Laying down insurance policies
A case study of Al Wifaq finance company
Table of Contents
1.Introduction
2. Pattern of Shareholding
3. Types of Financing Services
4. Market Analysis of Dubai Financial Sector
5. Overview of Islamic Financing
6. Insurance Requirement for Finance Company
7. Al-Wifaq Financing Services
7.1 Retail Financing
7.2 Business Financing Services
8. Stages in Transactions and Risks Involved in each Stage
9. Suggested Insurance Policies
10. Selection of Insurer
11. Financial Statements
12. List of Assets to be Insured with rates and premium
13. Total Annual Premium and Payment Method
14. Reference List
Contents of tables and figures
Table 1: Pattern of shareholding at Al-Wifaq Finance Company
Table 2: Profit and loss account of Al-Wifaq Finance Company for the years 2014 and 15
Table 3: Balance sheet of Al-Wifaq Finance Company for the years 2014 and 15
Table 4: Total annual premium calculation
Figure 1: Service offered by Al-Wifaq Finance Company
Figure 2: Growth of insurance sector in UAE
Figure 3: Al-Wifaq's Murabaha financing services
Figure 4: Ijarah services
Figure 5: List of insurance services provided by Oman insurance Company in the UAE
1.Introduction
The objective of this paper is to assess whether the Al Wifaq Finance the type of insurance policies that the Al Wifaq Finance Company can implement across the group. Al Wifaq is the Dubai based financing company involved in the business of leasing of vehicles, machinery, and other equipment. The nature of business is such that it involve high use of capital assets that are subject to risk of accidents and theft. This makes it very important for the Al Wifaq to have an effective insurance policies for its entire properties insured. The detailed study of the company and its operations has been performed in order base the suggestion for formulating the insurance and protection policy in the entire company.
The company was founded in 2006 and is operating as limited liability Company in the Dubai. The services are extended to the Abu Dhabi and Sharjah. The company has financed a large number of assets and has more than 5000 active customers. United National Bank is parent company of Al-Wifaq having majority interest in the Al-Wifaq.
2.Pattern of Shareholding
IT is important to determine the pattern of shareholding of the company because it indicate the significant influence of the owners. If the shareholders are in large number and hold minority interests then it is difficult to convince all the shareholders about any major decision. If the shareholder holds the majority of the interest then it is possible that consensus is reached quickly among the shareholders. In case of Wifaq Finance Company the United National Bank is the Major shareholder holding the 76.6% of the total interest as shown in the table 1 below. It mean that the nominee director on behalf of the United National Bank will have the sole power to implement the insurance policies.
Table 1: Pattern of shareholding at Al-Wifaq Finance Company
Al-Wifaq Finance CompanyMajor shareholders (5% and above)
Shareholders / Percentage
Union National bank / 76.60%
Dubai capital group / 5%
Others / 19.4%
Total / 100%
Source: United National Bank Dubai, 2015
Dubai Capital Group has the 5% shareholding representing minority interest in the company and therefore will have least influence in the formulation of the company’s policies. Other shareholder are 19.4% representing the individual investors having small interests in the company. Such shareholder will also have least influence in the company decisions.
3. Types of Financing Services
The Al Wifaq Finance Company has been providing the services of retail financing and business financing. The retail financing services are typically offered to the household users to meet their personal finance needs. The financing options available under the retail finance include personal financing, auto financing, Ijarah, home mortgage, and Islamic credit cards. The retail financing companies have been popular in Dubai and has large number individual customers in the state.
Business finance is offered to business enterprises to finance their business projects. Al-Wifaq business financing services involve the financing of goods through Murabaha scheme, financing of plant and machinery, providing funds for working capital, and other commercial financing services. The Goods Murabahaservice is the flexible mode of financing that allows the customers to purchase goods and services that are specific needs of the business. Figure 1 below presents detailed services offered by the company.
