Risk coping mechanisms

The aim of this section is to present and discuss the risk coping strategies used by each respondent to mitigate and deal with risk. All respondents were asked to respond based on the risk strategies listed in the survey questionnaire, based on the frequencies of coping strategies used in Malaysia. This section compares the risk management techniques in place. The characterization of risk-coping mechanisms offers some important insights into microtakaful scheme development that is compatible with the needs of the community.

The section is divided into three major parts. The first part discusses the major coping strategies used by individuals. The next part provides a descriptive analysis of risk-coping strategies between takaful and non-takaful clients, followed by the strategies used by microtakaful and non-microtakaful clients. The last part is descriptive analysis of risk- coping mechanism variables in takaful and microtakaful demand.

4.4.3.1Major risk coping mechanisms among respondents

This study set out with the aim of assessing respondents’ risk-coping strategies for possible shock and risks. There are four major types of coping mechanisms: personal

coping strategies (PCS), informal social networks (ISC), credit-coping strategies (CCS), and member-based networking (MBN).

Personal coping strategies emerge as the major coping strategies among respondents. There are four types of PCS: no coping action, using own funds, getting an additional job and selling household assets. This coping strategy requires awareness of risk and shock happening. Any loss that occurs will be absorbed by the individuals using their own assets, savings or future income. Saving is an effective coping approach for the majority of economic shocks (Manje and Churchill, 2002). No coping action is where they neglect illness or do not replace stolen assets, etc.

Second, risk coping mechanisms are broadened to include informal social networks as follows: i) getting free help from either a working collective, community, relatives or friends abroad, ii) donation by getting free help from the government, local associations, private persons or organizations, iii) getting assistance from an employer via packages and formal help. Credit-coping strategies are explained by borrowing activities, as a strategy to cope with shocks faced by the household. This type of risk mitigation includes borrowing with or without interest from relatives and friends, borrowing from credit unions, and borrowing from banks.

The fourth element of coping mechanisms is the member-based networks used by respondents, including takaful, the Rotating Saving and Credit Association (ROSCA), and Islamic pawn-broking. Takaful is one of their options as a financial tool providing extra protection for themselves and their family. ROSCA is a common and traditional way for individuals to use, especially in rural areas, as this is an easy way for them to have savings and credit facilities.

This is group-based with some contributions from each member to each member at a regular time as per an agreement. No interest is charged and this is based on a qard al hassan transaction. Rahnu, or Islamic pawn-broking, is an alternative involving pledging some assets or gold to a certified pawn-broking or banking institution. This will help the individual who needs funds immediately. Usually this is applicable to small and medium- size entrepreneurs who face financial difficulties in running their business. Table 4.6 presents the definitions of variables for this part.

Table 4.6: Definitions of variables for risk-coping mechanisms

Definition of variables Variable

No coping action Dummy variable, 1 if it frequently happens that respondent has no coping actions, and 0 otherwise.

Using own funds Dummy variable, 1 if respondent frequently uses their own funds, 0 otherwise.

Getting an additional job

Dummy variable, 1 if respondent frequently gets an additional job, 0 otherwise.

Getting free of charge help

Dummy variable, 1 if respondent frequently gets free of charge help from a relative, friend or community, 0 otherwise.

Donation Dummy variable, 1 if respondent frequently uses donations, 0 otherwise. Getting assistance from

an employer

Dummy variable, 1 if respondent frequently gets assistance from an employer, 0 otherwise.

Borrowing from relatives/friends

Dummy variable, 1 if respondent frequently borrows from relatives/friends, 0 otherwise.

Borrowing from credit unions

Dummy variable, 1 if respondent frequently borrows from credit unions, 0 otherwise.

Borrowing from banks Dummy variable, 1 if respondent frequently borrows from banks, 0 otherwise. Takaful Dummy variable, 1 if respondent frequently uses takaful, 0 otherwise. ROSCA Dummy variable, 1 if respondent frequently uses Rosca, 0 otherwise. Rahnu Dummy variable, 1 if respondent frequently uses Rahu, 0 otherwise. Selling household

assets

Dummy variable, 1 if respondent frequently sells household assets, 0 otherwise.

