Topic vi. islamic insurance takaful

Islamic Insurance – Takaful &
Islamic Micro Finance
1

Basic Concepts of Takaful
 Takaful - Arabic word originating from the root verb
kafalah –to guarantee, to secure or to be
responsible for others
 Literally, takaful means joint responsibility or
guarantee based on mutual agreement
 Three basic concepts of mutuality are embodied in
the takaful model of insurance:
- Mutual help
- Mutual responsibility
- Mutual protection
2

Triangular Relationship of the Major Aspects of
Takaful
3

 Takaful: Islamic alternative to conventional
insurance where members contribute financial
resources into a pool based on principles of:
- ta’awun (mutual assistance)
- tabarru’ (donation) where the group undertakes
to share the mutual risk together
An appropriate Shariah-compliant framework
effectively manages risks in commercial activities as
well as other civil engagements - following the hadith
‘Tie your camel first’
 All prohibitive elements in Islamic commercial
transactions are prohibited in the design of takaful
models
4

Main Features of Takaful
1. Cooperative Risk Sharing
2. Clear Financial Segregation
3. Shariah-compliant Policies and Strategies
5

1. Cooperative Risk Sharing
 Cooperative risk sharing through the use of donation
was designed to:
- eliminate riba and ghrar elements in takaful
- address issues of social responsibility, solidarity
and the innate need to care for others
 Donations adopted/merged with other frameworks
of Islamic commercial transactions to replace
premiums
 Premiums paid by policyholders are considered
donations to assist members who suffer any loss
6

2.Clear Financial Segregation
 In Islamic law:
 Clear segregation between participants and operators
 The role of the insurance company is restricted to an
operator managing the portfolio and investing insurance
contribution on behalf of participants
 In the conventional practice of insurance business:
The insurance company is a profit-making entity which
agrees to bear the financial burden and losses of its
policyholders
 The shareholders are entitled to receive profit and bear
the burden of any deficit at the end of the financial year
7

3. Shariah-compliant Policies and Strategies
 Investment of insurance funds should be made on
ethical businesses that cause no harm to people or
the environment
 Ethical considerations in takaful extends to
investment in businesses or products that do not
contradict Shariah. Both the process and the end-
product must be Shariah-compliant
 Takaful operators are required to put in place a
standard Shariah governance system to ensure
absolute compliance with the Shariah
8

Takaful Core Principles
 Ta’awun (mutual assistance)
 Tabarru’ (donation)
 prohibition of riba, gharar and maysir
9

Major Differences Between Takaful and Conventional
Insurance
The major differences between the two frameworks are:
 Parties to the contract
 Payment of premiums
 Investment of insurance funds
10

Major Difference Between Takaful
and Conventional Insurance
11
Parties to the Contract
 In conventional insurance, there are two main
parties, the insurance company and the
insured party (who has nothing to do with other
insured parties in terms of guaranteeing one
another against any loss).
 In the takaful scheme, the participants mutually
insure one another against any loss, and the
takaful operator is merely a fund administrator.

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Payment of Premiums
 The insured party in a conventional insurance scheme
pays regular instalments, called premiums, in return
for insurance cover.
 The insurance company guarantees the payment of
compensation in the event that the insurance contract
occurs.
 In takaful, premiums are not paid as regular
instalments, but instead as a donation from
participants into the common fund, to guarantee the
receipt of compensation (for other participants) in
the event that the insured-for occurrence happens.
 The participants remain the owners of the
“premiums” even though they have donated them into
a pool of funds to indemnify any member of the group.

13
Investment of Insurance Funds
 Takaful funds, unlike those of conventional
insurance companies, are invested solely in
Shariah-compliant products and companies.
 Profits from such investments are distributed on
the basis of pre-agreed ratios (note: model of
takaful adopted by the stakeholders determines
the profit distribution as well) as the remuneration
of the takaful operator in the underlying takaful
contract.

