Islamic Banking is a form of financing that draws its mode of operation from the sharia law. The Koran strictly forbids taking interest “ribba” from money lent to someone. It likens taking ‘ribba’ to taking a bribe. Therefore, in Islamic banking, “ribba” is forbidden, but instead banks will share a part of the profits made from monies lent out to businesses. This seems very reasonable to the ordinary person as it allows for a culture of full focus on the business activities to generate profits.
Islamic banking has quickly gained popularity around the world and many countries, now including Uganda have enacted laws to embrace it.
Agency banking allows the financial institutions to directly take their services to the rural people. This is an offering that has over the years been dominated by the telecom companies and SACCOs.
Analysts have always argued that this is a service that banks should have long embraced owing to their superior structures and systems than the telecoms and Saccos. They point to the recent mobile money fraud that hit telecom giant MTN as an indicator of the unpreparedness of the telecom companies.
Following the success of mobile money, and yet for long it had no clear regulation, the new law comes at the right time. Banks must get more concerned. Today, banks under the Uganda Bankers Association, have invested in a shared Agency banking platform that has reduced the cost of adoption. All a bank needs to do is to join the platform and connect her agency network to seamlessly access their core banking application and transact. This is revolutionising banking and increasing financial inclusion at the lowest cost people through use of agents who already run private businesses and therefore banks do not have to invest in brick and motor branches to reach customers that were otherwise outside the banking system.
Bancassurance is a specialised service offering that secures collateral provided against loans taken. This service has been largely offered by the insurance companies. It gained popularity following the huge rate of loan defaults that arose. This reduces the provision book of banks hence allowing them to report more accurate revenues to their shareholders.
The entry of banks directly into provision of bancassurance will put them in direct competition with insurance companies. This will erode the revenue streams of insurance companies.
However, as much as this fear holds, analysts believe it will happen slowly. The main reason is the specialised nature of the service. It is an insurance service, while provide financial services. They will need to put in place proper systems and structures to accommodate bancassurance. Otherwise an early unplanned rush into this apparent goldmine could result in coping with fraud that characterised this industry over the years.
This will therefore require some mechanisms that will allow co-working relationship with the insurance companies and the different regulators.
Is the Gold Rush on?
Would the saying the early bird catches the worm hold true here? As much as one could argue that the banks that quickly rush to avail these new offerings to the public will surely reap big as the Uganda market opens up, analysts advise banks to take that with a pinch of salt.
The risks outweigh the benefits. Taking a look at the players in the Uganda market, as it stands, there are few indications that any of these banks are quickly embracing the new product offerings. The question is why? These are new territories and adequate preparations are needed to ensure the benefits are reaped. This requires time. Guidance will need to be sought from markets that have registered success. A number of investments will have to be placed in research, trainings and education among others.
However, overall this should benefit the banks and see more revenue streams flow into the economy.
A lot of housekeeping must be made by both banks and insurance companies. Bancassurance arose from the fact that both banks and insurance companies face significant pressures to their survival. Banks in Uganda, and elsewhere, face a lot of pressures specifically:
- Customer retention in the face of competition: how do we retain our current customers profitably?
- Staff retention and motivation: how do we keep our best employees?
- Universal Banking- approach to provide all financial product under one roof; a broader relationship approach
- Optimum utilization of infrastructure and resources- maximize revenue
Equally, the insurance companies are threatened:
- How do we diversify our channels from traditional direct sale approaches?
- How can we gain access to a high-quality customer base in the financial institutions? Surely, if someone is bankable, s/he should be insurable?
- How to achieve the geographical reach within minimum time and cost
- How can insurance companies ensure higher probability of success in the sales process?
- At a mere 2% insurance penetration, how do we attain faster penetration in the market place?
The solution is creating close partnership between insurance and banking, also known as Bancassurance. This is the provision of insurance and banking products and services through a common distribution channel or to a common client base.
One of the models to implement this is the integrative or generalist model. Under this model:
- Product distribution is made through existing bank channels
- Bankers themselves sells the insurance products to their bank customers
- The insurance sales process is managed by the banks and insurer act as only product/service provider. The resulting profit is shared between bank & insurance
Another model to consider is the specialist model. Here the bank distributes insurance products through generally employees or representatives of the insurance company. The model operates thus: Bankers help to identify the prospects to be contacted by insurance professionals; and passes over the prospect lists to the insurance companies for further follow up. Requires less training and higher compensation to support the referral process. It lengthens the process of sale.
Under the specialist model, the referral fee is paid to the bank.
The last model is financial planning model or ‘close partner’. Under this model: Insurer employs sales force and deploys them at bank branches. Bank as introducer, insurer sales force as converters. Offers each customer and prospect a full financial planning package addressing all of the individual’s financial concerns
You need to choose the model most likely to succeed.