Islamic Banking and Insurance
Muslims state that financial services considered as unconventional may not be acceptable because some of the practices conducted do not follow the Sharia law. For example, the Sharia law does not allow interest payments or earnings. This means that for most Muslims, taking a loan, buying properties, and acquiring bank accounts may be challenging. Issues may also arise on how to invest money when payments are made in the bank. Many Muslims have been forbidden to invest their money in corporations dealing with tobacco, pornographic content, gambling, or alcohol. Consequently, they need a bank account that will guarantee them that their cash will not be used in funding corporations involving themselves in these industries.
As a result of the underlying challenges, Islamic financial services have been created in response to the given difficulties. They are charged with catering for the precise needs of the whole Muslim community, even though their services are open to any person (Khorshid, 2013). The popularity of these commodities is growing, and with various street banks currently offering services of Islamic banking, they may appeal to people from different religions concerned with the ways their money may be capitalized.
This paper talks about the systems used in Islamic financial industries and insurance. The paper has discussed examples of Islamic banks and insurance firms. Additionally, it has also discussed the innovative solutions in the Islamic financial industry and explained the impact of these solutions on the client’s satisfaction.
To come up with these, the information has been mainly acquired from the banks’ and the insurance firms’ websites. It is important to note that data over years as stated in the paper has been mainly retrieved from these websites. The research has also been conducted using information retrieved from various books and journals to make a comprehensive report on the Islamic financial and insurance industries.
Islamic banking financial systems
While eliminating interest referred to as Riba in all its forms of banking is a vital Islamic financial system feature, there are many other differences seen in Islamic banking. A sense of cooperation is found among many Muslims. This is by assisting one another as stated in the principles of piety and goodness and not indulging in malice or evil (Henry & Wilson, 2004). Essentially, this aims at eliminating exploitation and establishing an equal society by applying Sharia rulings and Islamic laws to the bank's operations among other different financial institutions. In making sure that the Sharia laws have been adhered to, the Islamic banks use religious service boards that encompass Sharia scholars. Additionally, Islamic financing may be seen as a way of ethical lending or investing except for the fact that there are no issues on loans if they do not have any interests.
In the ethical restrictions found in these Islamic laws, there are the prohibitions on pork consumption, alcohol, and gambling. It is not a must for clients and people to be Muslims, but they need to follow the ethical restrictions emphasized by Islamic values working in these banks (Henry & Wilson, 2004). Economic principles in Islam offer a balance amid communism and extreme capitalism. They offer a person the freedom of creating and producing wealth while they are surrounded by an environment that is not controlled by humans alone. It also has to be controlled by divine guidance that sets behavior, norms, and moral rules that need the extreme intention sincerity (Henry, C.M. & Wilson, 2004).
Khorshid (2013) asserts that all activities conducted by humans are prone to the perils of loss from events that are unforeseen. To ease this problem for the people, insurance was introduced and has existed for a long period. Over 1400 years, this Takaful concept has been practiced in different forms. Takaful concept originated from the word Kafalah, which is an Arabic word meaning joint guarantee or guaranteeing each other (Khorshid, 2013).
Additionally, this concept is in line with the compensation principles and shared accountabilities among the population. Takaful came from the old Arab tribes as pooled liabilities that obliged the wrongdoers from different tribes to pay compensations to the victims (Khorshid, 2013). Later on, this principle was prolonged to various walks of lives such as sea trade, whereby all people who participated contributed funds to cover for anybody in the group who suffered from disasters on sea voyages. Currently, Takaful serves as the Islamic insurance because of the similarities between it and the insurance contracts.
Financial Companies that Adopted Islamic Law – Sharia
Central Bank of Oman
This Islamic bank was developed in December 1974 and started operating on April 1, 1975 (Central Bank of Oman, 2007). This bank has become the main currency authority in Oman, replacing the Oman Currency Board. Moreover, the Central Bank of Oman is in charge of maintaining the national currency stability (Omani Rial) and making sure that the financial and monetary sectors are stable (Central Bank of Oman, 2007). Central Bank of Oman had a capital base of 1,000,000 Omani Rials when it started its tasks in 1975. From time to time, this capital base was strengthened and, since April 2002, the capital base has been stabilized at 3,000,000 Omani Rials.
