REPORT A WAQF CROP MICROTAKAFUL MODEL THROUGH CROWDFUNDING -WAQF 16062023 (1)

1 REPORT WAQF CROP MICRO TAKAFUL FRAMEWORK THROUGH CROWDFUNDING-WAQF IN MALAYSIA Associate Professor Dr Fauzilah Salleh (Project Leader) Associate Professor Dr Engku Muhammad Tajuddin bin Engku Ali Associate Professor Dr Sharifah Wajihah Wafa binti Syed Saadun Tarek Wafa Associate Professor Dr Nik Mohd Norfadzilah bin Nik Mohd Rashid Dr Nor Mazlina Abu Bakar Dr Muhammad Shahrul Ifwat bin Ishak Puan Nur Salina Ismail This report resulted from research supported by the Takaful Ikhlas General Berhad. The content is solely the responsibility of the authors and does not necessarily represent the official views of the Takaful Ikhlas General Berhad.

2 Cetakan Pertama / First Printing, 2023. © Hak cipta / Copyright Fakulti Perniagaan dan Pengurusan (FPP), 2023. Hak cipta terpelihara. Tiada bahagian daripada terbitan ini boleh diterbitkan semula, disimpan untuk pengeluaran atau ditukarkan ke dalam sebarang bentuk atau dengan sebarang alat juga pun, sama ada dengan cara elektronik, gambar serta rakaman dan sebagainya tanpa kebenaran bertulis daripada Penerbit Fakulti Perniagaan dan Pengurusan (FPP), Universiti Sultan Zainal Abidin terlebih dahulu. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from Fakulti Perniagaan dan Pengurusan (FPP). Diterbitkan di Malaysia oleh / Published in Malaysia by Penerbit Fakulti Perniagaan dan Pengurusan Universiti Sultan Zainal Abidin Kampus Gong Badak 21300 Kuala Nerus Terengganu, MALAYSIA Tel. 09-6688805, Faks. 09-6687846 Laman web: https://fpp.unisza.edu.my/ Dicetak di Malaysia oleh / Printed in Malaysia by ISBN: 978-629-98354-1-7

2 Cetakan Pertama / First Printing, 2023. © Hak cipta / Copyright Fakulti Perniagaan dan Pengurusan (FPP), 2023. Hak cipta terpelihara. Tiada bahagian daripada terbitan ini boleh diterbitkan semula, disimpan untuk pengeluaran atau ditukarkan ke dalam sebarang bentuk atau dengan sebarang alat juga pun, sama ada dengan cara elektronik, gambar serta rakaman dan sebagainya tanpa kebenaran bertulis daripada Penerbit Fakulti Perniagaan dan Pengurusan (FPP), Universiti Sultan Zainal Abidin terlebih dahulu. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without permission in writing from Fakulti Perniagaan dan Pengurusan (FPP). Diterbitkan di Malaysia oleh / Published in Malaysia by Penerbit Fakulti Perniagaan dan Pengurusan Universiti Sultan Zainal Abidin Kampus Gong Badak 21300 Kuala Nerus Terengganu, MALAYSIA Tel. 09-6688805, Faks. 09-6687846 Laman web: https://fpp.unisza.edu.my/ Dicetak di Malaysia oleh / Printed in Malaysia by ISBN: 978-629-98354-1-7 1 EXECUTIVE SUMMARY This report details the development of a Waqf Crop Micro Takaful Framework (WCMTF) in Malaysia via crowdfunding-waqf. This project's objective was to develop a sustainable and inclusive micro takaful model that employs the concept of waqf in order to support smallholder farmers in Malaysia. To design a framework that meets the needs of smallholder farmers and potential donors, the project team conducted extensive research on the waqf system, the crop takaful market in Malaysia, and crowdfunding platforms. This project's Waqf Crop Micro Takaful framework leverages the waqf system to establish a sustainable takaful fund for smallholder farmers. The model is inclusive, with affordable contributions and a transparent claims process. The crowdfunding-waqf strategy is utilised to raise funds for the takaful fund, with donors contributing to the fund as a form of perpetual charity (sadaqah jariyah). The project team collaborated with Bank Negara Malaysia, State Islamic Religious Council, local takaful operators, and a crowdfunding platform to develop the model and ensure local compliance. The current study follows an earlier study in 2019, ‘Developing Crop Microtakaful Framework for Smallholders in Malaysia”. This initiative led to development of Paddy microtakaful scheme for smallholder farmers to consider implementing a national crop takaful programme. The current study on developing a waqf crop microtakaful framework through crowdfunding is to be set as a guideline on the promoting sustainable crop microtakaful scheme in Malaysia. The Waqf Crop Micro Takaful framework has the potential to significantly impact the livelihoods of Malaysian smallholder farmers. The model can assist farmers in mitigating risks and enhancing their economic security by providing affordable and accessible insurance coverage. The crowdfunding-waqf strategy also offers donors the chance to support a sustainable and socially responsible initiative. This new framework demonstrates the potential for innovative and collaborative approaches to social and economic problems. This project has created an inclusive micro takaful framework by leveraging the waqf system and crowdfunding, which can benefit smallholder farmers and communities not only in Malaysia, but also can be extended in other parts of the world. Ultimately, the intention of developing the Waqf Crop Micro Takaful Framework for the sustainability of the product would be to create a scalable, sustainable model for supporting smallholder farmers in different contexts. By doing so, it may be possible to promote more sustainable agricultural practices, reduce food insecurity, and support the livelihoods of smallholder farmers and their communities. Keywords: Waqf, Micro Takaful, Crowdfunding, Smallholder Farmers

1 TABLE OF CONTENTS PAGE 1. INTRODUCTION 1 1.1. Background And Report Objectives 1 1.2. Methodology 2 1.3. Structure Of The Report 3 2. THE AGRICULTURE INDUSTRY IN MALAYSIA 4 2.1 Overview 4 2.1 Food Crops In Malaysian Economies: Facts And Figures 8 2.2 Paddy In Malaysia 8 2.2.1 Paddy Cultivation In Malaysia 8 2.2.2 Paddy Production In Malaysia 11 3. CROP MICRO TAKAFUL SCHEME 16 3.1 Overview 16 3.2 Role And Scope Of Crop Insurance 16 3.2.1 Crop Insurance/Takaful In Selected Countries 17 3.2.2 Crop Insurance/Takaful In Malaysia 24 3.3 Risks Associated With Food Crop Production 25 3.3.1 Types Of Risks 25 3.3.2 Perils Associated With Crop Farming 25 3.3.3 Natural Disaster 26 3.3.4 Pests 27 3.3.5 Crops Diseases 29 3.4 A Framework For Crop Micro Takaful Scheme 29 3.5 Definitions Of Key Term 32 3.5.1 Smallholder Farmers 32 3.5.2 Cash Crops And Food Crops 33 3.5.3 Risk 33 3.5.4 Food Security 33 3.5.5 Stakeholders 34

2 3.6 Parametric Based Crop Insurance (Pbci) 34 3.6.1 What Is Parametric Insurance? 34 3.6.2 The Key Differences Between Traditional Indemnity And Parametric Insurance. 35 3.6.3 How Does Parametric Insurance Work? 36 4. CROWDFUNDING 38 4.1 Overview 38 4.2 Current Trend And Practices 38 4.3 The Role Of Crowdfunding In Strengthening Muslim Socio-Economic 39 4.4 Definiton Of Terms 40 5. WAQF 41 5.1 Overview 41 5.1.2 The History Of Waqf In Islam 41 5.1.3 The Legislation Of Waqf In Islam 42 5.1.4 Types Of Waqf 42 5.1.5 Ownership Of Waqf 43 5.1.6 Characteristics Of Waqf 43 5.1.7 Pillars For Waqf And Their Conditions 43 5.2 Current Trend And Practices 44 5.3 Items That Can Be Donated As Waqf 45 5.4 The Role Of Waqf In Strengthening Muslim Socio-Economic 45 5.5 Definition Of Terms 47 Chapter 6 48 An Insight On Crowdfunding Waqf Crop Micro Takaful 48 6.1 Overview 48 6.2 Crowdfunding 48 6.3 Information On Mufti’s Views 49 6.3.1 View On Microtakaful Product 49 6.3.2 View On Investing Cash Waqf 50 6.4 Information On Waqf 52 6.4.1 Specific Waqf 52 6.4.2 Procedures In Expanding Cash Waqf 54

2 3.6 Parametric Based Crop Insurance (Pbci) 34 3.6.1 What Is Parametric Insurance? 34 3.6.2 The Key Differences Between Traditional Indemnity And Parametric Insurance. 35 3.6.3 How Does Parametric Insurance Work? 36 4. CROWDFUNDING 38 4.1 Overview 38 4.2 Current Trend And Practices 38 4.3 The Role Of Crowdfunding In Strengthening Muslim Socio-Economic 39 4.4 Definiton Of Terms 40 5. WAQF 41 5.1 Overview 41 5.1.2 The History Of Waqf In Islam 41 5.1.3 The Legislation Of Waqf In Islam 42 5.1.4 Types Of Waqf 42 5.1.5 Ownership Of Waqf 43 5.1.6 Characteristics Of Waqf 43 5.1.7 Pillars For Waqf And Their Conditions 43 5.2 Current Trend And Practices 44 5.3 Items That Can Be Donated As Waqf 45 5.4 The Role Of Waqf In Strengthening Muslim Socio-Economic 45 5.5 Definition Of Terms 47 Chapter 6 48 An Insight On Crowdfunding Waqf Crop Micro Takaful 48 6.1 Overview 48 6.2 Crowdfunding 48 6.3 Information On Mufti’s Views 49 6.3.1 View On Microtakaful Product 49 6.3.2 View On Investing Cash Waqf 50 6.4 Information On Waqf 52 6.4.1 Specific Waqf 52 6.4.2 Procedures In Expanding Cash Waqf 54 3 6.4.3 Mutawalli And Procedure 55 6.4.4 Tax Exemption For Waqif 55 6.4.5 Waqf Muaqqat And Waqf Muallaq 56 6.4.6 Proposed Framework Crowdfunding Waqf Crop Micro Takaful Scheme 58 7. CHALLENGES AND SOLUTIONS 60 7.1 Overview 60 7.2 Crop Micro Takaful Scheme 60 7.3 Crowdfunding 63 7.4 The Challenges Of Empowering Waqf In Malaysia 64 8. CONCLUSION 66 8.1 Overview 66 8.2 The Role Of Crowdfunding In Ensuring The Sustainability Of Crop Micro Takaful Scheme. 66 8.3 The Role Of Waqf In Ensuring The Sustainability Crop Micro Takaful Scheme 66

1 LIST OF TABLES PAGE Table 2.1: Cost of Production Breakdown and net Profit for a Renter in MADA 2014 (RM/Ha) 15 Table 3.1: Selected Availability of Crop Insurance in Developed and Developing Countries 18 Table 3.2: Details of Crops Insurance Policy in ASEAN 22 Table 3.3 Agriculture (Crop) Insurance Uptake and Penetration Levels 23 Table 3.4: Events of Flood Incidents in Malaysia 27 Table 3.5: Events of Pest Attack in Malaysia 28 Table 3.6 Proposed Crop Micro Takaful Scheme (CMTS) 30 Table 3.7: Crop Micro Takaful Scheme (CMTS) Framework 31 Table 3.8 Traditional Indemnity Vs Parametric Insurance 36 Table 4.1: Crowdfunding Models 39 Table 6.1: Muftis’ View on Investing Cash Waqf 50 Table 6.2: Practises of Specific Waqf among States in Malaysia 53 Table 6.3: Mutawalli Procedures 55 Table 6.4: States Regulations for Tax Exemption For Waqif 56 Table 6.5: Reasons for the Inapplicability of the Concept of Waqf Muaqqat and Waqf Muallaq in All States 57 Table 7.1: Challenges and Solution for Establishing and Sustainability of Crop Microtakaful Scheme 59 Table 7.2: Challenges and Solution for Empowering Waqf in Malaysia 63

