For centuries the concept of risk management and insurance remained vague to the Saudis, and remained so until the emergence of current global financial crises. Hedging against adverse rate fluctuations was never considered worth taking any action, and this was because of the culture Saudis accepted for years that risk is to be accepted, never managed, reduced or eliminated. This traditional culture continued to prevail over years that on one hand led the Saudis suppress from purging poor performers, while on the other, it replaced them with high performers. Management practices over the past twenty years are a result of tribal traditions inherited over the timespan, for which Saudi companies have remained unable to bridge the gap between the business culture and work practices of Saudi and those of the West (Idris, 2007). Contemporary credit crunch has managed Saudis to understand the significance of managing risk in a turbulent state of a global economy (Newswire, 2009). Senior banking executives are seeking ways to establish effective risk management processes not only in banking sector but also e-banking and insurance arena.
The concept of insurance in Saudi Arabia has escorted managers to contemplate upon ways to acquire foreign private investment against the political risks of expropriation, inconvertibility and revolutionary insurrection. The traditional standards of international law has witnessed departure in this region for the reason that for centuries the Saudis have suffered from insecure foreign investments and no economic or legal protection. Therefore, today Saudis are deviating from their traditional insecure policies and are seeking and adopting insurance and risk management techniques to secure insurance of private investment.
Contemporary Islamic management acknowledges that those days are no longer there, when risk management and modern forms of insurance were considered as products of western economic culture. Saudis attitude towards these two have changed and is still in the process of transformation. In the light of such change in attitude, Saudis realize that the need for successful insurance market development is not limited to the West today and for success it must be embedded into Islamic banking and insurance sectors, which are related to a different attitude towards business and interest. This has equipped the Saudis to adopt a unique school of thought which prepares them to confront the modern day challenges of globalization, which not only requires risk management and sharing, but also helps them in building up large capital reserves vital for economic and insurance activities. This period of development has been marked with tremendous changes which further influenced Saudis to be more oriented towards seeking better ways of modernizing their businesses, thereby preparing the individual provisions for coping with risk practices. Despite such a developmental phase, there are senior executives who hold school of thought that it is Arab’s destiny to perceive risk management as a suspicious activity, though it is still claimed to be perceive not against God’s will (Theil & Ferguson, 2003).
Modern-day Islamic view proclaims that any insurance not based on interest is acceptable and that contrary to gambling, insurance reduces or eliminates adverse economic consequences of an already existing risk rather than creating new risks (ibid). Saudis attitude has become optimistic in believing that insurance serves a noble purpose, in that it avoids the adverse psychological consequences caused by anxiety, creating peace of mind, as well as reducing actual hardship and grief by providing for the deprived people, all of which is halal. Thus, Saudis have introduced Shari’a compliant takafol insurance, which specifically avoids ‘haram’ concepts of interest, and is now flourishing in many Islamic nations offering significant future growth opportunities.
‘Takafol’ has introduced a new step towards success but still it needs a lot more than that. Saudi banks are making slow but steady progress in gearing up for an increased demand for derivatives and structured products. Contemporary literature and surveys through research methodology suggest that banks are improving their capabilities to create and implement new value strategies. Ford (2007) states that Saudi managers are continuing to seek out new investment options for surplus revenues where diversification has remained one of the main topics of debate at the Jeddah Economic Forum, but since Saudi firms are already managing to seek out new market opportunities, while foreign investment in this region itself is becoming more diverse (Ford, 2007).
Being an Islamic state, contemporary economic trend where on one hand fulfills the Shari’a supremacy, on the other hand, it is expecting to tackle the problem of insurance by establishing a scheme of ‘Islamic’ insurance following in the footsteps of countries like Malaysia. As far as commercial insurance is concerned, no commercial companies can be set up and registered in Saudi Arabia, and no insurance regulations have been enacted except certain provisions concerning marine insurance in the Commercial Court Regulations from which the validity of insurance transactions in the Arab world are inferred (Khorshid, 2004, p. 132).
Although Saudi Arabian insurance market has not yet officially accredited by the State, despite in practice it is largely composed of segments similar to those constituting the insurance market in the States of the Gulf Cooperative Council. Still, all insurance business is transacted under the umbrella of commercial firms, which indicate the internal rivalry of Saudi companies with the government. Awaiting to be officially legalized, the insurance companies are not practically accepted or licensed to perform in isolation from other commercial activities of the agent, who is usually a merchant or a trader, which has created a void and a rift between Saudi attitudes and the reform. This wide gap reveals the distinction between Saudi legal theory and practice which in the last two decades very many new insurance companies with a majority of Saudi interests have suffered.
Saudi Insurance Market, does not depict any official record for the number of insurance companies in Saudi Arabia, and since various foreign insurance offices are accustomed to entering and leaving the market without any governmental supervision, the real scale of insurance activity within the Saudi economy is unknowable. However, judged through theoretical research framework, the whole structure of the economic scope is estimated to be the largest market not only within the States of the Gulf Cooperative Council, but also in the whole Arab world.