Models of Takaful
 The Mudarabah Model
 The Wakalah Model
 Hybrid Wakalah-cum-Mudarabah Model
 Wakalah with Waqf Model
14

Models of Takaful
The Mudarabah Model
 Islamic insurance model based on trust partnership
between the takaful operator (mudarib) appointed
to manage the takaful business by the participants
who act as the financiers, investors or fund
contributors (rabb al-mal)
 The funds contributed by the participants are
divided into:
- Participants’ Risk Fund (PRF) and
- Participants’ Investment Fund (PIF)
 The Takaful Participants are the capital providers
and the owners of the takaful undertaking
15

Models of Takaful
The Mudarabah model
 The Takaful Operator is considered a business
partner of the participants in the investor-
entrepreneur relationship under the mudarabah
contract
 The ratios of profit distribution are predetermined
 Financial loss is borne by capital providers (Takaful
Participants), while the entrepreneur (Takaful
Operator) may lose his/her managerial efforts
 Takaful Operator remunerated from the
underwriting surplus as agreed upon in the
underlying takaful contract
16

Models of Takaful
Surplus
The amount that remains after all expenses and
management fees for the administration of the
takaful fund
have been deducted and the contributions are more
than
the claims made by the participants
17

Models of Takaful
The Wakalah Model
 Islamic insurance model based on the contract of agency
between takaful participants and takaful operator where the
former are the real owners of the fund while the latter acts as
an agent
 Wakalah takaful is based on the contract of agency between
the takaful participants and the takaful operator where:
- the takaful participants are the real owners of the fund
- the takaful operator acts as an agent
The takaful operator is entitled to agency fee or commission
for its service. The agency fee must be specified and clearly
stated in the contract
 Islamic insurance model based on the contract of agency
between takaful participants and takaful operator where the
former are the real owners of the fund while the latter acts
as an agent
19

Models of Takaful
 IFSB-8 suggests that the agency fee should cover
the total sum of the following costs:
- management expenses;
- distribution costs, including intermediaries’
remuneration;
- a margin of operational profit to the Takaful
Operator
 Any surplus realised from the investment of the
participants’ funds will go to the participants. The
operator only receives its agency fee based on the
nature of the takfaul model.
 The Takaful Operator does not share in any risk
borne in the investment or management of the
20

Models of Takaful
Example of the
Wakalah Model
of Takaful
21

Main Takaful Products
Hybrid Wakalah-Mudarabah Model
 The hybrid takaful model (also called the mixed
model ) is a combination of the wakalah model and
the mudarabah model where:
- the wakalah model is employed for the
underwriting purposes
- the mudarabah model is utilised for the
investment activities
22

Models of Takaful
 The twin role of the takaful operator makes the
model unique with its hybrid structure:
- the takaful operator is entitled to agency fee or mutually
predetermined commission for the role it plays as a wakil or
agent who manages the takaful funds
- the takaful operator is also entitled to a share in the profits
realised for managing the investment activities of the fund
as an entrepreneur (mudarib)
23

Models of Takaful
 The sources of income of the takaful operator
consist of:
- agency fee
- incentive fee
- the profit share from the investment of the funds
 One important element of the hybrid model is the
clear segregation between the shareholders’ funds
and the participants’ funds
24

Models of Takaful
Hybrid
Takaful
Model
25

Models of Takaful
Waqf-Wakalah-Mudarabah Model
The Waqf Component
 The shareholders of a takaful company make
donations to a common pool of funds which is
established as a waqf.
 Waqf funds are invested in Sharī‘ah- compliant
activities.
 Returns from such investments in addition to
tabarru’ funds in Participants’ Special Account (
PSA) are used for the benefit of the participants.
 The original capital amount contributed into the
common pool of funds must be reinvestment to
ensure continuity of waqf funds
26

Models of Takaful
Waqf-Wakalah-Mudarabah Model
The Wakalah Component
 The shareholders of the Takaful company donate to it,
establishing a waqf fund
 The company becomes the agent of the shareholders
and assumes responsibilities of proper management of
the waqf funds, paying necessary claims
 Company stands to receive a pre-agreed fee for acting as
an agent of the shareholders
 The company also manages the investment of such waqf
funds as an entrepreneur, therefore entitled to share in
the profit from investment
27

