Potential of Livestock TAKAFUL in Pakistan: An

Volume 1 | No. 1 | July – December 2017

Potential of Livestock TAKAFUL in Pakistan: An Empirical Investigation Azhar Abbas1, Waheed Akhter2, Mubeen Butt3, Raza Ullah1, M. Amjed Iqbal1

Abstract Livestock sector in Pakistan is among top countries in the production of animal and dairy product. The country has witnessed an increasing trend in milk production during the last 5 years particularly in Punjab province. There are numerous risks associated with livestock which threaten the viability of this important sector. Most important of these risks and uncertainties are natural disasters including flood, heavy rainfall, and earthquake etc. All these risks play important role in the productivity of livestock sector. Livestock insurance is one of the options to mitigate the potential impacts of such natural calamities. This study is designed to investigate the demand for livestock insurance in Punjab province of Pakistan. Three Tehsils from central Punjab namely Lahore, Kasur and Raiwind, were selected as universe of the study. A total of 250 dairy farmers were interviewed using a structured questionnaire during January to March 2015. Descriptive statistics and binary logistic regression were used to assess the potential demand for livestock TAKAFUL (Islamic Insurance) in the study area. The results point to the significance of number of animals, ratio of farm income to household income, desire to increase herd strength and livestock farm quality in respondents’ willingness to pay for livestock TAKAFUL. The findings urged provision of Shariah compliant product for farmers and training in livestock management. Keywords: Livestock, Shariah, TAKAFUL, Willingness.

1. Introduction Being an agricultural country, livestock and agriculture are considered to be the backbone of Pakistan. Livestock sector constitute the largest segment of rural economy. However, like the crop sector, livestock sector is also sever threats of adverse weather conditions and natural disasters. The floods in 2010 caused unprecedented damages to agriculture crops, livestock, fisheries and forestry and primary infrastructure such as tube wells, water channels household storages, houses, animal sheds, personal seed stocks, fertilizers and agricultural machinery S. U. Khan (2014). Over 1.2 million head of livestock (excluding poultry) died due to the flood (WFP, 2010). The 2011 massive flood struck and severely affected Sindh and Balochistan provinces. Across both 1

Institute of Agricultural and Resource Economics, University of Agriculture, Faisalabad Center of Islamic Finance, Department of Management Sciences, COMSATS Institute of Information Technology, Lahore 3 School of Islamic Economics Business and Finance, Minhaj University, Lahore 2

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A. Abbas et al. / Potential of Livestock TAKAFUL in Pakistan: An Empirical Investigation (pp. 29 - 37) -----------------------------------------------------------------------------------------------------------------------------------------------

provinces, there has been a significant impact on people’s lives, especially related to the loss of livelihoods, primarily those related to agricultural activities. Approximately 80% of Sindh’s rural population’s livelihood is dependent upon agricultural activities, such as crops, livestock, fisheries and forestry (NDMA, 2011). The flood destroyed standing crops of cotton, rice, sugarcane, sorghum, vegetables and pulses on about 0.84 million hectares of land (Iqbal, Ping, Abid, Kazmi, & Rizwan, 2016). Similarly the livestock also suffered heavy losses, approximately 115,500 livestock have perished and about 5 million surviving livestock were directly affected (Pakistan, 2012). Keeping in view the vulnerability of livestock sector to various natural calamities, the farmers and livestock owners are exploring sophisticate risk coping tools to minimize the potential impacts of adverse weather conditions and continue earning their livelihoods from livestock. Insurance industry plays a vital role in the overall economy particularly in indemnifying the financial, monetary risks. National Bank of Pakistan (NBP) with the help of Insurance Companies and Provincial Animal Husbandry department developed a framework for livestock insurance. The main aim is to improve access to capital for livestock and dairy industry and to cope with unfavorable conditions including loss of livestock due to natural disasters and accidents. The program protects farmers from financial losses in the wake of a natural disaster such as floods, storms and accidental deaths and illness. Being a Muslim country, Pakistan is facing hurdles in implementing the livestock insurance and diffusing its benefits to the rural masses throughout the country. The religious scholars usually associate (livestock) insurance with Riba, Gharar and Maiser which are prohibited by Islam. The Islamic insurance system called TAKAFUL is an alternative for the conventional livestock insurance as the former is based on mutual help, mutual indemnification of losses of member parties. The concept is derived from the system Kafala which means guarantee. Religious scholars are convinced that TAKAFUL is in accordance with Shariah AbdulRahman (2009). According to Islamic financial planning, TAKAFUL is the a way to reduce the economic risk of loss due to accident and disasters Al-islamy (2006). For instance, a group of people who live in a society or different localities agree to jointly help each other in any misfortune. Every member of the group donates an agreed upon amount which is then used to assist member(s) in times of misfortune. As such, insurance cannot deter the incidence of a risky event, but it can provide a financial cushion and a means of spreading risk intertemporally in the aftermath of such event Abbas, Amjath-Babu, Kächele, and Müller (2015) This study is designed to assess the potential demand for livestock TAKAFUL and to assess farmers’ willingness to pay for the livestock TAKAFUL in Punjab province of Pakistan. The findings of the study will be of great importance for policy makers and researchers as it provides richer insights and concrete evidences on how livestock owners protect themselves from the adverse financial conditions arising mainly due to natural disasters on one hand and compliance with the Shariah Laws on the other hand. ======================================================================================== Sukkur IBA Journal of Economics and Finance – SIJEF | Volume 1 No. 1 July – December 2017 © Sukkur IBA University