1 LIST OF TABLES PAGE Table 2.1: Cost of Production Breakdown and net Profit for a Renter in MADA 2014 (RM/Ha) 15 Table 3.1: Selected Availability of Crop Insurance in Developed and Developing Countries 18 Table 3.2: Details of Crops Insurance Policy in ASEAN 22 Table 3.3 Agriculture (Crop) Insurance Uptake and Penetration Levels 23 Table 3.4: Events of Flood Incidents in Malaysia 27 Table 3.5: Events of Pest Attack in Malaysia 28 Table 3.6 Proposed Crop Micro Takaful Scheme (CMTS) 30 Table 3.7: Crop Micro Takaful Scheme (CMTS) Framework 31 Table 3.8 Traditional Indemnity Vs Parametric Insurance 36 Table 4.1: Crowdfunding Models 39 Table 6.1: Muftis’ View on Investing Cash Waqf 50 Table 6.2: Practises of Specific Waqf among States in Malaysia 53 Table 6.3: Mutawalli Procedures 55 Table 6.4: States Regulations for Tax Exemption For Waqif 56 Table 6.5: Reasons for the Inapplicability of the Concept of Waqf Muaqqat and Waqf Muallaq in All States 57 Table 7.1: Challenges and Solution for Establishing and Sustainability of Crop Microtakaful Scheme 59 Table 7.2: Challenges and Solution for Empowering Waqf in Malaysia 63 1 LIST OF FIGURES PAGE Figure 2.1: Gross Domestic Product (GDP) 2021 4 Figure 2.2: Production of Selected Agriculture and Number of Livestock Malaysia 2021 5 Figure 2.3: Number of Food Cropping Farmers vs Number of Populations according to States in Malaysia 6 Figure 2.4: Average Monthly Salaries & Wages by Economic Activity, 2020 & 2021 7 Figure 2.5: Paddy Farmers in Malaysia 9 Figure 2.6: Cycle of Paddy Cultivation 10 Figure 2.7: Paddy Subsidies and Incentives VS Percentage of Ministry of Agriculture’s Expenditure 10 Figure 2.8: Rice Consumption in Malaysia 11 Figure 2.9 Total Area Harvested (Hectares) and Paddy Yield (Metric Tonne, MT) 2015-2019 12 Figure 2.10: Paddy Production by Granary Area 2016 (MT and Percentage of Total Domestic Production) 13 Figure 2.11: Production for Rice production for Different States 2022 14 Figure 3.1: Countries with Inclusive Insurance Regulation in Place or Under Development 2018 19 Figure 3.2: Overview of Crop Insurance in ASEAN 20 Figure 3.3: Spatial distribution of (a) Annual, (b) Southwest Monsoon and (c) Northeast Monsoon Rainfall in Peninsular Malaysia 26 Figure 3.4: Infographic of Parametric Based Crop Insurance 37 Figure 5.1: Current Trend of Waqf 44 Figure 6.2: Crowdfunding Waqf Paddy Microtakaful Framework 58

CHAPTER 1

1 CHAPTER 1 INTRODUCTION 1.1. BACKGROUND AND REPORT OBJECTIVES This project intends to propose the Waqf Crop Micro Takaful Framework (WCMTF) through crowdfunding-waqf in Malaysia. The idea mooted for the economic sustainability of smallholder farmers due to some underprivileged conditions in Malaysia. Waqf has long promoted social and economic development in Muslim-majority nations such as Turkey, Jordan, and Egypt. There have been a big amount of infrastructures and services such as health maintenance, education and for society which have been financed and preserved for centuries through this system of waqf in all parts of the Muslim world. Not only that, Waqf also funds social welfare programmes and aids the poor. Meanwhile, crowdfunding is another effective way to raise money worldwide for social and economic causes. In recent years, crowdfunding platforms have funded small business startups, social enterprises, and humanitarian relief efforts. Islamic crowdfunding platforms have grown in popularity in Muslim-majority countries and Muslim communities worldwide. These platforms let people raise money for charities, social enterprises, and personal needs. Thus, the proposed Waqf Crop Micro Takaful Framework (WCMTF) through crowdfunding-waqf in Malaysia is an innovative way to support smallholder farmers' economic sustainability by combining waqf's rich history and crowdfunding's growing potential. This approach could be replicated in countries with large Muslim populations and similar smallholder farmer challenges. Currently, there is no micro takaful framework that employs the concept of crowdfunding-waqf. Additionally, so far, no specific waqf crop micro takaful scheme has been undertaken in the country. Questions arise, if this scheme is developed, are smallholder farmers able to contribute to it, and what about its sustainability? Hence, a sustainable source of funding for crop insurance is crucial for protecting the livelihoods of smallholder farmers, enhancing food security, reducing poverty, stimulating economic growth, and adapting to the impacts of climate change. This proposed framework would be a potential solution to the problems faced by smallholder farmers in Malaysia who lack access to sustainable crop insurance and this framework can be an innovative and effective way to address these challenges. This project collaborated with Bank Negara Malaysia, local takaful operators, and a crowdfunding platform with the aim to develop the framework and ensure local compliance. This framework will be beneficial to the Ministry of Agriculture and Food Security (MAFS) as a guideline in crop sustainability and food security in CHAPTER 1

2| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 2 Malaysia, in accordance with SDG-1 (No Poverty), SDG -2 (Zero Hunger) and SDG- 8 (Decent Work and Economic Growth). The central objectives of the report are as follows: 1. To synthesise the current trend of Crop Micro Takaful in Malaysia 2. To investigate whether the current crowdfunding models suit Crop Micro Takaful Scheme in Malaysia 3. To analyse the applicability of the waqf contract as financing through the crowdfunding platform. 4. To develop a sustainable 'Waqf Crop Micro Takaful Model' (WCMTM) for smallholder farmers. 5. To propose a policy paper to enhance the optimisation of crowdfunding in developing WCMTM. 1.2. METHODOLOGY This study includes: 1. An extensive review of the available literature on the design and implementation of crop insurance policies in Malaysia. 2. In-depth semi-structured interviews with fourteen (14) State Islamic Religious Councils (SIRC) and two (2) Waqf fund management and crowdfunding platforms; the results of which are presented at relevant points in this report. 3. In-depth semi-structured interview with Focus Group Discussions (FGD) to validate and verify the proposed "Crowdfunding Waqf Crop Micro Takaful Framework" in Malaysia. This final report incorporates the useful comments and feedback provided by the FDG.

Introduction|3 2 Malaysia, in accordance with SDG-1 (No Poverty), SDG -2 (Zero Hunger) and SDG- 8 (Decent Work and Economic Growth). The central objectives of the report are as follows: 1. To synthesise the current trend of Crop Micro Takaful in Malaysia 2. To investigate whether the current crowdfunding models suit Crop Micro Takaful Scheme in Malaysia 3. To analyse the applicability of the waqf contract as financing through the crowdfunding platform. 4. To develop a sustainable 'Waqf Crop Micro Takaful Model' (WCMTM) for smallholder farmers. 5. To propose a policy paper to enhance the optimisation of crowdfunding in developing WCMTM. 1.2. METHODOLOGY This study includes: 1. An extensive review of the available literature on the design and implementation of crop insurance policies in Malaysia. 2. In-depth semi-structured interviews with fourteen (14) State Islamic Religious Councils (SIRC) and two (2) Waqf fund management and crowdfunding platforms; the results of which are presented at relevant points in this report. 3. In-depth semi-structured interview with Focus Group Discussions (FGD) to validate and verify the proposed "Crowdfunding Waqf Crop Micro Takaful Framework" in Malaysia. This final report incorporates the useful comments and feedback provided by the FDG. 3 1.3. STRUCTURE OF THE REPORT The remainder of this report is structured as follows: Chapter 2 presents the background of this research, providing the overview of crops in Malaysia economies, highlighting the agriculture industry in Malaysia. Chapter 3 deals with the role and scope of crop micro takaful scheme, highlights the common risks associated with food crop production and illustrates the developing framework for crop micro takaful sustainability. In Chapter 4, the role of crowdfunding in strengthening Muslim socio-economic status is discussed. Meanwhile, Chapter 5 outlines the overview of waqf, highlighting the role of waqf in strengthening Muslim socio-economic status. Chapter 6 provides an insight into the framework for crop micro takaful scheme by presenting the preliminary findings from the semi-structured interviews. Chapter 7 further discusses the challenges and solutions namely in crop micro takaful, crowdfunding and waqf. Finally, Chapter 8 presents conclusions on the role of crowdfunding and waqf in sustainability of crop micro takaful scheme.

4 CHAPTER 2 THE AGRICULTURE INDUSTRY IN MALAYSIA 2.1 OVERVIEW Agriculture in Malaysia focuses on transforming a traditionally small-scale, production-based sector into a large-scale agribusiness industry that contributes to economic growth and sustainability. Nearly twenty-four percent of Malaysia's land area is agricultural land, where 8,571,000 hectares is arable and permanent cropland. The tropical climate with a humidity level of 90% provides Malaysia's proper conditions to produce various crops. Palm oil, rubber, cocoa, or tea are types of cash crops dominating the agriculture industry and are exclusively grown for sale. These are usually produced in large scale farming for domestic and export markets. Modern agro technology has allowed traditional food crops such as paddy, vegetables, and fruits to be commercially grown for revenue; particularly in developed countries, including Malaysia. Figure 2.1: Gross Domestic Product (GDP) 2021 Malaysia's economy gained its momentum in 2021, recording RM1,386.7 billion in GDP, up 3.1% from RM1,345.1 billion in 2020. Agriculture sector growth was 0.2 percent in 2021, compared to negative 2.4 percent in the previous year. The commodities sub-sector, particularly oil palm, was responsible for the decline (2020: -3.6%). Even though the growth rate of oil palm exhibited a drop, it was the biggest contributor to the value added of agriculture sector with RM34.8 billion or 35.2 per cent (see Figure 2.2). CHAPTER 2

The Agriculture Industry In Malaysia|5 4 CHAPTER 2 THE AGRICULTURE INDUSTRY IN MALAYSIA 2.1 OVERVIEW Agriculture in Malaysia focuses on transforming a traditionally small-scale, production-based sector into a large-scale agribusiness industry that contributes to economic growth and sustainability. Nearly twenty-four percent of Malaysia's land area is agricultural land, where 8,571,000 hectares is arable and permanent cropland. The tropical climate with a humidity level of 90% provides Malaysia's proper conditions to produce various crops. Palm oil, rubber, cocoa, or tea are types of cash crops dominating the agriculture industry and are exclusively grown for sale. These are usually produced in large scale farming for domestic and export markets. Modern agro technology has allowed traditional food crops such as paddy, vegetables, and fruits to be commercially grown for revenue; particularly in developed countries, including Malaysia. Figure 2.1: Gross Domestic Product (GDP) 2021 Malaysia's economy gained its momentum in 2021, recording RM1,386.7 billion in GDP, up 3.1% from RM1,345.1 billion in 2020. Agriculture sector growth was 0.2 percent in 2021, compared to negative 2.4 percent in the previous year. The commodities sub-sector, particularly oil palm, was responsible for the decline (2020: -3.6%). Even though the growth rate of oil palm exhibited a drop, it was the biggest contributor to the value added of agriculture sector with RM34.8 billion or 35.2 per cent (see Figure 2.2). CHAPTER 2 5 Overall, production of four important commodity crops, namely fresh fruit bunches (oil palm), natural rubber, kenaf (dry stem), and cocoa beans, decreased in 2021 compared to 2020. Though fresh fruit bunches (oil palm) output was the greatest among agricultural commodities, it declined by 5,575.6 thousand tonnes (5.7%) from the previous year. In this report, we focus exclusively on paddy which is also cash crops conducted on a small scale by the smallholder farmers. Figure 2.2: Production of Selected Agriculture and Number of Livestock Malaysia 2021 Figure 2.3 shows the total number of food cropping farmers extracted from the total population in different states in Malaysia for 2019. Kedah has the highest number of farmers, known as Negeri Jelapang Padi, the land of cultivating paddy. The second highest is from Johor, which is also the largest producer of fruits in Malaysia, followed by Kelantan.

6| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 6 Figure 2.3: Number of Food Cropping Farmers vs Number of Populations according to States in Malaysia Taman Kekal Pertanian Malaysia (TKPM) program or Permanent Food Production Areas is proposed as a strategy under the Third National Agricultural Policy (DPN3) to encourage largescale, commercial, and high-tech agricultural projects by entrepreneurs, including the private sector. A permanent food crop production zone initiative is targeted to increase the country's sustainable and quality food production in collaboration with entrepreneurs in food production. The program is also aimed to increase the participants' net income to at least RM3,000 per month and encourage the private sector's involvement in the production of food crops. The government has also boosted the Agriculture and Agro-based Industry Ministry allocation from RM4.4 billion in 2019 to RM4.9 billion in 2020 as an effort to enhance farmers' income. RM150 million was set aside to facilitate cash crop planting of chilli, pineapple, coconut, watermelon, and bamboo. An allocation for paddy inputs is also increased from RM796 million in 2019 to RM855 million in 2020 under the Skim Baja Padi Kerajaan Persekutuan (SBPKP) and Skim Insentif Pengeluaran Padi (SIPP). Another RM43 million is set to develop new crop varieties with higher productivity and quality. In a general view of Malaysia's agricultural industry, the farming community is regarded to receive the lowest salary compared to other sectors, as illustrated in Figure 2.4. Thus, the farming community needs to earn sufficient income from their agriculture harvest, which directly

The Agriculture Industry In Malaysia|7 6 Figure 2.3: Number of Food Cropping Farmers vs Number of Populations according to States in Malaysia Taman Kekal Pertanian Malaysia (TKPM) program or Permanent Food Production Areas is proposed as a strategy under the Third National Agricultural Policy (DPN3) to encourage largescale, commercial, and high-tech agricultural projects by entrepreneurs, including the private sector. A permanent food crop production zone initiative is targeted to increase the country's sustainable and quality food production in collaboration with entrepreneurs in food production. The program is also aimed to increase the participants' net income to at least RM3,000 per month and encourage the private sector's involvement in the production of food crops. The government has also boosted the Agriculture and Agro-based Industry Ministry allocation from RM4.4 billion in 2019 to RM4.9 billion in 2020 as an effort to enhance farmers' income. RM150 million was set aside to facilitate cash crop planting of chilli, pineapple, coconut, watermelon, and bamboo. An allocation for paddy inputs is also increased from RM796 million in 2019 to RM855 million in 2020 under the Skim Baja Padi Kerajaan Persekutuan (SBPKP) and Skim Insentif Pengeluaran Padi (SIPP). Another RM43 million is set to develop new crop varieties with higher productivity and quality. In a general view of Malaysia's agricultural industry, the farming community is regarded to receive the lowest salary compared to other sectors, as illustrated in Figure 2.4. Thus, the farming community needs to earn sufficient income from their agriculture harvest, which directly 7 determines the country's food security. Development in agriculture has shown some progress, including technological advancement in producing high-quality seeds and fertilisers for better crops and harvest. Besides, the advancement in irrigation systems and planting techniques are to increase yields per cultivation area. However, development must also be focused on protecting their crops against the exposed risk and the uncertainties of the future. Thus, highlighting the importance of developing the CMTS for the smallholder farmers' community is crucial for the sustainability of the agriculture sector. Figure 2.4: Average Monthly Salaries & Wages by Economic Activity, 2020 & 2021

8| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 8 2.1 FOOD CROPS IN MALAYSIAN ECONOMIES: FACTS AND FIGURES This chapter provides some facts and figures about the agriculture industry in Malaysia. The focus is on the paddy cultivation by smallholder farmers. A number of key observations are as follows: 1. Smallholder farming plays an important role in agricultural growth and national food production, with 420,739 farmers planting paddy, fruits vegetables totalling 646,704 hectares of Malaysia cultivation. 2. Most 50% of land use for paddy is mainly found in Kedah as 'Negeri Jelapang Padi' with a rice yield of 2.91 million tonnes in 2019. 3. Production of food crops in Malaysia is variably distributed among the states with the highest paddy production in Kedah, vegetables in Pahang and fruits in Johor. 4. Employment in Malaysia's agriculture sector (% of total employment) was reported at 10.36% in 2019. 5. Development in the agriculture sector is vital in determining the country's sustainability of food security. 6. Development must focus on the advancement in methods and techniques in agriculture and advancement in handling the risk upon an uncertain future. 2.2 PADDY IN MALAYSIA 2.2.1 PADDY CULTIVATION IN MALAYSIA Paddy is the most important crop in Malaysia as rice is the staple food for many people. Based on The Star 2019, it is recorded that around 200,000 from 1.6 million workers are paddy farmers whose monthly income stood at RM2,527 (Figure 2.5). These groups of farmers are categorised under the 'Bottom 40%' (B40) income category.

The Agriculture Industry In Malaysia|9 8 2.1 FOOD CROPS IN MALAYSIAN ECONOMIES: FACTS AND FIGURES This chapter provides some facts and figures about the agriculture industry in Malaysia. The focus is on the paddy cultivation by smallholder farmers. A number of key observations are as follows: 1. Smallholder farming plays an important role in agricultural growth and national food production, with 420,739 farmers planting paddy, fruits vegetables totalling 646,704 hectares of Malaysia cultivation. 2. Most 50% of land use for paddy is mainly found in Kedah as 'Negeri Jelapang Padi' with a rice yield of 2.91 million tonnes in 2019. 3. Production of food crops in Malaysia is variably distributed among the states with the highest paddy production in Kedah, vegetables in Pahang and fruits in Johor. 4. Employment in Malaysia's agriculture sector (% of total employment) was reported at 10.36% in 2019. 5. Development in the agriculture sector is vital in determining the country's sustainability of food security. 6. Development must focus on the advancement in methods and techniques in agriculture and advancement in handling the risk upon an uncertain future. 2.2 PADDY IN MALAYSIA 2.2.1 PADDY CULTIVATION IN MALAYSIA Paddy is the most important crop in Malaysia as rice is the staple food for many people. Based on The Star 2019, it is recorded that around 200,000 from 1.6 million workers are paddy farmers whose monthly income stood at RM2,527 (Figure 2.5). These groups of farmers are categorised under the 'Bottom 40%' (B40) income category. 9 Figure 2.5: Paddy Farmers in Malaysia Locally, paddy is cultivated as a rainfed or irrigated lowland crop. Paddy grows best in warm places, and it is vastly increased on the Malaysian Peninsula in areas of about 300,500 hectares. The temperature regime and the rainfall distribution in the country are suitable for the year-round cultivation of rice. Most farmers, however, plant and harvest rice more or less during the same period. Figure 2.6 shows the cycle of paddy cultivation. The cycle starts with the paddy plot being ploughed and then flooded with water to grow seedlings. This is followed by the gradual reduction of the visible water surface as the height of the darker green paddy plants grow. As the plants continue to mature, they produce grains, giving a golden-yellow colour to the paddy field. Soon after, the field is harvested before it reverts to being a plot of exposed soil. The whole process of germination to harvesting takes 120 days.

10| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 10 Figure 2.6: Cycle of Paddy Cultivation Cost & subsidies Albeit the declining trend, the paddy and rice industry continue to receive more budgetary assistance than any other crops. Figure 2.7 illustrates the paddy subsidies and incentives received versus the expenses from the Ministry of Agriculture. Figure 2.7: Paddy Subsidies and Incentives Vs Percentage of Ministry of Agriculture's Expenditure

The Agriculture Industry In Malaysia|11 10 Figure 2.6: Cycle of Paddy Cultivation Cost & subsidies Albeit the declining trend, the paddy and rice industry continue to receive more budgetary assistance than any other crops. Figure 2.7 illustrates the paddy subsidies and incentives received versus the expenses from the Ministry of Agriculture. Figure 2.7: Paddy Subsidies and Incentives Vs Percentage of Ministry of Agriculture's Expenditure 11 2.2.2 PADDY PRODUCTION IN MALAYSIA In Malaysia, per capita rice consumption was 82.3 kg in 2016, which is about 26% of the total caloric intake per day, costing an average of RM44/month per household. According to Khazanah Research Institute 2019, Malaysia consumed 2.7 million metric tonnes (MT) of rice, whereby 67% was produced locally, and the rest was imported primarily from Thailand, Vietnam, and Pakistan, as illustrated in Figure 2.8. Figure 2.9 indicates that the land use of 684,416 Hectares for food crops is mainly dedicated to the cultivation of paddy as rice is consumed in Malaysians' everyday diet. Thus, rice production, which stood at 2.91 million metric tonnes in 2019, plays a crucial part in the country's agriculture in ensuring national food security. Figure 2.8: Rice Consumption in Malaysia For domestic paddy production, Malaysia relies primarily on ten key granary areas for its paddy supply, as listed in Figure 2.10. In 2019, the nation produced a total of 2.7 million metric tonnes (MT) of paddy. Out of this, 2.0 million MT or 74.1% of the total paddy produced was from the granary areas. Muda Agricultural Development Authority (MADA), in the Northern Peninsular of Malaysia, produced about 38.8% of the total national paddy production and is known as the 'Rice Bowl' of the nation, followed by Kemubu Agricultural Development Authority (KADA) at 9.1% and Integrated Agricultural Development Area (IADA) Barat Laut Selangor (BLS) at 8.1%.

12| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 12 Figure 2.9: Total Area Harvested (Hectares) and Paddy Yield (Metric Tonne, MT) 2015-2019

The Agriculture Industry In Malaysia|13 12 Figure 2.9: Total Area Harvested (Hectares) and Paddy Yield (Metric Tonne, MT) 2015-2019 13 Notes: IADA Seberang Perak: 103,388 MT (3.8%) IADA Ketara: 54,836 MT (2.0%) IADA Kemasin Semarak: 27,456 (1.0%) IADA Pekan: 13,425 (0.5%) IADA Rompin: 14,437 (0.3%) Source: MOA Chart by KRI Figure 2.10: Paddy Production by Granary Area 2016 (MT and Percentage of Total Domestic Production)

14| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 14 Figure 2.11 Production for Rice production for Different States 2022

The Agriculture Industry In Malaysia|15 14 Figure 2.11 Production for Rice production for Different States 2022 15 Given the differences in their locations (different environmental conditions), farm practices and various other factors, these granary areas have different farm yield levels (Figure 2.11). Table 2.1: Cost of Production Breakdown and net Profit for a Renter in MADA 2014 (RM/Ha) Description Unit(RM/Ha) Formula Gross Profit (per Ha) Yield (MT/Ha) 5.54 (A) Cut Off Rate (%) 17% (B) Paddy Price per MT 1,448.10 (C) Gross Profit (per Ha) 6,658.65 (A) X(100% - (B)) X (C) = (D) Production Cost (per Ha) Land Rent 1,591.98 Input Cost 663.40 Labour Cost 343.42 Machinery Cost 1,146.30 Others 21.16 Total Cost (with input subsidies) 3,766.26 (E) Input Subsidies 1,466.60 (F) Total Cost (without input subsidies) 5,232.86 (E) + (F) = (G) Net Profit (per Ha) Net Profit (with input subsidies) 2,892.39 (D) – (E) Net Profit (without input subsidies) 1,425.79 (D) – (G) Source (Khazanah Research Institute, 2019) From Table 2.1, it can be illustrated that paddy farmers remain in the B40. As reported by MADA, these farmers' household income was RM 2,527/month while the national mean was at RM6,958/month. Without subsidies, the cost of production (COP) is high. The net profit from paddy cultivation in MADA in 2014 stood at RM2,892/Ha/season, and this is affected by the COP at RM 3,766/hectare/season. The largest contributions to the COP are land rental and machinery, at 42% and 30%, respectively, while input and labour costs contributed less.

16 CHAPTER 3 CROP MICRO TAKAFUL SCHEME 3.1 OVERVIEW Crop insurance is a specialised type of property insurance that serves as a financial instrument to mitigate the production risks associated with farming activities by transferring them to a third party in exchange for the payment of a premium. Crop insurance is also known as farm insurance or crop insurance. This type of insurance protects against losses not only to crops, but also to livestock, bloodstock, forestry, aquaculture, and greenhouses, as well as agricultural practices. When it comes to the provision of crop insurance, the public sector frequently plays a pivotal role, particularly for smallholder farmers who may be particularly susceptible to crop losses, due to unfavourable weather conditions or other hazards. This type of insurance is an essential tool for farmers to manage their risk exposures. With this tool, farmers are able to better plan for the future and invest in their livelihoods with a greater sense of confidence. Crop insurance can help in ensuring that farmers have access to the financial resources they need to continue running their businesses over the long term by acting as a safety net against the possibility of financial losses. This can have a positive impact not only on the farmers' own economic well-being but also on that of their communities. 3.2 ROLE AND SCOPE OF CROP INSURANCE Crop insurance is crucial for mitigating the risks associated with agricultural production. It protects farmers financially against crop failures caused by natural disasters, weather events, pests, or diseases. Crop insurance helps farmers manage risk and ensures their financial stability, which is essential for the agriculture industry's sustainability. Here are some roles and responsibilities of crop insurance: i. Provides farmers with financial protection against crop failures caused by natural disasters, weather events, pests, or diseases. It assists farmers in mitigating loss risk and ensuring their financial stability. ii. Enhances creditworthiness: Crop insurance improves farmers' creditworthiness by assuring lenders that their loans will be repaid, even in the event of crop failure. This allows farmers to access credit on more favourable terms and invest in their agricultural operations. iii. Provides a safety net against crop failure: Crop insurance encourages farmers to invest in their farming operations. Consequently, agricultural productivity and income can increase. CHAPTER 3

Crop Micro Takaful Scheme|17 16 CHAPTER 3 CROP MICRO TAKAFUL SCHEME 3.1 OVERVIEW Crop insurance is a specialised type of property insurance that serves as a financial instrument to mitigate the production risks associated with farming activities by transferring them to a third party in exchange for the payment of a premium. Crop insurance is also known as farm insurance or crop insurance. This type of insurance protects against losses not only to crops, but also to livestock, bloodstock, forestry, aquaculture, and greenhouses, as well as agricultural practices. When it comes to the provision of crop insurance, the public sector frequently plays a pivotal role, particularly for smallholder farmers who may be particularly susceptible to crop losses, due to unfavourable weather conditions or other hazards. This type of insurance is an essential tool for farmers to manage their risk exposures. With this tool, farmers are able to better plan for the future and invest in their livelihoods with a greater sense of confidence. Crop insurance can help in ensuring that farmers have access to the financial resources they need to continue running their businesses over the long term by acting as a safety net against the possibility of financial losses. This can have a positive impact not only on the farmers' own economic well-being but also on that of their communities. 3.2 ROLE AND SCOPE OF CROP INSURANCE Crop insurance is crucial for mitigating the risks associated with agricultural production. It protects farmers financially against crop failures caused by natural disasters, weather events, pests, or diseases. Crop insurance helps farmers manage risk and ensures their financial stability, which is essential for the agriculture industry's sustainability. Here are some roles and responsibilities of crop insurance: i. Provides farmers with financial protection against crop failures caused by natural disasters, weather events, pests, or diseases. It assists farmers in mitigating loss risk and ensuring their financial stability. ii. Enhances creditworthiness: Crop insurance improves farmers' creditworthiness by assuring lenders that their loans will be repaid, even in the event of crop failure. This allows farmers to access credit on more favourable terms and invest in their agricultural operations. iii. Provides a safety net against crop failure: Crop insurance encourages farmers to invest in their farming operations. Consequently, agricultural productivity and income can increase. CHAPTER 3 17 iv. Supports agricultural sustainability by ensuring that farmers are able to recover from losses caused by natural disasters or other events that might otherwise force them to abandon their farms or switch to non-agricultural activities. v. Facilitates risk management by providing farmers with the tools necessary to mitigate the risks associated with agricultural production. It allows farmers to better plan and manage their operations, which can result in increased productivity and profitability. vi. Provides farmers with the financial security to experiment with new crops, technologies, and techniques, crop insurance encourages innovation in agriculture. This can result in higher levels of productivity, profitability, and sustainability (IFAD and WFP, 2010). Crop insurance plays a vital role in mitigating the risks associated with agricultural production. It protects farmers financially, improves their creditworthiness, encourages investment in agriculture, promotes agricultural sustainability, facilitates risk management, and fosters creativity. These benefits are essential to the longevity of the agriculture industry and the farmers' way of life. 3.2.1 CROP INSURANCE/TAKAFUL IN SELECTED COUNTRIES Crop insurance schemes provide more than just protection from risk. It plays a vital role in keeping the agriculture industry functioning. Crop insurance in many countries is considered important and it is purchased by agricultural producers, including farmers, ranchers, and others to protect against either the loss of their crops due to natural disasters, or the loss of revenue due to declines in the prices of agricultural commodities. The authorities are using a combination of subsidies and education in order to increase the acceptance of relevant policies in crop insurance. Agricultural insurance products have historically been expensive, under-appreciated and lacking the numbers to make them a sensible proposition, for the government, the insurance companies, and the farmers. Table 3.1 below indicates the implementation of crop insurance in most parts of the developed and developing countries. Crop insurance practices in some countries are either federally subsidised or unsubsidised. Insurance subsidies are commonly used as means to increase food production or agricultural exports for national purposes, improve equity of coverage, and support farm incomes. Other than that, it is also to substitute for safety net and disaster assistance spending, insured disaster assistance for quick access to funds when disaster strikes and protect banks and agricultural credit programs from bad debt. Subsidised agricultural insurance is also adopted in developing ASEAN countries such as The Philippines, Vietnam and Thailand which has the potential to offer private and social benefits. There is a willingness on the part of the governments of Indonesia, the Philippines, and Vietnam to provide micro-level retail insurance to subsistence and poor farmers. Tier 1 coverage in Thailand is fully subsidised thanks to a combination of a 60% governmental subsidy and a 40% premium subsidy from the Bank for

18| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 18 Agriculture and Agricultural Cooperatives (BAAC) following its mandatory implementation in 2016. Figure 3.1 further elucidates countries that have implemented the insurance regulation and countries that are still under development in doing so. Table 3.1: Selected Availability of Crop Insurance in Developed and Developing Countries Subsidised Unsubsidised Developed Countries Austria Australia Canada Germany Cyprus Greece Czech Republic Hungary France India New Zealand Japan Sweden Portugal The Netherlands Slovenia South Korea Spain Switzerland The United States Developing Countries The Philippines Cambodia Thailand Vietnam Indonesia Myanmar Source: Mahul and Stutley (2010); Smith & Glauber (2012); Ranjan Kumar Ghosh, et all (2021) Agricultural insurance is widely practised all around the world in both developed and developing countries. As illustrated from Figure 3.1, some countries are even in the process of piloting the agricultural insurance.

Crop Micro Takaful Scheme|19 18 Agriculture and Agricultural Cooperatives (BAAC) following its mandatory implementation in 2016. Figure 3.1 further elucidates countries that have implemented the insurance regulation and countries that are still under development in doing so. Table 3.1: Selected Availability of Crop Insurance in Developed and Developing Countries Subsidised Unsubsidised Developed Countries Austria Australia Canada Germany Cyprus Greece Czech Republic Hungary France India New Zealand Japan Sweden Portugal The Netherlands Slovenia South Korea Spain Switzerland The United States Developing Countries The Philippines Cambodia Thailand Vietnam Indonesia Myanmar Source: Mahul and Stutley (2010); Smith & Glauber (2012); Ranjan Kumar Ghosh, et all (2021) Agricultural insurance is widely practised all around the world in both developed and developing countries. As illustrated from Figure 3.1, some countries are even in the process of piloting the agricultural insurance. 19 Figure 3.1: Countries with Inclusive Insurance Regulation in Place or Under Development 2018

20| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 20 Figure 3.2: Overview of Crop Insurance in ASEAN 21 From Figure 3.1, Over the past decade, agricultural insurance provision in the Asia-Pacific region has expanded significantly, with a focus on smallholder farmers and major staple food crops such as rice and maize. China and India have implemented market-based reforms to allow private commercial insurers to compete in their formerly state-monopolized agricultural insurance markets and to increase premium subsidy support. China was the sixth-largest agricultural insurer in the world in 2007, with premiums totalling USD682 million, while India was outside the top ten with crop insurance premiums totalling USD132 million (Mahul and Stutley, 2010). China was the second-largest agricultural insurance market in the world in 2019 with a premium volume of USD9.2 billion, trailing India by approximately USD4 billion in premium volume (Stutley,2022). During this period, many Asean countries have also witnessed a significant expansion in agricultural insurance provision. In 2007, the only national agricultural insurance programme to receive government premium subsidy support was the one offered by Philippines Crop Insurance Corporation (PCIC) in the Philippines. With 38,000 rice and maize farmers covered and total premium income of USD2.4 million, this programme had very low penetration. Other countries, such as Thailand, Vietnam, Indonesia, and Malaysia, had very limited private sector crop or livestock or forestry insurance that did not attract premium subsidies, while Cambodia, Myanmar, Lao PDR, Brunei, and Singapore had no agricultural insurance at all (Mahul and Stutley, 2010, FAO, 2011; World Bank, 2011). In 2020, the Philippines substantially expanded its subsidised public sector agricultural insurance through PCIC, the state-owned agricultural insurer. In 2011, Thailand introduced a PPP for rice and maize under the Thai National Crop Insurance Scheme (TNCIS), which was underwritten by a pool of co-insurers and attracted substantial premium subsidy support. In 2015, Indonesia also implemented subsidised crop, livestock, and aquaculture insurance. Vietnam is currently in the second phase of its PPP-subsidised crop, livestock, and aquaculture insurance pilot implementation. In Cambodia and Myanmar, private insurers are piloting crop insurance, while Lao People's Democratic Republic and Malaysia are poised to launch agricultural insurance pilot programmes. Given the size of the agricultural sectors in Brunei and Singapore, neither country has an agricultural insurance programme.