Models of Takaful
Model
(Ultra-
hybrid
Model)
28

Available products in the takaful industry:
- General Takaful: is a Sharī‘ah-compliant
alternative to the general insurance
- Family Takaful: is a Sharī‘ah-compliant
alternatives to the life insurance
29

General Takaful
 General takaful: a short-term policy renewable
periodically; covers assets and other proprietary
belongings of participants from foreseeable material
loss or any form of damage
 General takaful fund established through participants’
contributions. Funds invested in Sharī‘ah-compliant
investments
 Proceeds accrue from such investment will be
returned to the fund for indemnifying the takaful
participants
 Underwriting surpluses of the takaful funds are
30

General Takaful Covers (list is not exhaustive)
- Motor Takaful
- Fire Takaful
- Employer Liability Takaful
- Fire consequential Loss Takaful
- Burglary Takaful
- Workmen Compensation Takaful
- Machinery Breakdown Takaful
- Health Takaful
 Available takaful covers are categorised into motor
takaful and non-motor takaful
31

Family Takaful
 Family takaful is a long-term policy (may span
between 10 to 30 years) where people come
together to mutually indemnify one another
against disasters that may occur such as sudden
death or permanent disability
 Examples of family takaful include
 accidental death
 savings and education plans for one’s dependants
 waqf plans
 retirement plans
 disability plans
32

Types of Family Takaful
 Ordinary collaboration
 Collaboration with savings
 Collaboration based on specific groups
33

Three Types of Family Takaful
First: Ordinary Collaboration
 The participants mutually agree to contribute to a
common pool of funds through donations (concept
of tabarru’)
 Premiums used for underwriting activities in case of
calamity or disaster for any of the members of the
group
 Payment made directly to participant or his/her
beneficiaries in accordance with the underlying
takaful contract
34

Second: Collaboration with Savings
 The parties contribute through donations into a
common pool of funds from which the underwriting
activities are carried out
 The second pool of funds constitutes savings of
individual participants which may be demanded by
respective owners at maturity of certain period of
time
 The two pools of funds are strategically segregated
 The participants benefit individually as well as
collectively form the collaboration with savings
35

Third: Collaboration Based on Specific Groups
 Type of family plan usually structured reflecting
communal, ethnic, or organisational needs
 Participants from the same community, district or
social group come together to establish a common
pool of funds for a specific purpose
 Membership to collaboration is limited to those
who come from the same group
 Contributions to the fund may be made jointly or
severally by the organisation and the participants
 Benefits from the common pool of funds can only be
enjoyed by the participants or their beneficiaries
36

Underwriting Surplus and Technical
Provisions
Underwriting Surplus
Insurance or underwriting surplus is the excess of
the total premium contributions paid by policyholders
during the financial period over the total indemnities
paid in respect of claims incurred during the period,
net of reinsurance and after deducting expenses and
changes in technical provisions”
(AAOIFI, 2010, p. 409)
37

Provisions
Regulating the Underwriting Surplus Process
 The underwriting surplus calculated for specific
financial year
 Indemnities paid for deserving claims, the retakaful
policy and changes in technical provisions must be
deducted from the total premium contributions of the
participants
 Net of reinsurance implies that all retakaful
operations must be considered while computing the
underwriting surplus
 All changes in technical provisions (mainly relate to
the method of accounting and balancing the financial
statement) including unpaid claims and unearned
38

Provisions
Right of Policyholders to Surplus
 Policyholders or takaful participants collectively
have right to surplus originated from policyholders
who made the financial contributions
 Should be a clear segregation between assets,
obligations and results of operations of
policyholders and shareholders
 Shareholders are not entitled to the takaful surplus
but will get reimbursed from the profit realised from
the investment activities of the takaful undertaking
 Some rulings by Sharī‘ah boards permit the
shareholders to share the surplus with the
policyholders
39