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2. Literature Review Shariah compliant TAKAFUL is widely used in many Islamic countries of the world Daud, Yussof, and Abideen (2011). The Takaful system bears its root from Islamic history as reported by Taylor (2006) who describes that Takaful used to exist in the ‘pre Islamic Arab’ where practices were followed to share risks associated with natural hazards and risky events. The system of Islamic finance is growing worldwide with almost 5% share in financial sector. Although the growth in Islamic finance is not in line with that of traditional finance industry, but the scope of covering permissible risk and their mitigation has risen to manifolds during the past decade including Pakistan (FIO, 2015). Moreover, as noted by Fauzi et al. (2016), the penetration of Islamic insurance system is relatively slow compared with traditional one while facing various constraints at the same time. However, the principles underlying Takaful make it more attractive for people for its uptake as noted by Jching (2008) as the Shariah-compliant Takaful is based on mutual cooperation principle as every participant would participate for offsetting each other’s losses while insurance operator needs to facilitate such cooperation through its expertise. Use of ‘Takaful’ in agriculture, in general and for livestock in particular is considered as a viable option to face risks and challenges in the present day environment. Davies (2014) note that livestock insurance can play a significant role in protecting herders from drought, however, the challenge is the low literacy levels of farmers. Lower levels of education are shown to influence this insurance uptake negatively (Davies, 2014). In addition, they also argue that prior experience of insurance would have such decisions positively.

3. Methodology 3.1. Sampling and Data Collection The present study was conducted in three Tehsils of the central Punjab, namely Lahore, Raiwind and Kasur. The required data for the present study were collected from 250 randomly selected livestock owners from the selected tehsils. Data were collected through a pretested questionnaire through face to face meetings with the selected respondents during January to March 2015. The selection of the respondents was based on probability proportional to population (of livestock owners) in each tehsil. As a result, 86 respondents were randomly selected from Lahore tehsil, 65 from Raiwind and 99 from Kaur. 3.2. Estimation Procedure The collected data was analysed using descriptive statistics including frequencies, percentages and cross tabulation. To assess farmers’ willingness to pay for livestock TAKAFUL a binary logistic regression was applied of the following form; Y = α + Σxiβ + ε

(1)

