The Takaful Solution: Bridging the Climate Protection Gap

The world is heating up even quicker than expected. Temperature records continue to be broken in 2024, with droughts, wildfires and extreme heat affecting more vulnerable people and communities around the world.

In developing countries, where the impacts of climate change are felt most severely, the vast majority of people, jobs and property are not insured. For example, in sub-Saharan Africa, just 3% of farmers are insured, and only 1 in every 10 people has any form of insurance in 36 low-income countries covered by the forthcoming Landscape of Microinsurance.

Growing Climate Risks and Limited Financial Resilience

Of the 30 countries most affected by the changing climate, over half are Muslim-majority populations. Two-thirds of low-income countries with sizeable Muslim populations are ranked in the bottom half of climate vulnerability and preparedness. For example, effects of catastrophic flooding in Indonesia and Pakistan, water scarcity and drought intensifying across the Middle East and North Africa, and rising sea levels affecting megacities and small island states alike.

Muslim communities and families are not the only ones at risk; the whole world is facing rising risks, hazards and shocks driven by climate change. However, for Muslim communities, financial solutions must also comply with faith-based tenets derived from Shari’ah (Islamic Law). Providing Shari’ah-compliant financial solutions may be an additional challenge to building financial protection, adding to existing challenges such as lack of access, trust and resources.

Takaful as a Potential Solution

The good news is that Shari’ah-compliant insurance-type solutions already exist in the form of Takaful. Takaful has its roots in ancient Arabic practices of sharing risks within and between communities, but it has existed in its modern form for only three to four decades. In some ways, Takaful is similar to cooperative and mutual insurance in that it is guided primarily by the overall good of the community. Just like many other forms of financial protection, it can do more than help people better understand and manage their risks, and financially protect lives, livelihoods and assets. By financially engineering product structures that move away uncertainty and risk, Takaful can incentivise investment, while also widening financial inclusion.

At the end of 2023, UNDP, the Islamic Development Bank (IsDB) and the IsDB Institute (IsDBI) released the report, Insuring a Sustainable Future: Building Climate Resilience Through Takaful, which outlined the potential and opportunities for Takaful to help close the financial protection gap. The report put forward four strategic recommendations for coordinated action to integrate Takaful into national climate strategies, deploying it at the sovereign level, and fostering public-private partnerships.

The outlook for Takaful market development is broadly good: growth across the world is more than 10% per year, albeit from a small base. Renewed awareness of and interest in alternatives to traditional insurance is driving this growth, as is the ability of Takaful companies to leverage technology for development, marketing, distribution and operation of their products.

Positive country trends in Takaful include substantial growth in Bangladesh, Malaysia, Pakistan and Saudi Arabia` The Malaysia Takaful Association estimates that almost 20% of the country’s population is currently financially protected through Takaful, and the organization is working to double that protection by 2027, with a strong focus on those with lower incomes and in informal or gig employment.

Harnessing Takaful for Climate Resilience

Yet, enthusiasm must be tempered with awareness of the long road ahead. Billions of people remain exposed to rising risks and while the opportunity to reach them is substantial, the challenges are equally significant. Some key challenges are the same as those seen in general insurance development, including lack of understanding and access, especially by the most vulnerable parts of society. Products are not always adapted well to national and local needs and the perception often remains that Takaful products are only for Muslim communities. These products are in fact a model that many families and businesses can use to financially protect what they value, irrespective of religion or race.

The fact remains that the Takaful base is extremely low, and it remains drastically under-utilised as a tool for financial risk management. While the volume of Takaful contributions is expected to rise to close to $74 billion by 2032, this is less than the premiums some individual insurance companies generate in a single year. And in the top five countries with Muslim-majority populations – Bangladesh, Egypt, Indonesia, Nigeria and Pakistan – out of a combined population of 1 billion people, less than 2% have access to insurance of any type, including Takaful.

To protect vulnerable people across the world from the escalating effects of climate change, policymakers and other public and private sector stakeholders must work together to better leverage this essential tool of Takaful. In this regard, UNDP is leading on the creation of a Global Takaful Alliance. The Alliance would bring together public and private organisations and institutions with the ambitious target of increasing the financial resilience of 100 million people by 2030.

What is clear is that the need for financial protection is soaring given increasing climate adversities and rising risk, and Takaful must be part of the solution.

For updates on our joint work to increase financial resilience through Takaful, reach out to loic.martel@undp.org

The views expressed are those of the authors and do not necessarily represent the official policy or position of the UNDP or the Islamic Development Bank Group, its Executive Directors or its Shari’ah Board. Both UNDP and IsDB Group do not guarantee the accuracy of the assertions made in this article.