Global Takaful Alliance: A Promising Concept for Financial Inclusion and Resilience

Takaful is a form of Islamic insurance that is based on the principles of mutual cooperation, solidarity, and shared responsibility among participants.?Unlike conventional insurance, takaful does not involve interest, uncertainty, or gambling, which are prohibited in Islam.?Instead, takaful participants contribute to a common pool of funds, which is used to pay for the losses of those who suffer from misfortunes.?The surplus of the pool, if any, is distributed among the participants or donated to charity.

Takaful has the potential to provide financial protection and resilience to people who are vulnerable to climate change risks, such as natural disasters, droughts, floods, and pandemics.?According to the United Nations Development Programme (#UNDP), more than 90% of the world’s population lives in countries that are exposed to at least one major natural hazard.?Moreover, the COVID-19 pandemic has shown how unexpected shocks can disrupt the livelihoods and well-being of millions of people, especially those in the low-income group.

However, access to insurance remains low in most developing countries, as less than 7% of the population has any type of insurance products, and 95% of the risks remain uninsured.?This is even more pronounced in countries with sizable Muslim populations, where people may be reluctant to buy insurance due to socio-cultural and religious reasons.?As a result, many people face the risk of falling into poverty and losing their assets when faced with unforeseen calamities.

To address this gap, UNDP has proposed the concept of a Global Takaful Alliance, an initiative that aims to promote takaful as a way to achieve the Sustainable Development Goals (SDGs), which are a universal call to action to end poverty, protect the planet, and ensure peace and prosperity for all by 2030.?The alliance brings together various stakeholders, such as governments, regulators, insurers, researchers, and development partners, to create innovative and inclusive takaful solutions that can reach 100 million people by 2030.

The objectives of the alliance are to:

• Raise awareness and knowledge about takaful and its potential benefits for sustainable development.
• Develop and implement pilot projects that demonstrate the feasibility and impact of takaful in different contexts and sectors.
• Support the development of enabling regulatory and policy frameworks that facilitate the growth and expansion of takaful.
• Foster partnerships and collaborations among takaful stakeholders to share best practices, lessons learned, and resources.
• Build the capacity and skills of takaful practitioners, regulators, and policymakers to design and deliver effective takaful solutions.

The alliance also offers several benefits, such as:

• Providing financial security and peace of mind to the takaful participants, who can cope with the adverse effects of unforeseen events without losing their assets or falling into debt.
• Enhancing social cohesion and solidarity among the takaful participants, who share the risks and rewards of the takaful scheme and support each other in times of need.
• Promoting ethical and responsible behavior among the takaful participants, who are encouraged to avoid harmful activities and adopt good practices that reduce the likelihood and severity of losses.
• Contributing to the social and economic development of the communities and countries where takaful operates, by creating jobs, generating income, and investing in productive sectors.
• Supporting the achievement of the SDGs, by addressing the issues of poverty, inequality, climate change, health, education, and gender equality.

The alliance faces several challenges, such as:

• The lack of awareness and understanding of takaful among the potential customers and the general public.
• The limited availability and accessibility of takaful products and services, especially in rural and remote areas.
• The high operational costs and low profitability of takaful operators, which may affect their sustainability and scalability.
• The diversity and complexity of the legal and regulatory frameworks that govern takaful in different countries and regions.
• The need for innovation and adaptation of takaful to suit the specific needs and preferences of the target segments and markets.

The prospective outcomes of the alliance are to:

• Increase the awareness and demand for takaful among the potential customers and the general public.
• Expand the supply and distribution of takaful products and services, especially in underserved and untapped markets.
• Improve the efficiency and profitability of takaful operators, by reducing costs, increasing revenues, and optimizing processes.
• Harmonize and streamline the legal and regulatory frameworks that enable and facilitate the growth and expansion of takaful.
• Innovate and customize takaful solutions that meet the specific needs and preferences of the target segments and markets.

The Global Takaful Alliance could become a promising initiative aiming to leverage the potential of takaful to provide financial inclusion and resilience to people who are vulnerable to climate change risks. By bringing together various stakeholders and fostering partnerships and collaborations, the alliance expects to create innovative and inclusive takaful solutions that can reach 100 million people by 2030. The alliance will also seek to support the achievement of the #SDGs, by addressing the issues of #poverty, #inequality, #climate change, health, education, and gender equality. The alliance may face several challenges, but will also offers several benefits, and expects to achieve several outcomes. The alliance concept, if turns to reality, would become a testament to the vision and mission of #UNDP, which is to empower lives and build resilient nations.

Source: Takaful - Delivering Financial Resilience to 100 million people by 2030 (undp.org)