Provisions
Allocating the Takaful Surplus
AAOFI identifies the following methods (alternatives) of
allocating takaful surplus
(a) Allocation of surplus to policyholders, regardless of
whether they have made claims on policy during the
financial period
(b) Allocation of surplus only among policyholders who have
not made any claims during the financial period
(c) Allocation of surplus among those why (conditions apply)
(d) Allocation of surplus between policyholders and
shareholders
(e) Allocation of surplus by using other methods
40

Provisions
Covering the Takaful Deficit
AAOIFI proposes the following methods for covering
the takaful deficit:
 To settle the deficit from the reserves of
policyholders, if any
 To borrow from the shareholders’ funds or from
others the amount of deficit that should be paid back
from future surpluses.
 To ask the policyholders to meet the deficit pro
rata.
 To increase the future premium contribution of
policyholders on a pro-rata basis.
41

Provisions
Deficit in Participants’ Risk Funds (PRF)
 Deficit occurs when assets of PRF are insufficient to
meet liabilities
 Duty of the takaful operator to rectify deficiency and
loss in PRF initially through qard hasan
 Must be a sound repayment mechanism managed
by takaful operator ensuring loan will be repaid
through future surpluses of the PRF
42

Provisions
Deficit in Participants’ Investment Fund (PIF)
 Recorded losses in Participants’ Investment Fund
(PIF) shall be absorbed by the capital providers
(the participants)
 The takaful operator as the entrepreneur cannot
rectify deficit through qard hasan
 When it is proved that the deficit occurred as a result
of the professional negligence or mismanagement of
takaful operator, deficiency shall be rectified through
necessary transfer from the shareholders’ fund
43

Reinsurance and Retakaful
 The Islamic alternative to reinsurance is retakaful, which
has been structured in a Shariah-compliant model, i.e.
reinsurance of takaful business on the basis of Islamic
principles is known as retakaful
 Within the conventional framework of insurance:
- Insurance operators collectively share the risks
they have undertaken to underwrite
- Large insurance companies underwrite the risks of
smaller insurance companies
- Reinsurance is a mechanism of the mitigation of
such great risks by transferring the risks to a large
insurer known as reinsurer
44

Retakaful
 Structured in a Shariah-compliant model; the Islamic
alternative to conventional reinsurance
 The risk aversion method of Retakaful is structured
in a way where:
- Takaful operators are participants in a takaful
undertaking with a large takaful company
- An agreed amount is paid periodically from the
takaful fund of the operators as premiums to the
Retakaful company
- All the underwriting risks of the takaful operators
are insured by the Retakaful company
45

 The Retakaful companies play a significant role
when the takaful operators record deficits or losses
 Capital of many Retakaful companies not so large to
attain an “A” rating which is mostly required for
reinsurance purposes
 Shariah scholars allow takfaul operators to reinsure
with conventional insurance companies under
certain conditions
46

Islamic Microfinance: Providing
Credit to the Entrepreneurial
Poor
47
• Microfinance is the provision of small-scale
financial services to the poor (usually excluded
from the formal financial services)
• Islamic microfinance is the process of providing
small-scale financial services, based on Sharī‘ah
concepts, to the poor who may be excluded from
formal financial services
• Islamic microfinance aims to provide necessary
credit facilities to the poor and/or low-income
individuals who may not have enough finance to
engage in normal financial transactions in formal
financial institutions

Credit to the Entrepreneurial
Poor
48
The History of Islamic Microfinance Institutions
 The early initiatives to alleviate poverty and promote
security in the Muslim communities include:
- The institution of zakat (compulsory alms)
- Waqf (charitable endowment)
- The praiseworthy qard hasan (benevolent loans)
 The informal savings clubs introduced by conventional
microfinance initiatives in the 16th century in Europe
through cooperative projects were tinted with interest,
hence did not serve the real objective of microfinance as a
means of assisting the entrepreneurial poor
 As an alternative, the revival of Islamic financial services
brought about the proper structuring of the Islamic models
on microfinance to assist the entrepreneurial poor

