It is not very clear as to how this has impacted the decision of these citizens. Did it drive their business abroad? Did they fall back on the options that were available to them in their own country? Or did they just abstain from participating in the market and leave their needs unfulfilled?
There have been various reports on the value of global Islamic financial services reaching US$1 trillion in 2011, and that of the global Takaful business reaching US$15 billion by 2015 (E&Y Takaful Report). It is not clear as to how much of this could be generated by the new Islamic financial market in Oman.
In Oman it is estimated that there are over 2.3 million Muslims. Many of them are quite conservative in their faith. It is said that many of these religious Muslims have been increasingly demanding Islamic financial services to satisfy their life style needs like financing for starting a business or buying a home or even a car.
At present they are constrained by the compulsion to pay interest, which is forbidden in Islam. The decision to allow Islamic banking services may have been a concession to this segment but there is also an economic imperative, recognizing the money that was being lost to Islamic banks in neighboring countries.
It is possible that initial estimates of the potential in Oman may have been conservative as the interest of the public in Islamic banking in the country becomes increasingly palpable with the opening of the first Islamic bank and first Takaful firm in Oman. Oman extends well beyond its main cities of Muscat, Sohar and Salalah as over 27% of the population lives in non-urban or rural areas.
There is also a sizeable middle class where government grants and subsidies have not substituted the need for sustained employment. The current rate of unemployment is about 15% which stretches the fabric of community support. People residing in small villages have a strong feeling of community and their traditions are deeply rooted in their religion. There has been some inevitable dilution of this tradition on account of economic development and to some extent due to globalization and the impact of the internet.
The Omani public has accepted conventional banking and insurance when forced to by law, as in the case of compulsory motor insurance or insurance by banks whenever they have had to take loans. It is however clear that they will be motivated to access the Islamic financial market and explore new business opportunities once the option is made available. This will allow them to access financing for building homes or buying a car. It will allow them to buy family protection (life insurance) to protect their families financially in the event of untimely death which in the past was ‘haram.’ It will allow them to save for important milestones in their lives such as the education of their children or the marriage of their sons and daughters, and to provide for their own retirement.
While the feeling of community continues to be a strong bond among the people of Oman, economic conditions no longer allow them to be as generous with their time and money to help out their neighbors, because times are tough for everyone.
Jobs are at a premium, relocation from their villages for the sake of employment and moving away from their support system due to necessity has become the norm. Under such circumstances the need for insurance to protect their financial assets or financial security for the future is urgent and due to their religious beliefs, what was not possible in the past has now become a viable option.
If this need gets converted into an identifiable demand, then projections made by various bodies in terms of business opportunities for new Islamic banks, Shariah compliant windows and Takaful companies could very well come true.
The companies will have to work hard to convert this potential demand into reality, however. The key challenges are:
Awareness
While people are aware of the non-compliance of conventional financial instruments, they are not familiar with the structure of Islamic products. They are also not aware of their rights and obligations under a typical Takaful contract, for instance, which can be quite different from those under a conventional one. The new entrants have to undertake an extensive exercise to get their message across. Unlike a conventional product where marketing is mainly based on a particular need, the selling of an Islamic product during the early days will be based on faith.
This is quite a complex situation and to make sure that there is no exploitation, the credibility of the product and its compliance with Shariah will be of critical importance. In Takaful, for example, the policyholder has to understand the concept of how his contribution builds the policyholder fund.
The role of the shareholder is really that of an agent (wakeel) who operates the fund on behalf of the policyholder. Hence the policyholder has actually a stake in the way the product is priced and the fund is managed and the fee that is charged to ensure long-term profitability of the fund. Unfortunately the tendency has been to delegate this concept of ownership to the shareholder, which progressively dilutes the spirit of solidarity among the policyholders that is central to the theme of Takaful.
Distribution
The success of the banking industry shows that its participants understand issues relating to distribution better than their insurance counterparts. This has been compounded by a lack of critical mass in many of the GCC states, and over the years, a fragmentation of the industry. The problems of distribution, critical mass and fragmentation have afflicted the Takaful industry as well when one takes into account the number of Takaful companies in the GCC (over 65 according to PwC).
While the regulator in Oman has unequivocally stated that there will be no Takaful windows, having seen the direction provided by some of the neighboring countries like Qatar, Bahrain and the UAE, there will be more than one Takaful company in the market putting pressure on what is already a very fragmented industry.
In addition to the geographical challenge of reaching out to the rural population with suitable products, the new entrants have to ensure that the segmentation of their market does not become too narrow and be wary of restricting it to faith- based consumers only.
A detailed study carried out by McKinsey on Islamic financial services has shown that for the business model to work well, Islamic financial products must have a broad-based appeal. Takaful business in Oman will not be feasible if its marketing focuses on Muslims only. It has to appeal to the community at large through its core principles of transparency, ethical investment and equity.
Business hurdles
Entry barriers for almost all new businesses in an established market can seem to be insurmountable and it will be no different for new Islamic banks and Takaful companies.
For Takaful companies, these include: lack of trained resources with necessary language (Arabic) skills; the lack of a level playing field for Takaful companies compared to conventional companies; limited Shariah compliant investment instruments; lack of AAIOFI-compatible IT systems; high start-up costs that put immense pressure on policyholders’ funds; the challenges of qard hassan and its impact on return on capital; the need to educate the masses; the need for endorsements from Shariah scholars that are acceptable to the local population; and the need to create a platform for education and distribution through ‘mosque assurance’. These are just some of the business hurdles to be overcome.
What does this mean for Omani companies? Faith is not as much of a governing factor when it comes to deciding on financial solutions — banking or insurance for a corporate body. As mentioned earlier, there will be a small number of companies that will be exceptions to this rule. These will be typically family-run units that are conservative and follow faith-based practices more consciously, with their business decisions driven by this principle.
I have met a diversified trading group in the country that believes in conducting most of its business in cash, and that does not believe in funding from banks to facilitate their business activities.
They do not have any life insurance – notwithstanding the fact that their wealth does not really require insurance to provide for future financial security for family members. They also do not insure their cars against comprehensive insurance, and buy legally required liability insurance only.
In my estimate, the number of such enterprises will not make any significant impact on business volume but will influence the way public opinion is shaped regarding the long-term viability for Islamic business.
As for Islamic banks and Takaful companies lining up for a license, they may take solace in some hard numbers. Total banking assets in Oman currently amount to US$17 billion and experts believe that in few years time Islamic banking could add another US$6 billion. This amounts to over 30% growth and a 25% share of the total market, which will be impressive if it comes to fruition.
There are currently no such projections for the Takaful market, but if one were to work on a market share basis and take a more conservative estimate, of 10% of the market turning to Takaful, then the potential Takaful premium could work out to around US$60 million.
This does not take into account life insurance premiums, which is where I believe lies the real potential for the Takaful market in Oman. In the absence of a structured study, it is however difficult to estimate the business that potentially exists if all the tools to convert this business were effectively deployed.
This still means that local businesses can expect a demand surge, driven by financial transactions generated through Islamic banks and Takaful companies. It is however difficult to assess how much of it will be cannibalized from existing business and how much will be new demand.
Conclusion
In the end, what will matter is the change in the country’s psyche. A lesson learnt from the recent crisis in US and Europe is that hope and optimism are important factors for an economic revival, and the introduction of Islamic financial services in Oman has definitely generated high levels of these two critical ingredients.
Gautam Datta is the CEO of Al Madina Insurance Company SAOC and he can be contacted at
[email protected]
.