Figure 1: Service offered by Al-Wifaq Finance Company
Source: Alwifaq.ae, 2016
The Wakala Deposit fund is the saving scheme offered to the SME and corporate enterprises that allow them to allow hold fixed deposits in the Sharia Compliant Investment schemes. The clients are large investors who have surplus business funds and willing to invest in the saving avenues. The Wakala deposit fund also allow the investors to agree profit rates in the deposit agreement. In this way the investors get satisfaction by having predefined returns on their investments.
4. Market Analysis of Dubai Financial Sector
The Islamic finance is the prevailing trend in the UAE and the highly competitive exist in the state. The Islamic Bank in the UAEconsist about 7% of world’s Islamic banking assets and have captured a market share of more than 25% in the UAE. The takafulservices has also grown at steady rate since 2010 and takaful growing trend seems set to increase; During the year 2015 aggregate takaful contributions to the UAE’s economy touched $1.16 billion the contributions are expected to increase at rate 8.3% per year. In many aspects of the economy. Year 2015has been marked as the transition from a robust recovery to favorable growth for UAE. With large number ofhigh cost investment ventures in the pipeline constructions, and the hosting of Expo 2020 event, the UAE is persistent to establish on its status as a vibrant and worldwide center for business and tourism.
There are large number of finance companies in operating in Dubai. The diversified services are provided by a large number competitors that is enduring the business and trade in the emirate. Major competitors include the followingAbu Dhabi Commercial Islamic Finance, Abu Dhabi Finance, Abu Dhabi National Islamic Finance, Aseel Finance, and Dunia Finance.
The statistic presented in the figure 2 below presents the total amount of premiumswritten by MAT insurance companies from 2009 to 2014 serving in the UAE. The forecast shown below represents the potential growth in the insurance sector until year 2025. The analysis below shows that the value of MAT insurance segment in the UAE is worth around USD0.47 billion in 2013 and it has beenexpected to grow to aboutUSD1.02 billion by the end of year 2025.
Figure 2: Growth of insurance sector in UAE
Source: Statisa.com, 2016
The analysis above imply that the more and more business enterprises are transferring their risks to the insurance companies.
5. Overview of Islamic Financing
The formation of the Islamic Development Bank was a majormilestonein the history Islamic banking. It was established in 1975 coming into just subsequent to the foundation of the first main Islamic commercial bankin the UAE. The breakthrough of the Dubai Islamic Banksteered to the formation of a number of similar financial institutions. The primary institution is the Faisal Islamic Bank based in Sudan and the other is Kuwait Finance House operating in Kuwait. These banks were incorporated in 1977. In the late 1970s initiatives were taken by the Pakistan’s government for establishing the Shariah Compliant financial system. The legal framework of was then changed in 1980 to enable for the consistent operations of Sharia compliant profit and loss sharing financing institutions, and to start financing through Sharia complaint Islamic instruments. Subsequent to the reforms in Pakistan, Iran enforced a system of interest free banking in early 1980s and allowing the existing banks to switch to interest free banking within a period of three years. In 1984 took tangible steps in reforming the banking system passed regulations to establish the Islamic banking infrastructure in the country (Ariss, 2010).
Islamic financing has been appreciated by Muslim countries particularly Middle East, Pakistan, and Malaysia. The Islamic financing has developed different products for each aspect of finance and trade and focus to meet the needs of the borrower by eliminating the cost of money. The objective of Islamic products – Mudaraba, Musharika and Ijarah – is to share the burden and risk of business activities and share the profit and loss from operations. The investments based products sale and lease contracts are allowed for just real assets and no imaginary assets are allowed under the Islamic financing laws (Ariss, 2010).