Credit to the Entrepreneurial Poor
49
The History of Islamic Microfinance Institutions
 The history of modern Islamic finance started in rural
Islamic microfinance in the remote village of Mit Ghamr in
Egypt back in 1960s
 Number of financial institutions offering Islamic products
were established across the Muslim world in the 70s and
80s
The 1990s and the new millennium ushered in a period of consolidation of
Islamic finance products
The joint partnership initiative of Grameen-Jameel opened the Gulf
Cooperation Council (GCC) countries to microfinance initiatives
 The Islamic microfinance model
- excludes exploitative tendencies e.g. charging interest
- empowers able entrepreneurs whom only contribution
to the business venture is their expertise

50
Components of Islamic Microfinance
Islamic microfinance is an umbrella concept that consists of:
 Micro-lending
 Micro-saving
 Micro-insurance (preferably known as micro-takaful)
Micro-lending
 Micro-lending (also called micro-credit)
 Involves the provision of credit facilities in the form of
interest-free loans based on the principle of qard hasan
 Flexibility in terms of repayment of the loan
 Micro-lending is provided for:
- the entrepreneurial poor, to assist them to grow their
income
- the low-income individuals in order to assist them to
grow their physical asset base

51
Micro-savings
 Micro-savings based on the concept of wadi’ah (safekeeping) in
Islamic finance, which is the underlying concept of savings account
(deposits) in the formal banking system
 Micro-savings allow low-income individuals to secure capital or profits
realised in a savings account, thus enabling saving and management of
finances
 Clients accumulate capital and profits in the micro-savings account
which allows them to plan for the repayment of any micro-lending from
which they might benefit
Micro-takaful
 Where members of a specified group of low-income individuals mutually
protect one another from risk through collaborative takaful
 The mutual risk transfer arrangement within the group will ultimately
benefit all members of the group plus dependants
 Micro-takaful is relevant for certain risks that are beyond the financial
capacity of the members of the group individually

52

53
‘Microfinance’ and ‘Micro-credit’
The two terms are different in terms of meaning, scope and application
 ‘Microfinance’ The whole range of small-scale financial services
provided for the benefit of the poor or low-income individuals (micro-
lending, micro-saving, and micro-takaful)
 ‘Micro-credit’ Small loans or financial assistance extended to poor
families practically excluded from formal financial services (micro-credit
is part of the parcel of microfinance)
Prohibition of Riba in Islamic Microfinance
 One major difference between conventional microfinance and Islamic
microfinance framework is prohibition of interest-bearing credit
facilities and interest-yielding deposits
 Modern conventional microfinance schemes dominated by interest-
based products that can further impoverish low-income individuals
 Likely impact of high interest rates on microfinance schemes is
counter-productive
 High interest rates exclude low-income households unable to afford
micro-credit facilities

54
Prohibition of Riba in Islamic Microfinance
Islamic microfinance offers multiple sources of income through
partnership and entrepreneurial commercial activities between the
financial institution and the clients
 Islamic approach to poverty alleviation is a holistic framework that
excludes counter-productive element e.g. riba and gharar
 Interest rates violate fundamental basis of Islamic commercial law
regardless whether high or low, so are prohibited
 The prohibition of riba safeguards against financial exploitation and
oppression by the few rich
The Islamic approach to the management of micro-credit schemes is
highly sensitive to clients who are unable to redeem their loans within the
contractual period:
- be given additional time
- in some extreme cases, the loans may be written off completely
- in some other extreme situations, remittal of credit facilities may
be considered

Islamic Microfinance Products
55
The Most Commonly Used Modes of Islamic
Microfinance:
 Salam as a mode of financing agriculture
 Mudarabah mode of combating unemployment
 Bai Muajjal-Murabahah mode of providing
working capital
 Diminishing Partnership for Housing Microfinance
 Non-for-Profit Modes of Islamic Microfinance

56
Salam as a Mode of Financing Agriculture
 Salam regarded as the most viable tool for financing agriculture
 Salam a contract where the bank is the buyer of the commodity and the
farmer is the seller who undertakes to embark on future delivery
 Bai salam a contract where the seller undertakes to supply specific
goods to the buyer at a future date in exchange of advance price which
is fully paid on the spot
 Parallel salam a separate contract distinct from the initial bai salam
where the Islamic bank is the seller of the commodity based on deferred
payment
 The two contracts must be distinguishable from each other
The Applicability of the Salam Contract
 Salam contract is used in Islamic commercial transactions
- To meet liquidity needs of traders for import/export business
- To meet financial needs of small farmers
 Salam contract is important in the financing of micro-farming, small-
scale farming where farmers require funding to grow crops and feed
their family up to the harvest time

