In 2022, record floods devastated much of Pakistan’s farmland, leading to heavy financial losses for farmers, who have avoided commercial insurance due to its conflict with Islamic principles. Conventional insurance contracts often contain interest, which is prohibited in Islam to prevent exploitative practices.
Enter takaful insurance, an Islamic financial product gaining traction among farmers, according to a Bloomberg report. Takaful operates on a mutual cooperation model where participants contribute to a pool that offsets each other’s losses. Surpluses, after service fees and costs, may be refunded to participants. This model aligns with Islamic principles and offers a potential solution for farmers facing climate risks.
Umair Ismail Ghaya, former executive director at Salaam Takaful, told Bloomberg that the 2022 floods heightened awareness of takaful insurance, which Pakistan plans to incorporate into a third of its financial sector by next year.
Salaam Takaful has partnered with major agricultural companies like Syngenta and National Foods Ltd., along with InFarmer, a satellite-data provider, and JazzCash, a mobile payment service, to pilot takaful programs. These partnerships address a key challenge: 79% of Pakistanis don’t have bank accounts. With JazzCash, farmers can pay premiums and receive payouts without traditional banking.
A significant feature of Salaam Takaful’s offerings is parametric insurance, which pays out when specific weather thresholds, such as temperature or rainfall, are met. This method allows for quick payouts without lengthy loss assessments. For instance, a farmer contributing $5 per acre annually could receive $18 per acre if a predetermined metric is breached.
However, for parametric insurance to succeed, policyholders must be dispersed widely to avoid a single event affecting all. This is challenging in Pakistan, one of the world’s most climate-vulnerable countries. In addition, despite the potential of takaful insurance, Pakistan lags in insurance penetration, remaining around 1%. Climate disasters have caused uninsured losses amounting to 10% of GDP over two decades, Bloomberg reported. The 2022 floods alone resulted in $30 billion in losses, with negligible coverage.
The future of takaful insurance in Pakistan hinges on promotion and subsidization, noted Naveed Alam, founder of InFarmer. Muhammad Ali Khan, who authored a report on takaful for UNDP and the Islamic Development Bank, emphasised the need for financing mechanisms aligned with local values.
At an outreach session in Toba Tek Singh, Salaam Takaful representatives explained to farmers how automatic payouts are triggered by weather conditions, generating interest but also questions. Many farmers prefer borrowing from known sources rather than navigating the complexities of insurance, said Maha Qasim, founder of Zero-point Partners.
As climate challenges persist, takaful insurance may offer a culturally resonant safety net for Pakistani farmers, helping bridge the insurance gap in a nation where agriculture is a cornerstone of life.
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