Apart from the only interest free financing the Islamic financial infrastructure got attention in 1990s and Muslim countries focused on the establishment of regulatory bodies and Islamic standards. This lead to the establishment of the International standardsetting organizations to lead the operations of the Islamic finance industry globally (CihakHesse, 2008). But still the standardization of Islamic financing products vary across Islamic states due to difference in interpretations and understandings of the Islamic teachings. Since the early 1990s, the AAOIFI, based in Bahrain, has been the pioneer in setting sharia compliant accounting and auditing standard setting for the financial institutions. Whereas in Malaysia the Islamic Financial Services Board (IFSB) founded in 2002, is leading the standard setting of Islamic financing in the country (Chapra, 2008).
6. Insurance Requirement for Finance Company
The financial definition of insurance is about an agreement that remedies the cost of unexpected loss. Business of insurance is run through the collection of small premium payments from all exposed and distributed losses (Gupta, 2008). In contrast, legal definition of insurance are based on the contract law whereby one party agrees to compensate another party for losses. In basic financial sense insurance is a social device by which a group of individuals transfer risk to another party (insurer). Insurers tend to provide remedy for the losses on the basis of statistical prediction of losses and provides for payment of losses from funds collected in the shape of premiums (Beasly et al., 2008).
Insurance is a process typicallyconsidered as a risk-sharing phenomena which enables indemnification for possible losses for the owner of the asset. It is also termed as aprocessoftransmitting the financial factor of risk from risk-averse agents to bigger, risk-neutral agents. Some researchersconsider it as a risk transfer social tool of securing justice, providing an alternate to the retaliatory model (which stresses on the suitability of the sanctions forced on those people who are adjudged to be blamed) in which perception of cause and blame are changed by the concept of a distributive allocation of a combinedrisk(Beasly et al., 2008). By defining ex ante the person who will be responsible for providing theindemnification if anyloss incurring event happens, insurance commits reduced costs of transactions for all the parties involved and seek the most benefit for the aggrieved parties. Mortgage Impairment is a risk of loss that arise when the mortgaged property is not insured by the lender or borrower. The risk of mortgage also arise when the borrower cancel the insurance with its insurer and that could be damaged by the lighting, floods and other natural disasters. According to Beasley and Hancock (2009) the mortgage impairment also occur when the borrower is unable to pay the due payments to the lender. A property is foreclosed in case of failure of nonpaymentof installments from the mortgager. The finance company should implement insurance policy that takes into account the unpaid mortgage installments, and additional expenses and charges related to mortgage contract (Grace et al., 2013).
7. Al-Wifaq Financing Services
7.1 Retail Financing
The company offers Goods Murabaha services under mode of Islamic Finance. The Company purchase the products from the market and sell it to the customers on deferred payment basis. Under this agreement the entire commercial risk is owned by the Al-Wifaq. The true owner is Al-Wifaq until the goods are safely sold to the end consumers. The risk for Al Wifaq cannotdeliver the goods to the customer safely or it may be broken or stolen during in transit. Therefore, it call for proper insurance of risk of damage, loss and theft during transit to the customer of the company (Meulbroek, 2002).
Home Mortgage Financing services Al-Wifaq offers residential property financing services to its customers by Mushrika and Ijarah contract with the customers. The Company purchase a property and finance the hundred percent price, or offers the customer partnership in financing the total cost of the property. In this case the Al-Wifaq remain the bearer of risks and rewards of all the related to the ownership of the property. The risks that may cause financial loss to Al-Wifaq include the earthquakes, floods, and natural catastrophes. This require the Al-Wifaq to transfer the risk of possible losses due to damages from natural disasters to suitable insurers. In this way the Al-Wifaq’s Property mortgage services would be safely offered to the customers. Figure 3 below explains how the Murabaha services offer wasy financing solutions to the customers.
Figure 3: Al-Wifaq'sMurabaha financing services
Source: AlWifaq.ae, 2016
Al Wifaq’sLiabilities Settlement services are offered by paying the Liabilities of the customers on their behalf at the agreed payment in the future. The customer need to pay the liability amount plus the Al-Wifaq’s agreed profits at the later date thereby the settling the immediate liabilities on time. The risk involved in the liability settlement services is that the customer may not pay the agreed installments to the company. To this end, the risks can be minimized by insuring the sum financed to the reliable insurer, and by checking the overall liquidity of the customer prior to financing the obligations on their behalf. In this stage the risk arise after the payment has been made to the customer’s creditors (Liebenberg & Hoyt, 2008).