57
Mudarabah Financing for Combating Unemployment
 Mudarabah is an Islamic finance contract where:
- an Islamic bank as an investor exclusively provides capital for a
business project - an entrepreneur provides the
management expertise
 Mudarabah a trust partnership finance mechanism structured as a tool
to combat unemployment and create jobs
 Mudarabah can be a good product for entrepreneurial activities,
especially when there is a large amount of skilled unemployed labour
Types of Mudarabah Contractual Arrangements
The two types of Mudarabah contractual arrangements are:
 Mudarabah al-Mutlaqah (Unrestricted Trust Financing): where the
particular business in which the micro-entrepreneur will invest the
capital finance is not specified or restricted
 Mudarabah al-Muqayyadah (Restricted Trust Financing): where the
bank or Islamic microfinance institution (the capital provider) specifies
or restricts the business in which the capital finance may be invested

58
Bai al-Mu’ajjal-Murabahah Model of Providing Working Capital
 Bai Muajjal or Bai-bithaman ajil (BBA) a sale where parties agree to
deferment of payment to a future date – meaning that there is already
an element of Murabahah
 When Murabahah is combined with Bai Muajjal, it becomes a
microfinance product which is one of the most commonly used
instruments by the Islamic MFIs
 The mark-up price in the Murabahah contract is settled as a deferred
payment based on Bai Muajjal
 The parties must know the cost price and the profit or mark-up in
Murabahah transactions
 In Bai Muajjal, cost price and the profit or mark-up is the deferment of
the payment of the price regardless of whether the parties are aware of
the cost and mark-up
 The parties must fix price of commodity and the terms of payment at
the time of concluding the contract to prevent any element of gharar in
the contract

59
Diminishing Partnership for Housing Microfinance
 Housing microfinance is a means of providing shelter for low-income
individuals
 A diminishing partnership is known as musharakah mutanaqisah, an
Islamic financial product structured to strategically provide access to
housing for the poorest
 The Islamic MFI and the client form a partnership contract where they
purchase a property and lease it out for a specified term
 The client buys a specified number of units every month out of the
shares of the Islamic MFI which automatically decreases the capital
ownership of the MFI
The capital ownership of the Islamic MFI diminishes gradually until the
client buys the total capital share in the property (out of the profit
distributed over a period of time)
 The title passes to the client and he/she owns the property
 In situations where the poor clients do not have funds to buy a small
portion of the capital share, qard hasan, zakat or waqf funds may be
provided for such purpose
- If qard hasan is given, the client only needs to repay the capital
amount

60
Non-for-Profit Modes of Islamic Microfinance
 The non-for-profit modes of Islamic microfinance are
(i) zakat, (ii) waqf and (iii) qard hasan
 Islam institutionalised a number of mechanisms
including zakat, waqf, qard hasan and sadaqah to
ensure that wealth circulates among all the
members of the society between the rich and the
poor
 A hybrid framework for these mechanisms will
drastically alleviate poverty in the society
 Despite the non-for-profit nature of the hybrid model,
it can be easily modified to accommodate the
profit-oriented modes

Islamic Microfinance Institutions
versus Conventional Microfinance
Institutions
61
 The revival of Islamic finance services in the 20th century in a formalised form
brought with it the Islamic microfinance schemes
 The Islamic finance products have been structured to suit the requirements of
the modern microenterprises and microcredit schemes
 There are a number of operational and functional differences between the
Islamic microfinance institutions and the conventional MFIs
 Islamic banking and finance, with its microfinance framework, is inclusive in its
approach to reach out to the disadvantaged and poor and embed true social
justice in society
Major Differences between Islamic MFIs and Conventional MFIs
Sources of Fund:
 The conventional MFIs get their funds from:
Interest-bearing loans
Foreign donors
Central Banks
Government
 The Islamic MFIs get their funds (with the exception of interest-bearing loans)
from: - Equity finance products applied in the
finance of microenterprises - Islamic
charitable sources such as waqf, zakat and sadaqah