In the Arab world, Shari’a holds constitutionally to be an unquestionable source of legislation therefore, the insurance and management practice diverges in many respects from this governing principle, as various pieces of legislation contain dispositions that are contrary to Islamic law. This contradiction among Shari’a and market practices, elucidates the failure to harmonize a capitalistic economic structure as the majority of the actual religious authorities conventionally interpret it. Thus the current draft shaped by Saudis’ attitude towards insurance and risk, are still under modification, and currently in the final stage to be approved by the Shari’a council, widens the gap between theory and practice. Theoretical constitutional framework stipulates that no insurance company may be allowed to be constituted in Saudi Arabia, and that all insurance business will have to be transacted through an agent, whose position is regulated in detail by the draft decree. Khorshid (2004) points out that the rules entail some provisions to be strictly followed including the form that minimum capital of the insurance company must be represented by the agent, insurance company must be a joint-stock company with a paid up capital of a sum equivalent to ten million Saudi Riyals (Khorshid, 2004, p. 133).
It seems there is an internal conflict regarding insurance companies that once adopted, will further substantiate the contradiction that insurance companies may not be constituted in Saudi Arabia because of the concerns regarding the validity of insurance and the opposition of the majority of religious authorities to it. This is for the reason why commercial insurance is freely be undertaken from other countries through selective Saudi agents. This situation illustrates perfectly the dictum that there is a confrontation between an irresistible force (the economic and social necessity) and an immovable object, which demonstrates that the acceptance of insurance is imposed by economic reality and restrictions put to it are dictated by considerations pertaining to the Shari’a.
Modern Islamic financial institutions in Saudi Arabia confronts two types of risks of which the foremost managerial risk they have in common is with traditional banking acting as financial intermediaries, which includes risk like credit, market, liquidity and operational. However Saudis attitude towards the second type of risk entails modern risks that the Islamic banks confronts as a result of the changing asset and liability structures. The overall objectives and strategy of traditional Saudi bank towards risk and management policies enable and gives power to the board of directors to take onus for outlining the overall objectives, policies and strategies of risk management for any Islamic financial institution (Khan & Ahmed, 2001). The analyzed risk objectives in the light of communication through the institution, approves the overall policies of the bank regarding risk. It is the sole duty of senior executive management to implement these broad specifications approved by the board for which the management establishes policies and procedures used by the institution to manage risk. These procedures usually are inclusive of updating a risk management review process with appropriate limits on risk taking and control. However in order to achieve bank’s risk management objectives, procedures include appropriate approval processes, limits and mechanisms (ibid).
Risks that usually banks are keen to take up, lacks monitoring and managerial techniques. That means Saudi banks are not efficient in testing to see the effects on the portfolio resulting from different potential future changes. Banks lack in areas to be examined under the effects of downturn in the industry or economy and market risk events on default rates and liquidity conditions of the bank. There is no concept of stress testing that must be designed to identify the conditions under which a bank’s positions would be vulnerable and the possible responses to such situations. Saudi banks, though possess contingency plans but to what extent they are implementable and what are different scenarios under which they are implemented are unknown sectors of the Saudi risk and banking economy.
In the area of operational risk management, the executive board of directors decides in coordination with senior management if there is a need to develop any new changes in the policies and strategies for managing operational risk. Despite working together with the senior executives, Saudi managers are still unable to detect that cause behind operational risk and are unable to identify the risk due to failures in people, processes, and technology.
One weakness of the Saudi people is that they always prefer to take on managerial responsibilities, despite the fact that they when appointed as fresh managers, lacks in expertise, unable to identify the complexity of operational risk, and finds it difficult to quantify it. This situation becomes hilarious when most of their newly appointed managers, when asked about risk controlling techniques, expresses their belief that operational risk measurement techniques are simple and experimental. Saudi banks, however, when analyze and interpret information taken from different risks from reports and plans published within the banking institution, reveals the gaps that can represent potential risks.
Thus, it is not only the sole responsibility of Saudi management to take care of the fact that policies and procedures are properly implemented in their managerial system, but also some responsibility lies with the citizens to express their concerns in a positive attitude towards management techniques in collaboration with their culture. Islamic banks must demonstrate not only through their policies but also through the implication of these policies that risk management process can be fastened up with a pace by clearly identifying the risk objectives and strategies. There is a need for the Saudi banks and insurance management to implement modern day policies by establishing control systems that can identify and measure various risk exposures, while managing them effectively.
- Ford Neil, (March 2007) “Saudi Banking Goes International” The Middle East. Issue: 376, pp. 48.
- Idris, M. Abdullah, (2007) “Cultural Barriers to Improved Organizational Performance in Saudi Arabia”. SAM Advanced Management Journal. Vol. 72. No. 2. pp. 36.
- Khan Tariqullah & Ahmed Habib, (2001) “Risk Management: An analysis of issues in Islamic financial Industry”. Islamic Development Bank, Islamic research and training Institute.
- Khorshid Aly, (2004) Islamic Insurance: A Modern Approach to Islamic Banking: RoutledgeCurzon: New York.
- Newswire, 2009 IFC and Saudi Arabia’s Institute of Banking Help Saudi Banks Cope with Risk.
- Theil Michael & Ferguson L. William, (2003) “Risk Management as a Process: An International Perspective” Review of Business. Vol. 24. No. 3, pp. 30.