
investment assets).

WakālahAn agency contract where the Takāful or Retakāful participants (as principal) appoint
the Takāful or Retakāful Operator (as agent) to carry out the underwriting andinvestment activities of the Takāful or Retakāful funds on their behalf.

Waqf

A voluntary, permanent, irrevocable dedication of a portion of one’s wealth – in cashor kind – to Allah Almighty. Once a Waqf is established, it can never be gifted,
inherited or sold. It belongs to Allah Almighty and the corpus of the Waqf always
remains intact. The yield and/or usufruct of the Waqf may be utilised for any Sharī`ahcompliant purpose as determined by the Waqf deed.

42

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