The assets and liabilities of this bank totaled to 1826.4 million Omani Rials at the end of 2005. Additionally, the banking system of the central bank of many states experienced a lot of mergers in the 1990s, resulting in thirteen commercial banks at the end of 2005. Five of them were local banks while the remaining eight were foreign to add up to a combined branch network of 329 branches. Moreover, the local banks had ten branches and a single representative office out of the country. The Central Bank of Oman accepted the creation of an extra local bank referred to as Sohar Bank and a foreign branch bank referred to as Bank of Beirut (Central Bank of Oman, 2007).
These banks were expected to start their operations in 2006. In strengthening the licensed banks' financial positions and enabling them in facing competition, the low capital requirements necessary for the commercial banks were augmented to 50 million and 10 million Omani Rial for local banks and foreign banks respectively. The commercial banks had their capital adequacy ratio increased, reaching 18.5% in 2005 (Central Bank of Oman, 2007). Significant processes were made by the sultanate in applying the new capital adequacy principles implemented in the Basel-II Accord. By adopting the Basel-II Accord, the Central Bank of Oman’s current supervision tools and approaches would be transformed as well as its risk management and audit practices (Central Bank of Oman, 2007).
This bank also participates in and administers funding of a bank deposit insurance system. The system issues commercial banks with high security levels for deposits while mitigating the effects of whichever unexpected circumstances. The Central Bank of Oman has an early warning system used mainly in the commercial banks. This gives it the ability to predict the likely financial crises and take preventive actions as needed. Different monetary policy instruments used in the Central Bank of Oman’s command may be categorized broadly into direct and indirect measures (Central Bank of Oman, 2007).
Indirect measures that are market-oriented consist of market operations, involving the selling and buying of securities and issuing of Central Bank’s sole swaps and securities (Central Bank of Oman, 2007). During 2012, there was a strong gross domestic product growth. The bank’s total assets increased by 15.3% to 20,681.4 million RO in November 2012 as compared to the 17, 934.2 million RO seen in 2011. The total credit increased to 14,333.6 million from 12,354.4 million RO in 2011. This was a 16% increase. The banks offers financial products such as foreign exchange, fixed accounts and ATM debit/credit cards.
Mainly referred to as the Al Rajhi Banking and Investment Corporation, the organization is the largest bank in the Islamic world. Additionally, it is a leading investor in the business world in Saudi Arabia. This bank is among the greatest stock companies, having 6.75 billion SR as their paid up capital (Khorshid, 2013). The bank’s headquarters are in Riyadh, but it has other regional offices. Additionally, it has twenty four branches that are located in Malaysia. Its trading and banking activities started in 1957. By 1978, the individual creations were joined into Al Rajhi Trading and Exchange Corporation, which was later on changed in 1987 into a joint stock corporation.
In February 2006, the company was re-branded as Al-Rajhi Bank and changed its name to Al-Rajhi Banking and Investment Corp (Khorshid, 2013). The Al Rajhi royal family is the main equity holders of the bank. This bank has a capital base, which was 100% funded, starting at 750 million that was later increased to 1.5 billion SR. Additionally the base was increased to 2.25 billion SR and 4.5 billion SR in March 2005. Moreover, it was again increased to 6.75 billion SR in March 2006 and lastly 13.5 billion SR in March 2007. After working in Saudi Arabia for 50 years, the bank sprang in 2006 in Malaysia. This signified its first foray into the global banking. Following the Saudi’s business model adherence to the principles of Islamic banking, this group has plans to aid in bridging the gap amid inherent Islamic values and financial demands for various industry standards and growth in Malaysia (Khorshid, 2013). This bank offers products such as; personal banking, home financing, automobile financing, saving accounts,current accounts, ATM cards, Mudharabah savings account, foreign exchangeand inward/outward bills for collection. Ending March 31, the bank made a 2.05billion riyals net profit as compared to the 2.01 billion profits made earlier in the same year. This was a 2% increase.
Formerly recognized as Shamil Bank, on 21 October 2003, it bought all existing FIBEC’s assets and liabilities with the exemption of the constitutional deposits that were launched by BMA. After this purchase, the bank sold the whole FIBEC’s share capital to DMI and, later, FIBEC names’ were altered to Ithmaar Bank. The issued and authorized Class A administration shares attained from Shamil Bank from DMI were cancelled on November 4, 2003. The approved capital was put back together to 300,000,000 ordinary shares valued at $1 each (Ithmaar Bank, 2013).