Al Wifaq Ijarah financing options is another mode of financing services offered to retail as well as business clients. The main items financed under the Ijarah scheme include the office equipment, household appliances, and automobiles. In this service the Al Wifaq purchase product from the market and lease it to the customer at an agreed rental per month (Lee, 2003). For securitypurpose the Company hold the certain percentage of the cost price of the asset leased. In this way the lessee got the asset and enjoy all the user related benefits of the leased asset for the agreed period of time. The Al Wifaq has set minimum term of the Ijarah contact and after the end of that period the customer may cancel the contract and call the payment of security deposit on return of the asset to the company. In this case the risk of loss arise at the date of purchase of assets and prevail throughout the life of asset until it is disposed of or transferred to the lessee at the time of end of maturity of the Ijarah contact. The Al Wifaq has to deal with all risks of asset being its true owner and need suitable insurance policy for its risk cover. The detailed Ijarah services for the personal customer has been explained in the figure 4 below.
Figure 4: Ijarah services
Source: Al Wifaq.ae, 2016
7.2 Business Financing Services
Murabaha services is the Main business financing product of Al Wifaq that constitutes nearly 70% of its total financing services. This is Sharia Compliant sales agreement that is entered into between the Al -Wifaq and the client, whereby client agree to pay the cost of the asset plus and agreed rate of margin to the Al Wifaq. In this way the asset price is increased and Al Wifaq earn income for the deferment of the payment. In this sales contract the Al-Wifaq offers the Promise to Purchase (PP) to the client that can be opted at the end of sales agreement in case of binding PP agreement (Tahir, 2011). Al Wifaq’s main aim is to serve the SMEs and international corporations to purchase heavy fixed assets and easily pay them in a series of payment.
Al-Wifaq other commercial financing solution is the working capital financing services to large as well as medium sized entities. In this service the customer who are facing shortage to buy the raw materials on immediate payment basis or having difficulty to access trade credit are served. The Al Wifaq purchases the raw materials and inventories from the market and provide to the client for the selling to the customer after the value addition process. The Al Wifaq takes the share of profit from the goods sold from the financed raw materials making it true partner in the sales profits. The risks involved in this service are of two types and need flexible insurance policy for covering the risks from purchase to the recovery of payment from the end consumers (Merkley, 2001).
Al Wifaq also render services of financing of capital assets whether they are fleet of automobiles, HTVs, specialized construction equipment or plant and machinery costing over AED 25 million. In this service the Al Wifaq solely finance assets amounts and receive the agreed profit rate from the client over the tenure of the loan. The commercial loan nature of financing offered for period of 3 to 10 years. The commercial financing also covers the real estate financing, contract financing,
8.Stages in Transactions and Risks Involved in each Stage
Each transaction of financing involve different phases and subject to certain of risks at each phase. In this section the risks involved in each stage are highlighted and potential of their loss is stated so that a valid estimate of risks to be covered can be made. IIn the Islamic financing transactions risks involved are of different nature, and vary according to their term. For example some risks are of short term nature and cease to exist in matter of few days, as in the case of working capital finance (Redja & McNamara, 2014). The nature of risk exist but change the intensity and form at each stage. For example in case of Murabaha contract the risks of asset solely belong to the financer unless they are transferred to the lessee. Once transferred the risks are divided between the two parties and extent is depends on the nature of fault which caused the damage (Cooper & Golden, 2012). If the asset is destroyed due to any event not in control of financer and lessee the risks is divided in proportions and in case the assets is effected by the negligence of the lessee the loss is born by the lessee alone (Beasly et al., 2005).