Crop Micro Takaful Scheme|21 20 Figure 3.2: Overview of Crop Insurance in ASEAN 21 From Figure 3.1, Over the past decade, agricultural insurance provision in the Asia-Pacific region has expanded significantly, with a focus on smallholder farmers and major staple food crops such as rice and maize. China and India have implemented market-based reforms to allow private commercial insurers to compete in their formerly state-monopolized agricultural insurance markets and to increase premium subsidy support. China was the sixth-largest agricultural insurer in the world in 2007, with premiums totalling USD682 million, while India was outside the top ten with crop insurance premiums totalling USD132 million (Mahul and Stutley, 2010). China was the second-largest agricultural insurance market in the world in 2019 with a premium volume of USD9.2 billion, trailing India by approximately USD4 billion in premium volume (Stutley,2022). During this period, many Asean countries have also witnessed a significant expansion in agricultural insurance provision. In 2007, the only national agricultural insurance programme to receive government premium subsidy support was the one offered by Philippines Crop Insurance Corporation (PCIC) in the Philippines. With 38,000 rice and maize farmers covered and total premium income of USD2.4 million, this programme had very low penetration. Other countries, such as Thailand, Vietnam, Indonesia, and Malaysia, had very limited private sector crop or livestock or forestry insurance that did not attract premium subsidies, while Cambodia, Myanmar, Lao PDR, Brunei, and Singapore had no agricultural insurance at all (Mahul and Stutley, 2010, FAO, 2011; World Bank, 2011). In 2020, the Philippines substantially expanded its subsidised public sector agricultural insurance through PCIC, the state-owned agricultural insurer. In 2011, Thailand introduced a PPP for rice and maize under the Thai National Crop Insurance Scheme (TNCIS), which was underwritten by a pool of co-insurers and attracted substantial premium subsidy support. In 2015, Indonesia also implemented subsidised crop, livestock, and aquaculture insurance. Vietnam is currently in the second phase of its PPP-subsidised crop, livestock, and aquaculture insurance pilot implementation. In Cambodia and Myanmar, private insurers are piloting crop insurance, while Lao People's Democratic Republic and Malaysia are poised to launch agricultural insurance pilot programmes. Given the size of the agricultural sectors in Brunei and Singapore, neither country has an agricultural insurance programme.

22| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 22 Table 3.2: Details of Crops Insurance Policy in ASEAN Country Insurance Products Availability Risk(s) Covered Target Beneficiaries Source of Premium Impementing Indemnit Agency y Based Index Based Target Crop(s) Brunei DS - - - - - - - Cambodia - √ Rice (rubber, cassava, maise) Excessive rain, drought, dry days smallholder farmers, individual farmers nonsubsidised private company Indonesia √ √ Rice, maise, oil palm Flood, drought, named pests and diseases, rainfall, windstorm Smallholder, farmers groups, individual farmers Subsidise and nonsubsidise programs Government and private companies Lao PDR - - - - - - - MALAYSIA - - - - - - - Myanmar - √ paddy rice weatherrelated disasters paddy rice farmers - Government in cooperation with international donors and private companies Phillipines √ - Rice, maise, highvalue crops Natural calamities, pest and disease, other perils insured Smallholder farmers, other stakeholders in agriculture, fisheries, and forestry sectors Subsidised and non subsidise Government institutions (PCIC and others) and private sector Thailand √ - Rice Flood, drought, frost, windstorm/ typhoon, fire, hail, pests and diseases, Rice and maze farmers Subsidise Government in cooperation with private companies

Crop Micro Takaful Scheme|23 22 Table 3.2: Details of Crops Insurance Policy in ASEAN Country Insurance Products Availability Risk(s) Covered Target Beneficiaries Source of Premium Impementing Indemnit Agency y Based Index Based Target Crop(s) Brunei DS - - - - - - - Cambodia - √ Rice (rubber, cassava, maise) Excessive rain, drought, dry days smallholder farmers, individual farmers nonsubsidised private company Indonesia √ √ Rice, maise, oil palm Flood, drought, named pests and diseases, rainfall, windstorm Smallholder, farmers groups, individual farmers Subsidise and nonsubsidise programs Government and private companies Lao PDR - - - - - - - MALAYSIA - - - - - - - Myanmar - √ paddy rice weatherrelated disasters paddy rice farmers - Government in cooperation with international donors and private companies Phillipines √ - Rice, maise, highvalue crops Natural calamities, pest and disease, other perils insured Smallholder farmers, other stakeholders in agriculture, fisheries, and forestry sectors Subsidised and non subsidise Government institutions (PCIC and others) and private sector Thailand √ - Rice Flood, drought, frost, windstorm/ typhoon, fire, hail, pests and diseases, Rice and maze farmers Subsidise Government in cooperation with private companies 23 elephant damage Singapore - - - - - - - Vietnam - - Rice - farmers - Government in cooperation with private companies When looking at the uptake and penetration of agricultural insurance, Thailand has achieved very high levels of crop insurance penetration, such that by the year 2020, three-quarters (76%) of the national rice area had been insured under the TNCIS since the programme was first introduced in 2011. One of the primary reasons for this is that in 2016, the government made it so that rice farmers who took out seasonal loans from the Bank for Agriculture and Agricultural Cooperatives (Thailand) were required to have Tier 1 crop insurance cover as a condition of receiving those loans. Public sector insurers in the Philippines and Indonesia are also achieving high levels of uptake on their subsidised rice insurance programmes, respectively. In spite of this, the small-scale unsubsidised pilots in Cambodia and Myanmar have not yet achieved significant voluntary uptake; the same is true for Vietnam in the second phase of the National Agricultural Insurance Pilot Program (Vietnam) programme (Table 3.2). In both the Philippines and Indonesia, commercial expansion of subsidised livestock insurance programmes is currently underway; however, current levels of penetration are significantly lower than those seen in the agricultural sector. Table 3.3 Agriculture (Crop) Insurance Uptake and Penetration Levels Country Latest Year No Insured Farmers Insured Crop Area (ha) Penetration Rate (% of Farmers or % of Crop Area Insured) Brunei - - - - Cambodia 2021 675 887 <0.1% Indonesia 2020 1,367,678 1,000,001 6.9% of rice farmers; +/- 8% rice area Lao PDR - - - - Malaysia - - - - Philippines 2019 1,747,404 2,378,925 <0.1% Singapore - - - - Thailand 2020 3,301,000 6,192,000 76% of National Rice Area Vietnam 1st Pilot (2011-2013) 236,397 65,297 1% of National Rice Area 2nd Pilot (2020/21) 7291 1465 <0.1%

24| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 24 3.2.2 CROP INSURANCE/TAKAFUL IN MALAYSIA Agricultural sector in Malaysia comprises plantation enterprises on a large-scale basis along with a large number of small-scale producers. Both the large-scale entrepreneurs and small-scale producers have admittance to the crop insurance programme, but it is found that only the big farmers are more interested in purchasing the insurance. The crop insurance programme covers mainly oil palm, cocoa, rubber, several species of timber trees and tropical fruits (durian, mango, and mangosteen). Generally, there are similar features of crop insurance in Malaysia. Nonetheless, agencies need to know the technical needs and nature of the crop itself so that the proposed agricultural insurance planning can meet the needs and requirements of farmers especially in developing countries. In Malaysia, agricultural insurance policies have been introduced several times, but never with much success. Private commercial insurance for cocoa, fruit, coconut oil palm, and rubber for plantation export crops have been limited since the 1980s. All these crops have been insured to plantation or forestry fire policy along with additional perils. Malaysia's known planting crop policy only focuses on a frequently known issue such as insurance for growing trees like palm oil and rubber. Two insurance companies offer a large scale of plantation crop insurance, which is Syarikat Takaful Malaysia and Lonpac Insurance Berhad, but private insurance coverage is limited. The costly expenses of implementing crop insurance are the main factor why the government faces a delay in introducing crop insurance to the Malaysian farmer's community (APAN, 2013). There is no government support for agricultural insurance in Malaysia at present. However, the government extended assistance in crop compensation programmes during public disasters. Affected crops are rubber, oil palm, cocoa and coffee, and covered hazards included fire, flood, windstorm, animal damage (elephant) and insect damage (bagworms). The compensation schemes were compulsory for the settlers and participants in the FELDA, FELCRA and RISDA programmes. The compensation funds were either financed directly by the government or, in the case of rubber, by a cess on grower's rubber exports and by the government. In line with the development and improvement of the program, the government has increased the allocation for the Agriculture and Agro-based Industry Ministry from RM4.4 billion in 2019 to RM4.9 billion in 2020, in an effort to enhance farmers' income. Hence, the government should not only consider crop insurance for big-holder farmers but should also focus on smallholder farmers. With the objective to protect smallholder farmers, agricultural insurance should not only be particularly attractive, it also must be a cost-effective scheme for smallholder farmers.

