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Monday, 9 April 2012

Islamic banks progressing in Pakistan

Lahore—Islamic finance has achieved a substantial growth in the last few years, annualising a growth rate of about 18-percent. The Islamic finance industry that was currently estimated to be worth about US$1 trillion had made further headway in the Islamic traditional markets such as Malaysia, the Gulf Cooperation Council countries, Pakistan, Indonesia, apart from penetrating new markets such as in Europe and Africa. While Islamic banking assets account for a large part of this value, the segment that has enjoyed especially strong growth in the more recent years is Sukuk. 


Despite growth, Islamic banking is facing challenges like any other new industry, which despite being new is actually a very competitive market. Islamic Banking is based on the principles of Islamic finance and people have very little knowledge about these concepts. This in itself gives rise to anumber of challenges, for instance establishing credibility and spreading awareness. Capacity building is another major challenge posed to the Islamic banking. 



Conventional banking is being taught in numerous universities whereas very few institutions are offering formalized education in Islamic Banking, thus production of quality human capital is another challenge for our growing sector. The lack of effective marketing remains as one of the key reasons why the sector hasn’t been able to serve its massive potential. However, with growth of Islamic Banking, more educational institutions are emerging to prepare killed human resource. 



According to a recent IMF study, Islamic banks performed better than conventional ones in terms of profitability, credit and asset growth. The Islamic banking system has great potential for further market share expansion and a possible contribution to market stability given the available credit. Assets also reflected a similar trend, which were less affected and grew on twice the pace of conventional banks during the period of economic crisis. 



The growth in the market share of Islamic banking in Pakistan has also been impressive. This can be seen by looking at the market share achieved by other countries over time. The Islamic Banking sector in Pakistan has around 10% share of the total banking industry. 



In Pakistan, Islamic banking emerged as a response to both religious and economic needs. Efforts for economy wide elimination of Riba started during 1970s and most of the significant and practical steps were taken in 1980s. The mid-80s attempt was a significant step in the evolution of Islamic banking system in the country. In a technical sense, it was the most advanced model compared to any other model being practiced anywhere in the world at that time. However that system fell apart as it did not adequately address issues such as putting in place an effective Shariah compliance mechanism, giving emphasis to capacity building, and opting for a flexible and evolutionary approach. In any case this effort provided a valuable experience that has been taken into account while formulation of SBP’s current strategy to re-launch Islamic Banking in Pakistan. 



The banking system in an economy works like the blood circulation system of a body. As only an efficient blood circulation system can ensure a healthy body, similarly an efficient and equitable banking system can dispense economic efficiency and justice. These basic concepts and objectives are common to any banking system whether it be conventional or Islamic. The difference lies in the methodology adopted to achieve these objectives. 



Conventional banking aims to meet these objectives through use of interest based contracts while Islamic banking achieves these objectives through trade-based contracts. In Pakistan Islamic banking emerged as a response to both religious and economic needs. The initiative to re-introduce Islamic Banking in Pakistan was launched back in 2001 when the government decided to promote Islamic banking in a gradual manner and as a parallel and compatible system that is in line with best international practices. Following the decision of the government to shift to interest free economy in a phased manner without causing any disruptions the effort was envisaged to be based on a market driven and flexible approach. Furthermore, it aims at building a broad based financial system in the country to enable all segments of the population to access financial. While the number and operations of Islamic banks are fast expanding, this segment of the market is still small relative to the appetite for Islamic finance.


(Pakistan Observer / 08 April 2012)


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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Consultant/Trainer/CEO:
www.ahmad-sanusi-husain.com
Islamic Investment Malaysia:
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Sharia-style insurance

