Banking, Finance & Takaful

Understanding Islamic finance key to success in Southeast Asia

z.hashemi20111114162813937The Southeast Asian market is attracting Korean insurers that are seeking ways to expand their businesses overseas because of the saturated domestic market.

To succeed in the Southeast Asian market, Korean insurers should first understand the Islamic financial culture and develop mutual trust, analysts said.

“Southeast Asia is home to the largest Islamic population and some countries such as Indonesia and Malaysia have boosted Islamic finance,” said Jeon Yong-sik, a researcher of the the Korea Insurance Research Institute (KIRI) in a report.

“Understanding financial practices across the region is the key to expanding their businesses, particularly in Indonesia and Malaysia.”

After Hanwha Life Insurance advanced into Vietnam in 2009 with the first overseas affiliate of its kind, the company opened a regional affiliate in October in Indonesia, where the foreign insurers’ market share reaches about 50 percent.

LIG Insurance also established its first overseas affiliate in Indonesia in 1997, and afterwards opened branches in Jakarta, Bandung and Surabaya.

The region has attracted international attention from those seeking business opportunities due to the large population. Malaysia has emerged as a major global force in the Islamic financial industry, while Indonesia with the largest Muslim population in the region is often referred to as the industry’s “sleeping giant.” It is expected to be tapped by foreign financial institutions.

Financial regulators in Malaysia, Indonesia and other countries in the region are striving to nurture the Islamic finance industry.

Islamic finance is based on the strict principles of Sharia, a moral code and religious law. Deriving from Islam’s ethical treatment of financial dealings, the Islamic financial transaction laws are aimed at protecting the rights of all parties involved in a business transaction while also eliminating the possibility for either party to exploit the other.

For example, takaful is a type of Islamic insurance where members contribute money into a pooling system in order to guarantee each other against loss or damage. Based on Sharia, takaful insurance shows the responsibility of individuals to cooperate and protect each other.

Indonesia and Malaysia account for one-third of the takaful market, which is worth $11 billion worldwide. It has grown by 35 percent every year since 2005.

Also, Islamic finance includes a ban on interest and uncertainty, and adheres to risk-sharing and profit-sharing, promotion of ethical investments that enhance society and do not violate practices banned in the Quran, the central Islamic religious text. Thus, it prohibits any speculative transactions that lead to the rise of the asset values.

“Based on these financial practices, Korean insurers should build up confidence in the region first to operate their businesses. They should differentiate their business strategies based on the Islamic financial system,” Jeon said.

He said that Korean companies should advance into the emerging markets in Southeast Asia rather than the advanced markets in terms of their economic growth rate and the potential market size.

“If they fail to understand their religion-based practices, they will not win trust from the local customers, and this will lead to the failure of business sustainability there,” he said.

Source: Korea Times

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