Top management of Islamic finance institutions should set the tone on value-based intermediation (VBI), said panelists at the Value-Based Intermediation: The Islamic Perspective session during the Global Islamic Finance Forum 2018 (GIFF2018).
According to Bank Negara Malaysia (BNM), VBI refers to intermediation that "aims to deliver the intended
outcomes of shari'ah through practices, conduct and offerings that
generate positive and sustainable impact to the economy,
community and environment, consistent with the shareholders’
sustainable returns and long-term interests".
BNM Governor Datuk Nor Shamsiah Mohd Yunus shared in her keynote that an
International
Finance Corporation survey of global banks had showed that around 86% of
respondents which integrated social and environmental risks in
their business have yielded positive business results.
The VBI
system is also aimed at helping the Islamic banks to explore new
opportunities for sustained growth as its rapid growth rate in Malaysia
has declined from double-digit growth in 2011 to 8% in 2016.
The sustainability agenda needs to be incorporated into the shari'ah
governance framework in Islamic financial institutions, said Professor Datuk Dr Azmi Omar, President and CEO, INCEIF.
Speaking after a panel titled Roadmap to Sustainability at GIFF2018, Professor
Azmi said the move would push the sustainability agenda up to the board
level of these institutions, and compel them to adopt an agenda that
goes beyond profit.
"The key thing is that you need the support
of the board. In some banks, the board may not fully embrace it. They
are looking at the dollar and cents. So you need to get the board
support, and you also need the nudge from the regulators," he said.
Dato' Mohd Redza Shah Abd Wahid, CEO of Bank Muamalat Malaysia said that if the CEO or the board do not embrace VBI, it will not happen. "If you don't know, ask. Don't do it alone. This is a journey of Islamic finance, you need to change finance for finance to change,” he said at a panel.
Azmi
added that Islamic financial institutions are encouraged to regard a
sustainability agenda as an opportunity for innovation, rather than an
initiative that will affect their bottom line. For instance, he
said they are encouraged to work with companies that do not fully meet
the sustainable criteria by assisting them in their progress, rather
than automatically rejecting their financing requests.
Dr Adnan Chilwan, Group CEO of Dubai Islamic Bank said banks or financial institutions should also consider the customer's standpoint when implementing VBI strategies.
"The first step for customers is for them to think about the proposal and plan a business that is going to create value for society. It will fall under the bank's VBI scorecard," he said.
He also said that some jurisdictions would support VBI-based proposals, while others might need time to study it. He shared that most of the Islamic finance markets under the Gulf Cooperation Council (GCC) were embracing the VBI concept, which is also being accepted by conventional financial institutions.
Dato' Redza said executing VBI strategies was not a challenge, particularly if a regulator is sponsoring the concept along with setting out the guidelines, such as BNM. BNM issued three documents with the help of INCEIF to facilitate VBI adoption the same day - an implementation guide, an impact assessment framework, and a scorecard. The latter two are consultative documents, for which feedback is solicited. Implementation is on a
voluntary basis.
"If you don't have that (support), you have to battle the board, stakeholders and the most important people - your staff," Dato' Redza pointed out.
Redza also said institutions should inculcate a culture of thinking of the community amongst bank employees. He said that one way to engage employees is to communicate the methods of balancing a staff's key performance indicators (KPI) against the positive impact on society at large.
Dr Chilwan also said VBI was a natural extension of what Islamic finance has been doing all this while. “VBI is also about how you can merge it with pure commercial indicators, how you can create value for society and in the process, make profit,” he said.
He added that VBI approaches must consider how Islamic finance institutions can create an environment that could support entrepreneurs, small and medium sized businesses through various initiatives, and ensuring financial inclusion.
"Why (do) you need VBI - you need to do it because we want to create a population that is financially independent. And that independence does not come from financing alone, but through training and empowerment," he said.
Dr Chilwan added that VBI was essentially a "marriage" of environmental and social governance (ESG), corporate social responsibility (CSR) and socially responsible investments (SRI).
Sheikh Nizam Yaquby, a member of the ISRA Council of Scholars (COS) said the VBI concept was not new as Islamic finance is built on shari'ah concepts that emphasise ethical practices and environmental awareness.
But practical implementation could be difficult, he warned. He said, "When you put virtues and values to numbers, amounts and contracts, you will have a great deal of issues to tackle."
Redza also said Islamic banks who were new to VBI should be aware that VBI was not limited to scorecards or credit processes. This is because there are existing instruments that can be used to meet VBI goals. He said banks could incorporate zakat and wakaf approaches into the practice of VBI.
Dr Ioannis Ioannou,
Associate Professor of Strategy and Entrepreneurship in the London
Business School, said regulation of this sector can bring about the
creation of common best practices. "As a society, we want to bring all
of them to at least the best minimum standards, and then, give the space
to the best ones to innovate," he said.
Nine of the 27 Malaysian Islamic financial
institutions have pledged to adopt VBI. Two innovative products –
rent-to-own housing loans and cheaper financing for green hybrid
vehicles – have already been introduced.
The two-day GIFF2018 was organised by the Association of Islamic Banking and Financial Institutions Malaysia.
Explore:
Read more about BNM's guidance documents in a Suroor Asia blog post.
Read BNM's October 2018 documents on VBI
Download BNM's Value-based Intermediation:
Strengthening the Roles and Impact of
Islamic Finance strategy paper, dated March 2018