In a world full of uncertainties, insurance products are no longer a matter of luxury. They have become essential for both private and corporate clients seeking to minimize and manage risks. But to many Muslims around the world, conventional insurance policies are considered haram, or forbidden. Most policies contradict with Islamic principles, as they contain elements of uncertainty, or gharar, gambling ( maisir ) and usury ( riba).
Meanwhile takaful, or Islam’s response to insurance, has grown steadily as a halal, or religiously permitted, alternative to traditional insurance policies.
“There is no problem with the concept of insurance itself; however the problem lies in the way it is practised,” said Abdel-Latif Sallam, managing director of Wethaq Egypt, a takaful insurance operator.
In essence, insurance is based on cooperation between people who are exposed to the same risk, a concept which complies with Islamic Sharia law. Originally, the term takaful stems from the Arabic word kafalah, which means mutual or joint guarantee.
As with traditional insurance policies, takaful works by collecting small premiums from a large number of people to create a mutual fund or pool, in order to pay for losses which might affect some of the pool members. The key difference between takaful and commercial insurance rests in how the pool is managed. Sallam explained that takaful operators put premiums in one fund, which is used to pay out any claims made by participants. Takaful funds are managed and administered on behalf of its participants by an operator, after charging administrative expenses.
In the takaful system policyholders, or participants, are joint investors with the insurance company, which in turn acts merely as a pool manager. Policyholders share in the investment pool’s profits as well as its losses. In case of surplus, the benefits are distributed between the shareholders and participants, with a certain percentage defined by the takaful company. “Each company is free to set the percentage,” Sallam told Al-Ahram Weekly. “However the general practice is 60 per cent for shareholders and 40 per cent for participants.” In case of deficit, an interest-free loan is taken from the company’s capital. It is repaid when surplus is achieved. Also, takaful operators need to maintain two funds: a participants’ or policyholders’ fund, and a shareholders’ fund.
Another difference between takaful and conventional insurance companies is that takaful companies work under the supervision of a Sharia board. This comprises Islamic scholars whose role is to judge whether the company’s business complies with Islamic Sharia. Sallam cited an example, whereby his company refused to cover a cigarettes factory because an Islamic fatwa, or decree, prohibits smoking. In investment, takafulcompanies are only allowed to work with companies that comply with Sharia law. Each takaful company elects its own Sharia board.
As corporate insurance providers, takaful operators work to insure companies against all kinds of risks.
Egypt’s first experience of takaful came in 2003, when the Saudi-Egyptian Insurance House, the first takafulcompany, started operating. It was later joined by seven other takaful companies, established in mid-2008.
” Takaful insurance amounts to five per cent of Egypt’s LE10 billion-worth insurance market,” Egyptian Insurance Federation Chairman Abdel-Raouf Kotb told the Weekly. Though this is a small percentage for now, Kotb expected growth for takaful insurance in the Egyptian market over the coming years. “Egyptians have a strong religious sentiment, which works in favour of a larger takaful market,” he said.
Sallam also believes in the potential of the Egyptian takaful insurance market. He said the surge witnessed by existing takaful companies helped spread the concept. Though the companies operating in Egypt were all quite new, they have enjoyed significant success. Sallam said that in the first five years, takaful premiums did not exceed LE100 million, while today’s premiums exceed LE600 million.
This potential for growth is apparent in international takaful operators’ confidence in the Egyptian market. Manfred Dirrheimer, chairman of FWU Group, a global provider of takaful products, expected Islamic insurance in Egypt to capture 30 to 40 per cent of the market within five years. “I am 100 per cent sure that the market is going to grow, and my company is looking very carefully at the Egyptian market right now,” Dirrheimer told the Weekly. “I would not be surprised if we decide to enter the Egyptian market this year.”
Dirrheimer added that Egypt has all the components to make takaful a success. It has both a sizeable market and the expertise, including that of University of Alexandria specialists, to make it fertile ground for this kind of policy.
But in order for the takaful market to expand in Egypt, Kotb recommends that legislation be passed in order to manage takaful insurance companies in the country. He said there are currently no laws to manage takafulin Egypt today. Rather, existing companies offering this type of insurance abide by regular insurance law. Kotb went on to say that the Egyptian Financial Supervisory Authority (EFSA) has set standards for takafulcompanies to comply with.
Sallam, on the other hand, believes there is no need for such legislation. Egypt, he said, is the only country in the region which has legislation that manages insurance companies’ operations. “We don’t need takafullegislation, because that might lead to discrimination,” he said.
To Sallam, key factors for the growth of the takaful market are stability and economic growth. He added that the insurance industry is currently vulnerable. “When there is a strong economic performance, you find a flourishing insurance industry, and vice versa,” said Sallam.
While takaful products have been primarily developed for the Muslim world, they have advantages that are just as appealing to non- Muslims. Dirrheimer believes takaful responds to “down-to-earth principles that are applicable on Muslims and non-Muslims.” He added that in Malaysia, more than 60 per cent of non-Muslims buy halal products.
Sallam agreed with Dirrheimer on that point. He added that takaful insurance has the capacity to attract non-Muslims. For one, his company has non-Muslim customers, producers and employees.
Not only is takaful expected to grow in the Egyptian market, but in the world at large. According to Ernst & Young, the global advisory services firm, the global takaful market could reach $25 billion at the end of 2015. The firm stated that the takaful industry is concentrated mainly in the Middle East and North Africa region and in Malaysia. “Saudi Arabia, Malaysia and the UAE are the top three takaful markets while Egypt, Sudan, Bangladesh and Pakistan are growing at a rapid pace,” according to the firm.
The world’s first takaful company was born in Sudan in 1979. It was followed by the United Arab Emirates in 1980 and Luxembourg in 1982. Afterwards, takaful companies started operating in Saudi Arabia, Malaysia, Bahrain, Indonesia, Qatar, Singapore, Jordan, Sri Lanka, Kuwait, Egypt and Britain.

(MuslimVillage.Com / 09 April 2012)


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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Consultant/Trainer/CEO:
www.ahmad-sanusi-husain.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com

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