Crop Micro Takaful Scheme|25 24 3.2.2 CROP INSURANCE/TAKAFUL IN MALAYSIA Agricultural sector in Malaysia comprises plantation enterprises on a large-scale basis along with a large number of small-scale producers. Both the large-scale entrepreneurs and small-scale producers have admittance to the crop insurance programme, but it is found that only the big farmers are more interested in purchasing the insurance. The crop insurance programme covers mainly oil palm, cocoa, rubber, several species of timber trees and tropical fruits (durian, mango, and mangosteen). Generally, there are similar features of crop insurance in Malaysia. Nonetheless, agencies need to know the technical needs and nature of the crop itself so that the proposed agricultural insurance planning can meet the needs and requirements of farmers especially in developing countries. In Malaysia, agricultural insurance policies have been introduced several times, but never with much success. Private commercial insurance for cocoa, fruit, coconut oil palm, and rubber for plantation export crops have been limited since the 1980s. All these crops have been insured to plantation or forestry fire policy along with additional perils. Malaysia's known planting crop policy only focuses on a frequently known issue such as insurance for growing trees like palm oil and rubber. Two insurance companies offer a large scale of plantation crop insurance, which is Syarikat Takaful Malaysia and Lonpac Insurance Berhad, but private insurance coverage is limited. The costly expenses of implementing crop insurance are the main factor why the government faces a delay in introducing crop insurance to the Malaysian farmer's community (APAN, 2013). There is no government support for agricultural insurance in Malaysia at present. However, the government extended assistance in crop compensation programmes during public disasters. Affected crops are rubber, oil palm, cocoa and coffee, and covered hazards included fire, flood, windstorm, animal damage (elephant) and insect damage (bagworms). The compensation schemes were compulsory for the settlers and participants in the FELDA, FELCRA and RISDA programmes. The compensation funds were either financed directly by the government or, in the case of rubber, by a cess on grower's rubber exports and by the government. In line with the development and improvement of the program, the government has increased the allocation for the Agriculture and Agro-based Industry Ministry from RM4.4 billion in 2019 to RM4.9 billion in 2020, in an effort to enhance farmers' income. Hence, the government should not only consider crop insurance for big-holder farmers but should also focus on smallholder farmers. With the objective to protect smallholder farmers, agricultural insurance should not only be particularly attractive, it also must be a cost-effective scheme for smallholder farmers. 25 3.3 RISKS ASSOCIATED WITH FOOD CROP PRODUCTION Risk is an innate part of farming business and many uncertainties inherent in weather, yields, prices, Government policies, global markets, and other factors can cause wide swings in farm income. Malaysian smallholder farmers are frequently exposed to the uncertainties of weather, prices, and disease. Most of them live on the edge of extreme uncertainty for the threshold of survival because of no insurance protection. 3.3.1 TYPES OF RISKS Generally, there are four different types of risk specifically related to crop farming financial risk. Production risk derives from the uncertain natural growth processes of crops and livestock. Weather, disease, pests, and other factors affect both the quantity and quality of commodities produced. Price or market risk refers to uncertainty about the prices producers will receive for commodities or the prices they must pay for inputs. The nature of price risk varies significantly from commodity to commodity. Financial risk results when the farm business borrows money and creates an obligation to repay debt. Rising interest rates, the prospect of loans being called by lenders, and restricted credit availability are also aspects of financial risk. Institutional risk results from uncertainties surrounding Government actions. Tax laws, regulations for chemical use, rules for animal waste disposal, and the level of price or income support payments are examples of government decisions that can have a major impact on the farm business. 3.3.2 PERILS ASSOCIATED WITH CROP FARMING For this report, we discuss some related food crop key perils that are mostly affecting smallholder farming. 1. Natural disasters including typhoons, flood, drought, earthquake, volcanic eruption and tornado. 2. Plant diseases (e.g., tungro, rice blast/neck rot, grassy stunt, bacterial leaf blight and sheath blight). 3. Pest infestation by any of the following major pests: rats, locusts, armyworms/cutworms, stemborers, rice grain bugs, black bugs and brown planthoppers/hopperburns.

26| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 26 3.3.3 NATURAL DISASTER Figure 3.3: Spatial distribution of (a) Annual, (b) Southwest Monsoon and (c) Northeast Monsoon Rainfall in Peninsular Malaysia Flood In Malaysia, floods commonly happen in parts of the states. Based on the annual rainfall distribution in Figure 5.1, the trend indicates the states with high probability of flood damage. Report from the Federation of Agriculture Organisation (FAO) 2017 indicates the significant rise in the incidence of crop-damaging weather events due to climate change. In 2015, the worst flood that hit several states in Malaysia reported that RM194mil was lost due to damage to agriculture produce, RM99.5mil due to infrastructure damage and RM5.5mil due to damage to assets. It also included 15,403 farmers, livestock breeders and fishermen involving 16,342 hectares of agricultural land. Kelantan was the highest hit numbering 7,119, while Pahang had 4,972, Terengganu 1,694 and Perak 1,617. About 9% of the land area in Malaysia is vulnerable to flooding affecting 3.5 million people. Other incidents of flood damage events are reported in Table 3.4. Drought Climate changes may also contribute to droughts. The extreme temperature results in increased evaporation in plant soils, which affects plant life and reduces rainfall. Malaysia is expected to see its water resources reduced by 20-25% by 2025 to 2030. Farmers in the northern region of Peninsular Malaysia worry more about dry spells or droughts that affect their rice yield than the

Crop Micro Takaful Scheme|27 26 3.3.3 NATURAL DISASTER Figure 3.3: Spatial distribution of (a) Annual, (b) Southwest Monsoon and (c) Northeast Monsoon Rainfall in Peninsular Malaysia Flood In Malaysia, floods commonly happen in parts of the states. Based on the annual rainfall distribution in Figure 5.1, the trend indicates the states with high probability of flood damage. Report from the Federation of Agriculture Organisation (FAO) 2017 indicates the significant rise in the incidence of crop-damaging weather events due to climate change. In 2015, the worst flood that hit several states in Malaysia reported that RM194mil was lost due to damage to agriculture produce, RM99.5mil due to infrastructure damage and RM5.5mil due to damage to assets. It also included 15,403 farmers, livestock breeders and fishermen involving 16,342 hectares of agricultural land. Kelantan was the highest hit numbering 7,119, while Pahang had 4,972, Terengganu 1,694 and Perak 1,617. About 9% of the land area in Malaysia is vulnerable to flooding affecting 3.5 million people. Other incidents of flood damage events are reported in Table 3.4. Drought Climate changes may also contribute to droughts. The extreme temperature results in increased evaporation in plant soils, which affects plant life and reduces rainfall. Malaysia is expected to see its water resources reduced by 20-25% by 2025 to 2030. Farmers in the northern region of Peninsular Malaysia worry more about dry spells or droughts that affect their rice yield than the 27 COVID-19 pandemic. Several districts were forced to suffer water rationing and rice crops were totally wiped out. Table 3.4: Events of Flood Incidents in Malaysia Sources: News: Berita Harian 4 December 2017 Farmers Losses, Paddy Crops Damaged by Floods Permaisuri: Rice crops are damaged due to flooding. Losses incurred amounted to RM 52,000, involving a total of 26 farmers. The loss suffered by the estate was 32.4 hectares out of a total of 121.4 hectares. Utusan 27 April 2016 Farmers Lost Millions of Dollars due to El-Nino Bagan Serai: Farmers in the Kerian district suffered losses estimated at RM20 million when paddy could not be planted as the flow schedule was delayed due to the El-Nino phenomenon. Farmers who face the disaster are almost 2000 people. Sinar 29 November 2017 30 Farmers Lost RM1.5 million due to Flood Kampung Becah, Terap, Baroh Raja, Baroh Pauh, and Lake are the areas involved, and it is said that the floods are the worst, and rice crops are being destroyed at once. The rain that lasted more than five days caused river water to flow into the rice fields. They also explain that they only earn income from farming sources and hope that the government will provide funds to help them. 3.3.4 PESTS In agriculture, pests are organisms that damage crops by their feeding or burrowing activities and diseases involve microorganisms like fungi, bacteria, and viruses. It damages the crops by disrupting the plant's physiology, metabolism or direct cellular and tissue damage and the crop ability to optimise production. Plant pests and diseases can damage our natural environment, destroying our food production and agriculture industries. Table 3.5 enlists some events of pest attack on corps in Malaysia.

28| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 28 Table 3.5: Events of Pest Attack in Malaysia Sources: News: Harian Metro 21 Mac 2017 Silent Killer This silent assassin refers to a gold gourd snail pest. Its capacity of only eight tailors is capable of destroying one square meter of paddy fields within 24 hours. The attack becomes very severe if the level of water falls below a centimetre, which can cause farmers to lose 93 percent of rice yields. BERNAMA 31 January 2016 RM4 million to remove red palm beetle RM4 million is allocated to curb, control, and eliminate red palm beetles. The beetles were identified to enter the country through the border doors in Penang, Perlis, Kedah, Terengganu, and Kelantan and have damaged 465 coconut trees and 335 palm trees nationwide. The beetles are also believed to have been digging into palm trees and destroying the tissue in the tree, causing the fragment of the tree in a short time.

Crop Micro Takaful Scheme|29 28 Table 3.5: Events of Pest Attack in Malaysia Sources: News: Harian Metro 21 Mac 2017 Silent Killer This silent assassin refers to a gold gourd snail pest. Its capacity of only eight tailors is capable of destroying one square meter of paddy fields within 24 hours. The attack becomes very severe if the level of water falls below a centimetre, which can cause farmers to lose 93 percent of rice yields. BERNAMA 31 January 2016 RM4 million to remove red palm beetle RM4 million is allocated to curb, control, and eliminate red palm beetles. The beetles were identified to enter the country through the border doors in Penang, Perlis, Kedah, Terengganu, and Kelantan and have damaged 465 coconut trees and 335 palm trees nationwide. The beetles are also believed to have been digging into palm trees and destroying the tissue in the tree, causing the fragment of the tree in a short time. 29 3.3.5 CROPS DISEASES Crop diseases are common and persistent problems that hinder food production. Local farmers must deal with blast disease (rice), moko disease (banana), and fusarium disease (tomato), among others. At one time, dragon fruit was all the rage among farmers as Malaysia's tropical climate, rainfall, the intensity of sunlight and soil types proved to be very suitable for this exotic fruit. A few years later, the buzz died down after the plants were wiped out by certain fungal diseases. In fact, farmers stopped growing them entirely. Other types of crop diseases include tungro, rice blast/neck rot, grassy stunt, bacterial leaf blight and sheath blight. 3.4 A FRAMEWORK FOR CROP MICRO TAKAFUL SCHEME In order to achieve the Crop Micro Takaful Scheme framework, some vital information must be drawn from selected stakeholders. Thus, focus group discussion (FGD) was held among related agencies such as the Ministry of Agriculture and Food Industry (MAFI), Malaysian Takaful Association (MTA), Bank Negara Malaysia (BNM), and Majlis Keselamatan Negara (MKN). The discussion is important to derive some important information about designing a framework: product, sum insured, contribution, and parametric. The discussion was designed to gather information from the industry experts regarding the following proposed framework outcomes. Their perceptions and opinion play an essential role in conducting the smallholders' farmers takaful framework. Based on the discussion among the selected stakeholders, the proposed CMTS is outlined. The finding of the focus group included data sources to enable efficient and successful data gathering. All the data sources are postulated in Table 3.6.

30| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 30 Table 3.6 Proposed Crop Micro Takaful Scheme (CMTS) Themes Items 1. Name of the scheme Paddy Micro Takaful 2. Crop Insured Paddy 3. Peril Covered Natural disaster Pests Diseases 4. Sum insured Total cost of input material per hectares 5. Contribution Fee TBA 6. Period of cover The insurance coverage shall be from direct seeding or transplanting up to harvesting, provided the insurance coverage shall commence from the date of issuance of the Certificate of Insurance Cover (CIC) or the emergence of seed growth (coleoptiles), if direct-seeded or upon transplanting, whichever is later. 7. Insured Smallholder farmer (Income –less than RM4,000 per month 8. Technique Parametric cover For a practical and sound crop takaful protection scheme, we are proposing the following Crop Micro Takaful Scheme (CMTS) Framework (see Table 3.7):

Crop Micro Takaful Scheme|31 30 Table 3.6 Proposed Crop Micro Takaful Scheme (CMTS) Themes Items 1. Name of the scheme Paddy Micro Takaful 2. Crop Insured Paddy 3. Peril Covered Natural disaster Pests Diseases 4. Sum insured Total cost of input material per hectares 5. Contribution Fee TBA 6. Period of cover The insurance coverage shall be from direct seeding or transplanting up to harvesting, provided the insurance coverage shall commence from the date of issuance of the Certificate of Insurance Cover (CIC) or the emergence of seed growth (coleoptiles), if direct-seeded or upon transplanting, whichever is later. 7. Insured Smallholder farmer (Income –less than RM4,000 per month 8. Technique Parametric cover For a practical and sound crop takaful protection scheme, we are proposing the following Crop Micro Takaful Scheme (CMTS) Framework (see Table 3.7): 31 Table 3.7: Crop Micro Takaful Scheme (CMTS) Framework POLICY MAKER 1. Government (MOA) 1. Subsidy contribution 2. Appointing a Takaful Operator 2. Bank Negara Malaysia (BNM) 1. Facilitator of discussions between the government and Takaful operators 2. Provide technical advice in developing microtakaful products TAKAFUL OPERATOR 1. Takaful & Retakaful 2. Banker 3. Data Management Agencies 1. The agencies responsible for covering risks (Takaful Ikhlas General Bhd. & Swiss Re) 2. To provide financial capacity to the micro crop community (Agro Bank) 3. The agency responsible to administer data related to Crop Micro Takaful (DOA - Mardi/Pertubuhan Peladang/Bernas) EXECUTING AGENCY MicroTakaful Network 1. Distribution: Micro Takaful Network helps provide access and distribution of Micro Takaful products to the lower income group. 2. Education: Micro Takaful Network helps provide education and promote awareness of Micro Takaful and its benefits for the low-income group. 3. Technical Support: Micro Takaful Network helps provide technical support and solutions to ensure efficient and effective Micro Takaful services for the low-income group. 4. Financial Inclusion: Micro Takaful Network helps promote financial inclusion and helps the

32| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 32 underprivileged gain access to traditional financial services END USERS Smallholder Farmers Paddy 3.5 DEFINITIONS OF KEY TERM 3.5.1 SMALLHOLDER FARMERS Definition of smallholder farmers varies greatly across countries and regions since their categorisation can depend on a variety of factors such as living standards, land ownership, agricultural activity and production scale, access to assets and resources, and share of family labour. Generally, for this project, smallholder farmers are those with an individual annual income of less than RM50,000 (MOA, 2016) focusing on those who cultivate food crops. They may be the sole owner of the farm or rent or lease the farm for farming activities. The smallholder farmers' activities by and large are to support their lives as well as other family members from the agricultural production. Commonly, farming activities performed are often assisted by nearby family members. Their yields are mainly for marketing purposes, and some for their own use. Their income which is largely categorised as poor or medium and make them eligible to receive support and assistance from the government. Their plantations are vulnerable to risks such as natural disaster, crops diseases, pests, and theft. On top of that, they do not have any insurance or takaful protection over their farming plantations. Hence, appropriate risk mitigation such as a crop takaful scheme is to be proposed to protect the asset and plantation as a whole over any calamities. Farming remains a major economic activity practised worldwide, providing sustainable economic growth and food security. This scheme protection will ensure the sustainability of the smallholder farming activities. The need for a comprehensive Crop Micro Takaful Scheme is crucial, considering the impact of the natural perils that can cause substantial economic loss to the country. Thus, this protection is significant for smallholder farmers to enable a transition to a more sustainable society with resilient and equitable food systems grounded by sustainable agriculture.

Crop Micro Takaful Scheme|33 32 underprivileged gain access to traditional financial services END USERS Smallholder Farmers Paddy 3.5 DEFINITIONS OF KEY TERM 3.5.1 SMALLHOLDER FARMERS Definition of smallholder farmers varies greatly across countries and regions since their categorisation can depend on a variety of factors such as living standards, land ownership, agricultural activity and production scale, access to assets and resources, and share of family labour. Generally, for this project, smallholder farmers are those with an individual annual income of less than RM50,000 (MOA, 2016) focusing on those who cultivate food crops. They may be the sole owner of the farm or rent or lease the farm for farming activities. The smallholder farmers' activities by and large are to support their lives as well as other family members from the agricultural production. Commonly, farming activities performed are often assisted by nearby family members. Their yields are mainly for marketing purposes, and some for their own use. Their income which is largely categorised as poor or medium and make them eligible to receive support and assistance from the government. Their plantations are vulnerable to risks such as natural disaster, crops diseases, pests, and theft. On top of that, they do not have any insurance or takaful protection over their farming plantations. Hence, appropriate risk mitigation such as a crop takaful scheme is to be proposed to protect the asset and plantation as a whole over any calamities. Farming remains a major economic activity practised worldwide, providing sustainable economic growth and food security. This scheme protection will ensure the sustainability of the smallholder farming activities. The need for a comprehensive Crop Micro Takaful Scheme is crucial, considering the impact of the natural perils that can cause substantial economic loss to the country. Thus, this protection is significant for smallholder farmers to enable a transition to a more sustainable society with resilient and equitable food systems grounded by sustainable agriculture. 33 3.5.2 CASH CROPS AND FOOD CROPS Historically, cash crops are regarded as agricultural crops which are grown with the purpose of generating profit. They are associated with plantation crops such as coffee, tea, cocoa, wheat, cotton, tobacco, oilseeds, sugar cane, oil palm, rubber, and fruit which are commonly grown for export purposes or for raw materials in manufacturing industries. Many of these traditional cash crops are perennial crops with a maturation period of several years and an economic cycle of 10- 15 years. In Malaysia, palm oil, rubber, cocoa, or tea are types of cash crops exclusively grown for sale. These are usually grown in large scale farming for domestic and export markets. On the other hand, food crops are cultivated on a small scale with a major purpose to feed the farmers and their families and such types of food crops are tubers, legumes, vegetables, and fruits. Any available surplus of the food crops will be marketed by these farmers for income generation. In this type of farming, planning decisions are mainly made based on the family's needs. In present days, the advancement of modern agro technology has allowed food crops to also be commercially grown for revenue, particularly in developed countries. It is important to make a clear distinction between food crops with cash crops as it could suggest that most food crops were not to be regarded for market trading. In this report, we focus exclusively on the food crops which are also cash crops conducted on a small scale by the smallholder farmers. Small scale in this context means farmers with annual income of less than RM50,000. The types of food crops considered are paddy, fruits and vegetables which include chillies, okra, water spinach, lemon grass, ginger, turmeric, cucumber etc.; grown commercially by smallholder farmers. Thus, any food crops cultivated in a larger farming area will not be in the scope of definition and unseemly as the focal point of this project. 3.5.3 RISK Risk is the probability of harmful consequences, or expected losses (deaths, injuries, property, livelihood, economic activity disrupted or environment damaged) resulting from interactions between natural or human-induced hazards and vulnerabilities. Risk management involves choosing among alternatives that reduce financial effects that can result from such uncertainties. 3.5.4 FOOD SECURITY 34 Food security exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life. (Source: World Food Summit, 2001, FAO) 3.5.5 STAKEHOLDERS A stakeholder is an individual, group, or organisation who may affect, be affected by, or perceive itself to be affected by a project's decision, activity, or outcome. Stakeholders are either directly involved in a project or have interests affected by the project's development. They play a vital role in ensuring the smooth running of a project. As for CMTS, the potential stakeholders to be involved are: i. Ministry of Agriculture and Food Industry (MAFI) ii. Department of Agriculture (DOA) iii. Ministry of Finance (MOF) iv. Bank Negara Malaysia (BNM) v. Takaful Operators (Takaful Ikhlas General Berhad) vi. Retakaful (Swiss Re) vii. Malaysian Takaful Association (MTA) 3.6 PARAMETRIC BASED CROP INSURANCE (PBCI) 3.6.1 WHAT IS PARAMETRIC INSURANCE? The parametric insurance compensates for damages based on a predetermined asset and investment loss index due to weather or other catastrophic events. With the actual damage coverage, traditional insurance relies on estimates of the damages. The implementation of parametric insurance should shift natural catastrophe risk to the commercial sector using an index-based alarm system. While the central government may pursue this approach, provincial and/territorial governments are also suitable. The amount of damage varies depending on the country or geographical location. Each time there is a cataclysmic event, most of the damage is uninsured. With index-based insurance, the payout is usually set at the level of the event itself. Let's say, for example, the pay could be dependent on wind speed or water level in a location. As for the pay-out, the indicator is called the trigger. Although damages are not included in the pay-out, this strategy is useful for more types of disasters, like business disruption. 33 3.5.2 CASH CROPS AND FOOD CROPS Historically, cash crops are regarded as agricultural crops which are grown with the purpose of generating profit. They are associated with plantation crops such as coffee, tea, cocoa, wheat, cotton, tobacco, oilseeds, sugar cane, oil palm, rubber, and fruit which are commonly grown for export purposes or for raw materials in manufacturing industries. Many of these traditional cash crops are perennial crops with a maturation period of several years and an economic cycle of 10- 15 years. In Malaysia, palm oil, rubber, cocoa, or tea are types of cash crops exclusively grown for sale. These are usually grown in large scale farming for domestic and export markets. On the other hand, food crops are cultivated on a small scale with a major purpose to feed the farmers and their families and such types of food crops are tubers, legumes, vegetables, and fruits. Any available surplus of the food crops will be marketed by these farmers for income generation. In this type of farming, planning decisions are mainly made based on the family's needs. In present days, the advancement of modern agro technology has allowed food crops to also be commercially grown for revenue, particularly in developed countries. It is important to make a clear distinction between food crops with cash crops as it could suggest that most food crops were not to be regarded for market trading. In this report, we focus exclusively on the food crops which are also cash crops conducted on a small scale by the smallholder farmers. Small scale in this context means farmers with annual income of less than RM50,000. The types of food crops considered are paddy, fruits and vegetables which include chillies, okra, water spinach, lemon grass, ginger, turmeric, cucumber etc.; grown commercially by smallholder farmers. Thus, any food crops cultivated in a larger farming area will not be in the scope of definition and unseemly as the focal point of this project. 3.5.3 RISK Risk is the probability of harmful consequences, or expected losses (deaths, injuries, property, livelihood, economic activity disrupted or environment damaged) resulting from interactions between natural or human-induced hazards and vulnerabilities. Risk management involves choosing among alternatives that reduce financial effects that can result from such uncertainties. 3.5.4 FOOD SECURITY 33 3.5.2 CASH CROPS AND FOOD CROPS Historically, cash crops are regarded as agricultural crops which are grown with the purpose of generating profit. They are associated with plantation crops such as coffee, tea, cocoa, wheat, cotton, tobacco, oilseeds, sugar cane, oil palm, rubber, and fruit which are commonly grown for export purposes or for raw materials in manufacturing industries. Many of these traditional cash crops are perennial crops with a maturation period of several years and an economic cycle of 10- 15 years. In Malaysia, palm oil, rubber, cocoa, or tea are types of cash crops exclusively grown for sale. These are usually grown in large scale farming for domestic and export markets. On the other hand, food crops are cultivated on a small scale with a major purpose to feed the farmers and their families and such types of food crops are tubers, legumes, vegetables, and fruits. Any available surplus of the food crops will be marketed by these farmers for income generation. In this type of farming, planning decisions are mainly made based on the family's needs. In present days, the advancement of modern agro technology has allowed food crops to also be commercially grown for revenue, particularly in developed countries. It is important to make a clear distinction between food crops with cash crops as it could suggest that most food crops were not to be regarded for market trading. In this report, we focus exclusively on the food crops which are also cash crops conducted on a small scale by the smallholder farmers. Small scale in this context means farmers with annual income of less than RM50,000. The types of food crops considered are paddy, fruits and vegetables which include chillies, okra, water spinach, lemon grass, ginger, turmeric, cucumber etc.; grown commercially by smallholder farmers. Thus, any food crops cultivated in a larger farming area will not be in the scope of definition and unseemly as the focal point of this project. 3.5.3 RISK Risk is the probability of harmful consequences, or expected losses (deaths, injuries, property, livelihood, economic activity disrupted or environment damaged) resulting from interactions between natural or human-induced hazards and vulnerabilities. Risk management involves choosing among alternatives that reduce financial effects that can result from such uncertainties. 3.5.4 FOOD SECURITY

34| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 34 Food security exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life. (Source: World Food Summit, 2001, FAO) 3.5.5 STAKEHOLDERS A stakeholder is an individual, group, or organisation who may affect, be affected by, or perceive itself to be affected by a project's decision, activity, or outcome. Stakeholders are either directly involved in a project or have interests affected by the project's development. They play a vital role in ensuring the smooth running of a project. As for CMTS, the potential stakeholders to be involved are: i. Ministry of Agriculture and Food Industry (MAFI) ii. Department of Agriculture (DOA) iii. Ministry of Finance (MOF) iv. Bank Negara Malaysia (BNM) v. Takaful Operators (Takaful Ikhlas General Berhad) vi. Retakaful (Swiss Re) vii. Malaysian Takaful Association (MTA) 3.6 PARAMETRIC BASED CROP INSURANCE (PBCI) 3.6.1 WHAT IS PARAMETRIC INSURANCE? The parametric insurance compensates for damages based on a predetermined asset and investment loss index due to weather or other catastrophic events. With the actual damage coverage, traditional insurance relies on estimates of the damages. The implementation of parametric insurance should shift natural catastrophe risk to the commercial sector using an index-based alarm system. While the central government may pursue this approach, provincial and/territorial governments are also suitable. The amount of damage varies depending on the country or geographical location. Each time there is a cataclysmic event, most of the damage is uninsured. With index-based insurance, the payout is usually set at the level of the event itself. Let's say, for example, the pay could be dependent on wind speed or water level in a location. As for the pay-out, the indicator is called the trigger. Although damages are not included in the pay-out, this strategy is useful for more types of disasters, like business disruption.

Crop Micro Takaful Scheme|35 34 Food security exists when all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food which meets their dietary needs and food preferences for an active and healthy life. (Source: World Food Summit, 2001, FAO) 3.5.5 STAKEHOLDERS A stakeholder is an individual, group, or organisation who may affect, be affected by, or perceive itself to be affected by a project's decision, activity, or outcome. Stakeholders are either directly involved in a project or have interests affected by the project's development. They play a vital role in ensuring the smooth running of a project. As for CMTS, the potential stakeholders to be involved are: i. Ministry of Agriculture and Food Industry (MAFI) ii. Department of Agriculture (DOA) iii. Ministry of Finance (MOF) iv. Bank Negara Malaysia (BNM) v. Takaful Operators (Takaful Ikhlas General Berhad) vi. Retakaful (Swiss Re) vii. Malaysian Takaful Association (MTA) 3.6 PARAMETRIC BASED CROP INSURANCE (PBCI) 3.6.1 WHAT IS PARAMETRIC INSURANCE? The parametric insurance compensates for damages based on a predetermined asset and investment loss index due to weather or other catastrophic events. With the actual damage coverage, traditional insurance relies on estimates of the damages. The implementation of parametric insurance should shift natural catastrophe risk to the commercial sector using an index-based alarm system. While the central government may pursue this approach, provincial and/territorial governments are also suitable. The amount of damage varies depending on the country or geographical location. Each time there is a cataclysmic event, most of the damage is uninsured. With index-based insurance, the payout is usually set at the level of the event itself. Let's say, for example, the pay could be dependent on wind speed or water level in a location. As for the pay-out, the indicator is called the trigger. Although damages are not included in the pay-out, this strategy is useful for more types of disasters, like business disruption. 35 Most of these parametric policies were intended for businesses in hazardous locations, like hotels and factories, where losses would occur, and the likelihood of impact was highly prevalent. They are also useful to cover general losses, such as business failure, if there is a disaster and quick return to the pre-to-operational level. These policies can be generic in a peril context because they could potentially deal with many potential losses. For example, a hotel could purchase a product in which purchase would occur if a minimum number of reservations booked or a minimum amount of revenue earned. Provisions for more specifically make claims under parametric policies, such as flight and vacation coverage, where the insurance covers a specific incident of Cancellation of Flight and Total Loss Expense losses in the event of equal to a set amount. 3.6.2 THE KEY DIFFERENCES BETWEEN TRADITIONAL INDEMNITY AND PARAMETRIC INSURANCE. Table 3.8 tabulates the differences between traditional indemnity and parametric insurance. The outline relates to the payment trigger, recovery, basis risk, claims process, term, and structure. Table 3.8 Traditional Indemnity VS Parametric Insurance Items Traditional insurance Parametric solutions Payment trigger Payment triggered by actual loss of or damage to a physical asset. For example, a flood may cause physical damage to the insured property and business interruption losses. Payment triggered by event occurrence exceeding the parametric threshold. For example, a parametric insurance policy for hurricanes might provide a set dollar amount whenever wind speeds exceed a certain level in a particular location. Recovery Compensation on the actual loss sustained. For example, the assessment and claims investigation of actual loss sustained due to a fire. Pre-agreed payment structure based on event parameter or index value. For example, the increasing pay-out amounts with increasing earthquake magnitude. Basis risk Policy conditions, deductibles, and exclusions. Correlation of the chosen index, the pay-out, and the loss sustained.

36| Waqf Crop Micro Takaful Framework Through Crowdfunding-Waqf In Malaysia 36 In conventional policies, deductibles and exclusions often accompany substantial coverage, allowing the insured and insurer to be aligned. Thus, this may leave the insured party with significant risk. For example, getting a partial pay-out for lower category storms and gradually rising the pay-out for stronger storms in a tropical cyclone. Claims process – loss assessment and payment Pay-outs for insurance can only occur when loss adjustment processes have concluded. The processes can take months to several years, depending on the complexity of the loss. Transparent, predictable, based on a parameter or index, as agreed earlier, quick settlement. There is no need for loss adjustment, and the payment was made as soon as four weeks after the incident. For instance, the pay-out determined by the wind speed in a given area or the river's height above flood level. Term Usually annual Multi-year deals, while possible, are more challenging to structure and tend to be less common. Single or multi-year Multi-year deals are common and possible for up to five years. Structure Standard products and contract wordings; some customisation. A typical indemnity solution's customizability usually is restricted since the insurer is still dealing with conventional industry wording. Customised product with high structuring flexibility. Parametric wording templates can be shared to provide a basic sample. There is no such thing as "normal" wording since each system will have its index and pay-out structure. This is unique to each client's needs and applications, and it may be a single trigger, a multi-trigger, or something else entirely. 3.6.3 HOW DOES PARAMETRIC INSURANCE WORK? Parametric insurance based on the use of a parameter (typically rainfall, temperature, or agricultural yield per hectare) correlated to the loss (e.g., decrease in revenues or profitability). The payment amount is fixed in advance in the insurance contract. Parametric insurance, with its tailor-made approach, provides covers for individuals, large companies, and international institutions. As it is based on an independent variable, there is no need for loss adjusters. This leads to very low claims handling costs. Figure 3.4 shows how parametric insurance for agriculture works as follows: 1. Parametric insurance employs global historical data on agriculture, weather, and vegetation (e.g., through weather stations, national statistical bodies, or advanced satellite technology)

Crop Micro Takaful Scheme|37 36 In conventional policies, deductibles and exclusions often accompany substantial coverage, allowing the insured and insurer to be aligned. Thus, this may leave the insured party with significant risk. For example, getting a partial pay-out for lower category storms and gradually rising the pay-out for stronger storms in a tropical cyclone. Claims process – loss assessment and payment Pay-outs for insurance can only occur when loss adjustment processes have concluded. The processes can take months to several years, depending on the complexity of the loss. Transparent, predictable, based on a parameter or index, as agreed earlier, quick settlement. There is no need for loss adjustment, and the payment was made as soon as four weeks after the incident. For instance, the pay-out determined by the wind speed in a given area or the river's height above flood level. Term Usually annual Multi-year deals, while possible, are more challenging to structure and tend to be less common. Single or multi-year Multi-year deals are common and possible for up to five years. Structure Standard products and contract wordings; some customisation. A typical indemnity solution's customizability usually is restricted since the insurer is still dealing with conventional industry wording. Customised product with high structuring flexibility. Parametric wording templates can be shared to provide a basic sample. There is no such thing as "normal" wording since each system will have its index and pay-out structure. This is unique to each client's needs and applications, and it may be a single trigger, a multi-trigger, or something else entirely. 3.6.3 HOW DOES PARAMETRIC INSURANCE WORK? Parametric insurance based on the use of a parameter (typically rainfall, temperature, or agricultural yield per hectare) correlated to the loss (e.g., decrease in revenues or profitability). The payment amount is fixed in advance in the insurance contract. Parametric insurance, with its tailor-made approach, provides covers for individuals, large companies, and international institutions. As it is based on an independent variable, there is no need for loss adjusters. This leads to very low claims handling costs. Figure 3.4 shows how parametric insurance for agriculture works as follows: 1. Parametric insurance employs global historical data on agriculture, weather, and vegetation (e.g., through weather stations, national statistical bodies, or advanced satellite technology) 37 2. That data is correlated to the crop's historical/yield development. To increase accuracy, the models consider various long-term and future trends, such as El Niño effects, global warming trends, etc. 3. To cause the claims pay-out, the buyer, broker, and insurer settle on a weather level that indicates irregular crop health. The client collects a payment within a few days after the level is met (e.g., plant growth X points below average, rainfall below X mm for a given period). Figure 3.4 Infographic of Parametric Based Crop Insurance

38 CHAPTER 4 CROWDFUNDING 4.1 OVERVIEW Modern crowdfunding is practiced in a form of fundraising that links between two groups of people: those who have additional funds and those who need funds. In terms of operation, the fund is commonly channelled through crowdfunding platforms and is explicitly managed as most platforms provide a real-time update system. In addition, many platforms allow funders to receive regular updates on their contributions through emails and dashboards. This would be different from the traditional funding system, in which contributors sometimes have no idea whether their money is being used appropriately or not (Khairuddin & Ishak, 2021). 4.2 CURRENT TREND AND PRACTICES Currently, crowdfunding has attracted many talents to obtain their funds via online platforms (Wahjono et al., 2017). Therefore, crowdfunding is widely recognized as an alternative funding to intermediary institutions in which business entities could obtain their capital from the public, through the internet platform (Schwienbacher & Larralde, 2010). At the same time, crowdfunding is a popular mean to gather money for the purpose of charitable activities, community-based projects, and humanitarian campaigns. Through this unique practice, entrepreneurs or activists can obtain funds through crowdfunding platforms (Mollick, 2014). In general, four crowdfunding models are widely practised including donation, reward, lending, and equity. The first two models are known as community-based crowdfunding while the rest is popularly known as financial return-based crowdfunding (Ishak & Kamaruddin, 2021). In fact, all crowdfunding models are seen to have the potential to support businesses or society-based projects as far as the element of trust has been established between two groups: funders and project initiators (Wan Mohamad Nazarie & Williams, 2021). This has been proven by many studies that trust in crowdfunding is the main factor of successful projects (Moysidou & Hausberg, 2020). Without trust, there would be fewer funders, resulting in crowdfunding being ineffective as a financing platform (Wan Mohamad Nazarie & Williams, 2021). CHAPTER 4