In the same year, 10,000,000 ordinary shares were allotted and paid fully in exchange for the Class A administration shares that were cancelled and 20,000,000 ordinary shares were allotted as cash paid up fully. Ithmaar Bank allotted share capitals were increased to $150,000,000 on March 31, 2004 by creating an extra 120,000,000 shares that were all allotted to DMI. The capital that was authorized was increased further to 500,000,000 ordinary shares of $1 each on October 25, 2005. Additionally, Ithmaar Bank acquired funds from DMI in October 2003. Under the purchase and sales agreements, Ithmaar Bank paid a whole deliberation of $45,995,304 that was particularly based on the investments carrying amounts attained on June 30, 2003. This made Ithmaar bank entitled beneficially to its assets and responsible for its liabilities together with its earnings from July 1, 2003 (Ithmaar Bank, 2013).
The acquired investments in Ithmaar Bank were through purchasing the stated subsidiaries, acquiring indirectly 49% and 28% interest in Faisal Finance of Switzerland and Faysal Bank Limited of Pakistan respectively (Ithmaar Bank, 2013). Additionally, Ithmaar Bank attained 40% interest of DMI in Solidarity Company for a whole consideration of $40,000,000. It also attained a 23% interest in Egypt’s Faiscal Islamic Bank that amounted to $34,125,000. Ithmaar Bank (2013) affirms that this bank attained a 60% shareholding from Bahrain’s Shamir Bank, which was an Islamic investment commercial bank in August 2006. The bank’s activities were broadened when Shamil Bank was acquired for $410 million. These activities covered the whole spectrum of Islamic financial and banking services. The bank’s $150 million sale transactions increased the profits to $104 million that were reflected in the 2006 statement. Additionally, the bank announced purchasing 19.1% of the outstanding and issued BBK’s share capital (Ithmaar Bank, 2013). The bank announced a net profit of $1.41 million dollars in the year 2013’s first quarter compared to the $719,000 loss in the same year. In 2012, the net loss was $30.46 million as compared to $62.89 loss in the same year. There are a lot of products offered by this bank including wealth and portfolio management and planning of financial investments.
Daman, National Health Insurance Company
This is a non-life government health insurance corporation in the United Arabs Emirates. Its operations began in May 2006, with more than 1000 staff. Daman offers different health insurance benefits that have extensive policy limits, wider geographic coverage, and added benefits. By using an extensive worldwide network provider, this insurance company gives its clients comprehensive solutions (Daman, 2013).
Munich Re has been nominated by Daman as the leading re-insurers in the world with a good reputation, financial strength, and more than 125 years of experience internationally. Daman introduced Munich Re as its strategic partner. Additionally, the Daman insurance corporation has a large market share of nearly 85% in Abu Dhabi, covering approximately 2,000,000 as stated in September 2010 (Daman, 2013). The following are products offered by this insurance company; Global plan, Regional plan, International plan, Premier plan, Visitor plan, UAE plan and UAE Optima plan.
Sharia Compliant Solutions
Currently, Islamic banking and insurance is one of the areas that are developing rapidly. Banks and insurance companies that need to be competitive in the market cannot ignore this area. Different banks that are developing are responding to the prospects offered by the customer segments with different Sharia compliant products (Khorshid, 2013). Over the last decades, assets of these institutions that offer Islamic services and products have risen by nearly 25% yearly. In the stated managed assets, services in Islamic finance are nearing 1 trillion dollars.
Khorshid (2013) affirms that the Islamic banking and insurance system’s total market size is anticipated to increase from 1.1 billion dollars in 2010 to nearly 1.6 in 2014. Central banks and governments have taken a lead in supervising these Islamic insurance and banks, boosting their growth, and passing Islamic insurance and banking laws in their nations. In these scenarios, conventional banks may not ignore the increasing demand for products complying with the Sharia law (Khorshid, 2013). They are supposed to leverage the information’s wealth presented by the Sharia law scholars who identify financial solutions conforming to contractual mechanisms and their binding Islamic ethics. In addressing the burgeoning needs of the Muslims, comprehensive Islamic banking providers are determined to offer functionalities and help in defining Sharia compliant products.