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Where Y is the dichotomous dependent variable, in our case Y represents respondents’ willingness to pay for livestock Takaful. xi is a vector of observed variables used in the analysis, β is the vector of unknown parameter (to be estimated) and ε is the error term. The parameters β are estimated using maximum likelihood. In this case, the dependent variable ‘Y’ takes value 1 if the respondent is willing to pay for the livestock TAKAFUL and 0 otherwise. Multiple logit and probit model are best suited to check the willingness to pay attributes M. A. Khan, Chander, and Bardhan (2013) (Teweldemedhin and Kafidi (2009); Thornton et al. (2008)) and (Mohammed & Ortmann, 2005) also used multiple logit regression model to check the influence of various factors on adoption of livestock insurance in Eritrea. The specific form of the binary logistic regression model applied in this study is presented as follows: lin(pi/1pi)=α±∑β gender ± ∑β experience of dairy farming ± ∑β dependent family members ± ∑β F.I to H.I ± ∑βlevel of education ± ∑βcost of animal treatment ± ∑β number of animals ± ∑β herd strength ± ∑βfarm quality ± ℮i (2) Table 1 provides details of the variables used in the analysis. This table presents variables used in the model and their measurements units. Some variables like increase in herd strength and livestock farm quality were used in the form of dummy. Moreover, level of education was used in the form of categorical variables like primary, secondary etc. Table 1: Variables Considered in the Study Variable Definition Measurement Gender Male and Female Male =1 Female=0 Experience of dairy farming Number of dependent F.I to H.I Farm Area

Level Of Education

How many years spending

Categorical range

Number of household

In number

Monthly income from Farm and other sources

In Rupees

Land specific for cattle farming

In Hectares (ha)

Farmers educational level (e.g primary=6 years, Middle=8 years, secondary=12years)

Primary Middle High school Intermediate Graduation and above


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Cost of animal treatment Number of animals Increase herd Strength Livestock farm quality

Treatment per year per animal

In Rupees

How many animals he or she has

In numbers

Number wise improvement Quality of a herd

1=Yes 0=No 1=Yes 0=No

4. Results and Discussions Table 2 depicts the socio-economic attributes of the sampled respondents. Major portion of respondents (92%) were male while only 8 per were females. The experience in dairy farming of the sampled respondents ranges from 5 years to 30 years. Similarly, the number of dependents were reported to be in the range of 0 to above 10. Minimum farm size reported was 5 acres while the maximum was above 30 acres. The range of average of cost of animal treatment is 3000 to 5000. Table 2: Socio-economic attributes of Farmers Characteristics Unit / Mode Maximum Gender Percentage Male: 92% Experience of Dairy 5 years to 30 and 30 years Farming above No. of Dependents 7 to 9 >10 F.I to H.I 30,000 to 50,000 > 50,000 Farm Area 10 to 20 acre > 30 acre Education Level Middle to Master Matriculate Cost of Animal Treatment 3,000 to 5,000 >7,000 No. of Animals 32 199 Desire to increase Herd Percentage Yes: 85.2% Strength Desire to improve Farm Percentage Yes: 89.6% (herd) Quality Dummy of Locality (%) Lahore: 34.4% Kasur: 39.6%

Minimum Female:08% 5 years 0 10,000 5 acre Primary 1,000 4 No: 14.8% No: 11.4% Raiwind: 26%

The farm income and household income level is in between 30,000/- PKR to 50,000/PKR whereas the minimum income group was earning 10,000/-. The cost of animal treatment ranging from PKR 1,000/- to PKR 7, 000/- and above. Average number of animals of a farmer was reported to be 32 whereas 85.2% farmers were willing to increase their herd strength and just 14.8% were against this trend. Similarly, 89.6% of the farmers intended to enhance their herd quality while 11.4% were not interested to increase the herd quality. Based on the findings presented in table 3, 58 percent ======================================================================================== Sukkur IBA Journal of Economics and Finance – SIJEF | Volume 1 No. 1 July – December 2017 © Sukkur IBA University

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respondents were willing to participate or avail Islamic livestock TAKAFUL while 42 perc were not willing to participate Islamic livestock TAKAFUL. Table 3: Response Willingness to Avail Islamic Livestock Takaful by Respondents Willing To Avail Livestock TAKAFUL No of Respondents Percentage (%) Yes 145 (58) No 105 (42) Total 250 (100) There were number of reasons reported for not availing the livestock TAKAFUL by the sampled respondents. Table 4 summarize these obstacles. Table 4: Factors Affecting Non Willingness to Avail Islamic Livestock Insurance Status

Frequency

Percentages (%)