Source: Author

Figure 4.1: Risk-coping mechanisms used by takaful and microtakaful clients.

Source: Author’s illustration

0 50 100 150 200 250 300 350

Using own funds Getting additional job

No coping action Borrowing from relatives/friends ROSCA Takaful Borrowing from banks Getting free of charge help Donation Getting assistance from the employer

Rahnu Selling household assets Borrowing from credit unions

Figure 4.1 presents an overview of the major risk-coping mechanisms among respondents. Surprisingly, half of the respondents answered that they used their own funds as a coping mechanism (52%). A further 38% of the respondents answered that they got an additional job to mitigate their risk. A total of 162 respondents (26% of the sample) reported that they had no coping mechanisms to deal with a shock happening. Table 4.7 provides a descriptive analysis of relevant risk-coping mechanism variables collected from the household survey. Using one’s own funds is the primary risk-coping mechanism for all respondents, including takaful and microtakaful clients. In addition, most non-takaful clients borrowed from relatives or friends, joined ROSCA, or got an additional job compared to takaful clients. Non-takaful clients also chose Rahnu, sold household assets, or received free of charge help or donations as their preferred risk- coping mechanisms.

Table 4.7: Descriptive analysis of risk-coping mechanisms based on selected group

Takaful Microtakaful

Full sample client non-client client non-client

Variable Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. No coping action 0.26 0.44 0.25 0.44 0.26 0.44 0.17** 0.37 0.28 0.45 Using own funds 0.52 0.50 0.50 0.50 0.53 0.50 0.31*** 0.46 0.57 0.49 Getting additional job 0.38 0.48 0.28** 0.45 0.43 0.50 0.15*** 0.36 0.43 0.50 Getting free of charge help 0.14 0.35 0.06*** 0.23 0.18 0.39 0.00*** 0.00 0.17 0.38 Donation 0.11 0.32 0.06** 0.24 0.14 0.35 0.02*** 0.13 0.14 0.34 Getting assistance from an employer 0.12 0.32 0.11 0.31 0.12 0.33 0.01*** 0.09 0.14 0.35 Borrowing from relatives/friends 0.21 0.41 0.15** 0.35 0.25 0.43 0.07*** 0.26 0.25 0.43 Borrowing from credit unions 0.08 0.27 0.05** 0.22 0.10 0.29 0.01*** 0.09 0.10 0.30 Borrowing from banks 0.15 0.36 0.15 0.36 0.15 0.35 0.06*** 0.23 0.17 0.38 Takaful 0.15 0.36 0.18 0.38 0.14 0.35 0.04*** 0.20 0.18 0.39 ROSCA 0.21 0.41 0.13** 0.34 0.25 0.43 0.04*** 0.20 0.25 0.43 Rahnu 0.11 0.31 0.06** 0.24 0.13 0.34 0.03*** 0.18 0.12 0.33 Selling household assets 0.10 0.29 0.02*** 0.13 0.14 0.34 0.01*** 0.09 0.12 0.32 Source: Author’s calculations

On the other hand, for microtakaful clients, most chose no coping action, using their own funds and getting an additional job as their risk-coping strategies, compared to non- takaful clients, who used most of the coping strategies listed in the survey. They also preferred to borrow from relatives or friends during emergencies, rather than borrow from credit unions or banks. None of the microtakaful clients chose getting free of charge help as a risk-coping strategy but 17% or non-microtakaful clients used this coping strategy to minimize risk.

As shown in Table 4.8, the number of takaful clients exceeds the number of ROSCA clients. However, there are 29 respondents who use ROSCA and participate in takaful simultaneously. In addition, 189 respondents participate in takaful but do not use ROSCA as an alternative to cope with risk. Only 104 respondents reported that they frequently use ROSCA as a coping strategy but do not participate in takaful. The largest percentage comes from respondents who do not use either takaful or ROSCA as risk-coping strategies (313 respondents).

Table 4.8: Descriptive analysis of ROSCA and takaful

Takaful client ROSCA participants No Yes Total No 313 104 417 Yes 189 29 218 Total 502 133 635