Institutions
62
Modes of Financing
 Conventional MFIs utilise interest-based modes of
financing
 Islamic MFIs utilise Islamic financial instruments
which are either equity-based or debt-based
 Various financial instruments can be used to finance
different kinds of enterprises:
- A profit-sharing mode could be used for a
microenterprise where the microentrepreneur and the
MFI share the profit
- Salam and Parallel Salam may be more appropriate
for micro-farming
- Mudarabah trust financing may be utilised in order
to combat the curse of unemployment

Institutions
63
Financing the Poorest
 The framework of the conventional MFIs completely excludes the
poorest from the microfinance net
 Islamic microfinancing scheme ensures that no segment of the
population is excluded
- Zakat involves the provision of grants to the poor for consumption
- Qard hasan involves the provision of benevolent loans to the poor for
their entrepreneurial needs
- The mechanism of zakat and sadaqah may be combined with the
microfinance activities to manage default of repayment that might be
occasion by extreme poverty
 In the conventional MFIs, once a loan has been approved:
- A part of the principal is deducted by the institution for different
funds - The beneficiary pays
interest on the total amount approved
- The beneficiary may divert the funds to non-productive means
 Alternatively, the Islamic MFIs
- Prevent the diversion of the funds to non-productive means since
no cash is handed out to the beneficiaries
- Do not make any deductions

Institutions
64
Guarantee and Group Dynamics
 In the conventional MFIs, the repayment of the loan remains the sole
responsibility of the borrower
 In the Islamic MFIs, group guarantee in the repayment of the loans
takes the form of kafalah (guarantee)
- Any of the group members can stand in as a guarantor for the
repayment of the loan
- In the event of any default in the repayment of the loan, the group
members might agree to give such a member qard hasan to pay
his or her instalments
Objective of Targeting Women
 The conventional MFIs consider women seeking microcredit as a
means of women empowerment
Recent research suggests that:
- Men more often encourage women to take credit facilities
- Men spend the borrowed money while the women are held
responsible for the repayment of the instalments since they got the
credit facilities

Institutions
65
Major Differences between Islamic MFIs and Conventional MFIs
 In the Islamic MFIs
- The objective of targeting women differs from that of the
conventional MFIs
- The target group is the family
- Women and their spouses are made to sign the contract as the
target is the family and not the women alone
- Both parties are liable for the repayment of the instalments
Work Incentives of Staff Members
 The work incentive of the staff of the conventional MFIs is mainly
monetary gains from salary
 The work incentives of the staff of Islamic MFIs are both monetary and
religious
- In addition to earning a living, the staffs of Islamic MFIs also
perform a socio- religious duty of alleviating poverty within
the society
- Such an incentive gives the staff more zeal to work efficiently
towards the realization of the vision of the Islamic MFIs

Institutions
66
Social Development Programme
 The Social Development Programme of the conventional MFIs is secular and in
some cases goes against the ideals of Islam
 The Islamic MFIs put in place a social development programme where the
ethical, social, behavioural aspects of Islamic ideals are brought to the fore
- The Islamic MFIs programme helps in promoting the idea of brotherhood
and partnership among beneficiaries who are morally compelled to repay their
instalments regularly as at when due
Dealing with Default
 In the conventional MFIs
- Group and centre pressure used to deal with arrears and default
- In the event that this pressure does not work, the MFIs result to threats
and sale of assets
 The Islamic MFIs have more sustainable and reasonable ways to deal with
defaults and arrears
- Members in a group guarantee one another through kafalah (spirit of
brotherhood)
- The group may provide qard hasan to defaulting member which may be
used to settle the arrears
- Members will do their utmost to pay back their loans in order to fulfil their
religious obligations

Topic vi. islamic insurance takaful

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