Not Have Enough Money

11

11.11

Islamic Insurance Is Too Costly

8

8.08

No Need

46

46.46

Don’t Know

10

9.5

Unnecessary

10

9.5

Lack of Awareness

10

9.5

No comments Total

10 105

9.5 100.00

As many as 46 per of the sampled respondent believe that they do not need the livestock TAKAFUL to protect their livestock from adverse conditions followed by 11 per who reported financial constraints to be the major obstacle in availing the livestock TAKAFUL. Lack of awareness, Unnecessary and “don’t know” responses was recorded by 9.5 per in each category while 8 per reported that the Islamic Insurance is costly. Table 5 reveals that majority of the respondents (55.17 %) were willing to pay PKR 1,001 to 2,000 for cows. In case of buffalos majority of the respondents (54.48 %) were willing to pay PKR 1,001 to 2,000. Majority of the respondents (42.76%) were willing to pay PKR 1,001 to 2,000 for Exotic animals as well while for Exotic and local animals a major proportion (40%) were willing to pay PKR 2,001 to 4,000 followed by 38.62 per respondents who were willing to pay PKR 1,001 to 2,000.


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Table 5: Willingness to Pay Islamic Livestock Takaful (for the period of one year)

Amount/ Category Cow Buffalo Exotic Local & Exotic Mean

No. 25 27 25

% 17.24 18.62 17.24

Up to PKR 1,001 to 2,000 No. % 80 55.17 79 54.48 62 42.76

23

15.86

56

Up to PKR 1,000

25

69.3

38.62

Up to PKR 2,001 to 4,000 No. % 33 22.76 33 22.76 54 37.24 58

40.00

44.5

Up to PKR 4,001 to 6,000 No. % 7 4.83 5 3.45 4 2.76 8

5.52

6

Above PKR 6,000 No. % 0 1 0.69 0 0 0.2

-

Total No. 145 145 145

% 100 100 100

145

100

145

100

To assess the impact of various factors on respondents’ willingness to pay for livestock TAKAFUL, a binary logistic regression was used where the dependent variable assume value of 1 if the respondent is willing to pay for the livestock TAKAFUL and 0 otherwise. The results of the binary logistic regression analysis are provided in table 6. The coefficients of most of the variables show an insignificant effect on respondents’ willingness to pay for the livestock TAKAFUL except for farm income as a ratio of household income, number of animals, increase in the herd strength and livestock farm quality as reported by the Shakir (2007) Mohammed and Ortmann (2005) Meuwissen, Huirne, and Hardaker (2001) Table 6: Binary Logistic Regression Analysis on Livestock TAKAFUL In Pakistan (N=250) Independent Variable B-Coefficient Significance Gender

1.788

Experience of Dairy Farming Dependent Family Member F.I to H.I Land Area Level Of Education Cost Of Animal Treatment No Of Animals Increase Herd Strength Livestock Farm Quality Dummy of Kasur Dummy of Raiwind Constant Hosmer and lamshow

-0.14 0.145 -0.796 0.010 -0.102 0.255 0.014 1.497 1.376 -.244 0.297 -2.395 6.396

Negelkerke R-square

0.262

0.21 0.946 0.487 0.031 0.954 0.564 0.235 0.042 0.009 0.064 0.496 0.480 0.003 (0.603)


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Cox and snell R2 Cronbach Alpha for sample consistency

0.194 0.73

Number of dependent family members, land area and cost of animal treatment have a positive however, insignificant effect on respondents’ willingness to pay for livestock TAKAFUL. Nevertheless, these variables are considered for analysis as the number of dependent family members may force household head to not opt for Takaful as he has to feed more people and hence he would have less financial freedom to contribute for livestock insurance. Similarly, land area and cost of animal treatment could also affect such decision one way or the other. On the other hand, experience in dairy farming and level of education have a negative and insignificant effect on respondents’ willingness to pay for livestock TAKAFUL.