Finacle Islamic Banking
This banking solution offers comprehensive and integrated approaches for banks in defining and presenting Sharia compliant products to the customers. The solution is totally self-contained in its abilities of providing comprehensive support and controlling Islamic accounting. This is mainly because it is differentiated due to its strong audit features and product definitions. It serves as the accounting backbone in supporting functionalities of the back office and providing Straight Through processing capabilities on a Service-Oriented architecture (SOA) platform (Iqbal & Molyneux, 2005). This modular solution is made on the typical technology infrastructure and discourse existing necessities while factoring in flexibilities in changing the structure with business needs scaling.
This means that Islamic banking may be introduced as a product that is offered in bank branches and transformed to an independent banking unit if needed. The Finacle banking solution is designed from the perceptive of insight into the Far East, European markets, and Middle East and is geared towards addressing the requirements of regions’ specific Islamic banking needs. The solution is appropriate for both Islamic institutions and conventional banks offering Islamic products. Additionally, the definitions of business regulations are supported by the solution (Iqbal & Molyneux, 2005).
Their rules have profit sharing and Islamic accounting. These broad solutions give best functionalities, including solutions and products catering for the retail part, trade banking, and corporate space in Islamic banking and insurance. Another solution is customer centric abilities in displaying unified customers enterprise information. There are also widespread business rules of definition of Islamic products with a lot of currencies. Iqbal & Molyneux (2005) assert that robust frameworks are used for computerized charges as well as manual frameworks. Another solution is inclusive descriptions of basic assets like real estate, consumer durables, vehicles, and commodities. There are also multi-branch and multi-currency allowed as an accounting backbone. Additionally, profit sharing and pool management principles are other solutions. Finally, there are endorsing pool restrictions and linking the commodities to accounts (Bahia & Nantel, 2000).
Impacts of Islamic solutions on Clients’ Satisfaction
One of the main factors that have ensured the success and endurance of insurance and banking industries is service quality. This is seen especially when there is a growing pressure from different institutions that work in the similar industry and demand customer necessities. Islamic insurance and banking business is said to be among the fastest growing businesses worldwide (Iqbal & Molyneux, 2005). Muslims who have acknowledged these industries have gained a lot of support from non-Muslims.
The duties of Islamic financial institutions are mainly the same as of different conventional institutions in the industry. The only difference is the regulations and rules. The Islamic insurance and banking industries perform their duties according to the Islamic principles (Iqbal & Molyneux, 2005). The specific aim of these Islamic insurance and banking industries is to gain economic progress and social wellbeing of their clients by the assistance from Islamic principles and teachings. These industries have enhanced their quality of products and services offered to their clients because of the increasing competition in the insurance and banking sectors.
Good quality has emerged as a vital factor when offering clients choices for insurance and banking services. Currently, many insurance and banking institutions have a lot of knowledge on the clients’ expectations of services. Therefore, they need to make good quality products to increase the clients’ buying capacities. This calls for the institutions facing a lot of competition to make services offered to their clients perfect (Bahia & Nantel, 2000).
Many Islamic institutions offer services that fulfill the necessities of the world’s economy. Therefore, the banks and insurance companies have to know the demands and needs of the clients and understand how they observe the quality of services and products offered so that they may gain client loyalty. In Pakistan, Islamic insurance and banking industries have emerged as important financial components in the industry (Henry & Wilson, 2004).
Currently, by the approvals from the Pakistan State Bank, different conventional banks and insurance companies have opened new branches that offer Islamic products. This helps in increasing the economy at large. The banks have succeeded by offering products that have been organized properly and achieving a competitive edge in providing quality services to clients. The clients remain the main factors in capturing major shares in the demanding insurance and banking sectors. Good service quality has been considered as a key factor to achieving strategic benefits in the Islamic insurance and banking sectors (Bahia & Nantel, 2000). These services help in improving the clients' retention rates and obtaining competitive edges.
The service quality has impacts on the client satisfaction, which in turn affects the banks and insurance companies’ financial performance. Providing quality and excellent services are vital satisfaction and growth components for the clients. It is important for these industries to make every effort in improving the quality of their services and products. Consequently, there is a significant connection between quality of services and products and financial performance offered by the insurance and banking sector.