Microinsurance and Microtakaful: Strategies for Poverty Reduction Towards Sustainable Development

Abstract

Access to insurance is an important strategy for poverty reduction. The inability to manage the risk of vulnerability caused by the sudden death of a family member, illness, loss of income or property can perpetuate poverty. Insurance services, can play an important role in mitigating welfare losses resulting from the occurrence of such risk events. Use of insurance also provides a catalyst for sustainable economic development in low-income communities.

In Islamic countries another form of insurance and microinsurance established called takaful and microtakaful. It could be considered as a substitute or even an effective complement to existing social protection programs. Takaful and Microtakaful are flexible and powerful instruments, that could reduce vulnerability and mitigate the negative effects of external shocks on poor households. These instruments try to protect the poor and vulnerable by empowering them to find a way out of their poverty and give them a real hope of being financially self-sufficient.

Sustainable development implies economic growth and furthermore protection of environmental quality. The essence of sustainable development is a stable relationship between human activities and the natural world, which does not diminish the prospects for future generations to enjoy a quality of life at least as good as our own. Since poverty is one of the main reasons for devastating the environment and natural resources, any strategy which reduces poverty and improves life styles will have a positive effect on sustainable development. The present paper argues that, sustainable development is impossible when a large portion of the population are living in poverty. If we think about sustainable development, we should consider policies such as microinsurance and takaful insurance to overcome poverty.

Based on the above facts the paper tries to answer the following questions: (a) What are the relationship between poverty, insurance and sustainable development. (b) What are the differences between, conventional insurance, and takaful insurance? (c) How these policies could provide a kind of social protection and social security program for the poor? (d) Which institutional arrangements are needed to have an effective and sustainable Finance Institutions?

To answer the aforementioned questions, the present paper consists of five sections: The first part of the paper devoted to explain the concepts of microinsurance, microtakaful and sustainable development. The second part explain the link between poverty, insurance and sustainable development. The third part will explain differences between conventional insurance, and takaful insurance in terms of protecting poor and vulnerable. The fourth section gives a short performance of takaful in the real world. Finally the last part presents the challenges remain and concluding remarks.

Keywords: Microinsurance, Microtakaful, Sustainable Development, Social protection, Vulnerable groups