5. Conclusion and Policy Implications In our survey it was found that most of the farmers were agreed and willing to purchase the livestock TAKAFUL. The results of the study exposed that willingness to pay for livestock TAKAFUL of livestock owners is determined by number of animals, quality of animals, herd strength and farm income. The major constraints are lack of enough money, Islamic insurance is costly, no need, lack of awareness. Livestock owners were more concerns about the exotic and local animals as they were willing to pay more for these animals compared to cows and buffalos. Farmers’ willingness to pay is significantly affected by the ratio of farm income to household income, number of animals, herd strength and farm quality variables while all the other variables included in the analysis have insignificant effect on respondents’ willingness to pay. The findings suggest that awareness campaign should be carried out to disseminate information about the benefits and effectiveness of the livestock TAKAFUL and its compliance with the Shariah. Moreover, subsidy on TAKAFUL premium particularly to small farmers will help small holders to manage livestock risks and invest more in this sector. The existing insurance schemes can be made more accessible, effective and attractive by restructuring the current scheme in terms of period of insurance cover, number and quality of animals insured and payment of premium.

References Abbas, A., Amjath-Babu, T., Kächele, H., & Müller, K. (2015). Non-structural flood risk mitigation under developing country conditions: an analysis on the determinants of willingness to pay for flood insurance in rural Pakistan. Natural Hazards, 75(3), 2119-2135. AbdulRahman, Z. (2009). Takaful: Potential demand and growth. Islamic Economics, 22(1). Al-islamy, I. (2006). Risk Management in Islam–Takaful. as retrieved from www. islamic-world. net/economics/tafakul. htm on Thursday, 26th October. Daud, M., Yussof, I. M., & Abideen, A. (2011). The establishment and operation of Islamic Banks in Nigeria: Perception study on the role of the Central Bank of Nigeria. Australian Journal of Business and Management Research, 1(2), 14. ======================================================================================== Sukkur IBA Journal of Economics and Finance – SIJEF | Volume 1 No. 1 July – December 2017 © Sukkur IBA University

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Davies, B., & Mude, A. (2014). Livestock insurance could protect cattle-herders in Africa from drought. from https://www.theguardian.com/sustainablebusiness/food-blog/2014/sep/30/livestock-insurance-could-protect-cattleherders-in-africa-from-drought Fauzi, P., Rashid, K. A., Sharkawi, A. A., Hasan, S. F., Aripin, S., & Arifin, M. A. (2016). Takaful: A review on performance, issues and challenges in Malaysia. Journal of Scientific Research and Development, 71-76. FIO. (2015). An Overview on Takaful. Iqbal, M. A., Ping, Q., Abid, M., Kazmi, S. M. M., & Rizwan, M. (2016). Assessing risk perceptions and attitude among cotton farmers: A case of Punjab province, Pakistan. International Journal of Disaster Risk Reduction, 16, 68-74. Jching, Y. (2008). MARC’s approach to rating institutions offering Takaful. MIF monthly, Takaful supplement. Khan, M. A., Chander, M., & Bardhan, D. (2013). Willingness to pay for cattle and buffalo insurance: an analysis of dairy farmers in central India. Tropical animal health and production, 45(2), 461-468. Khan, S. U. (2014). Determinants of Takaful and Conventional Insurance Demand: A Cross-Country Study. COMSATS Institute of Information Technology LahorePakistan. Meuwissen, M. P., Huirne, R., & Hardaker, J. (2001). Risk and risk management: an empirical analysis of Dutch livestock farmers. Livestock production science, 69(1), 43-53. Mohammed, M., & Ortmann, G. F. (2005). Factors influencing adoption of livestock insurance by commercial dairy farmers in three zobatat of Eritrea. Agrekon, 44(2), 172-186. NDMA. (2011). National Disaster Management Authority Pakistan flood, Rapid Response Plan. Pakistan, G. o. (2012). Economics Survey of Pakistan Shakir, I. (2007). Tomorrow’s Takaful Products. Institute of Islamic Banking and Insurance, United Kingdom. Taylor, D. Y. (2006). Opportunities in Takaful: Understanding market awareness and Islamic life. Saudi Insurance Summit Workshop. Teweldemedhin, M. Y., & Kafidi, L. (2009). Risk management strategies of cattle farmers in Namibia-Case study from Omaheke and Otjozondjupa region. Thornton, P. K., Jones, P. G., Owiyo, T., Kruska, R. L., Herrero, M., Orindi, V., . . . Bekele, N. (2008). Climate change and poverty in Africa: Mapping hotspots of vulnerability. African Journal of Agricultural and Resource Economics, 2(1), 24-44. WFP. (2010). Pakistan Flood Impact Assessment.


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