Sunday, December 23, 2012

Retakaful for agricultural-based microtakaful funds

The Consultative Group to Assist the Poor, a part of the World Bank, has an interesting post from the EVP & Group Head of Retail and Microfinance at the Bank of Khartoum about the possibilities for Islamic microfinance in agricultural finance.  One of the points that I thought was noteworthy was the potential to offer microinsuance (microtakaful) to the farmers in the region served by the bank. 

There is value to that to provide a community-based way of sharing risks associated with agriculture, but I think that it would be beneficial to broaden the scope of the microtakaful beyond the communities involved in the bank's focus.  The microtakaful would presumably provide assistance if a farm ran into trouble in a given year, but it would surely be insufficient if there was a widespread drought across the entire region.

The takaful industry--not to mention microtakaful--is several years behind the rest of Islamic finance, so there is some catching up to do.  However, a focus on microtakaful would be one area where the takaful segment of Islamic finance could lead if there were a more widespread push to emphasize its development (Islamic finance in general has been behind the curve on microfinancing).  

The agricultural sector in many OIC countries is generally a large part of the overall employment, even if the total contribution to GDP is smaller than the share of employment.  This typically results from farmers who are working with small plots of land and not using as many productivity-generating methods compared to larger-scale agriculture.  Another result is that smaller farms are more susceptible to drought.

Given the high contribution in terms of employment that comes from agriculture in many OIC countries, providing a financial product that makes a contribution to soften the blow of drought (it would be pretty impractical to suggest that the impact could be entirely offset, absent significant progress to reverse the effects of climate change) would do a lot in both monetary and non-monetary terms to supporting development.

The efforts to develop microtakaful for farmers will provide some benefit, but in the absence of micro-retakaful (or remicrotakaful), the terms doesn't roll of the tongue for sure, but the development of a reinsurance program for microtakaful that is based on the deviations in rainfall and temperature in different regions and pays out accordingly would do a lot of good.  It would provide the microtakaful funds with assistance in case of events that would otherwise be catastrophic to the takaful fund (where need would far oustrip the available resources). 

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