The challenges around value-based intermediation in Islamic finance

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

Challenges for OIC tourism discussed in 2015 report

Source: SESRIC.

SESRIC has launched International Tourism in the OIC Countries: Prospects and Challenges 2015 during the 9th Session of Islamic Conference of Tourism Ministers (ICTM), which was held in Niamey-Niger between 21 and 23 December 2015.

Overall, the report sheds light on the challenges of tourism development in the OIC member countries and the issue of tourism cooperation among them, listing some recommendations as policy guidelines.The report examines the performance and economic role of international tourism sector in the OIC member countries in the latest five-year period for which the data are available. The report analyses the two traditionally used indicators in measuring international tourism, i.e. international tourist arrivals and international tourism receipts. Moreover, the report provides detailed analysis on the state of the intra-OIC tourism.

Islamic tourism has a great potential for sustainable growth and significant contribution to the development of the overall tourism sector in the OIC member countries, as is reflected by a special section in the 2015 report. 

Finally, the 2015 version of the report of SESRIC discusses in details the potential role of the public-private partnership (PPP) modality for the development of the tourism sector in the OIC member countries.

At the event, SESRIC also contributed to the selection of the next OIC Capital City of Tourism by providing detailed scoring results to the selection committee on the nominee cities. According to the results of the selection committee, the Ministerial Session adopted Madina al-Munawarra in KSA and Tabriz in Iran as the OIC Capital City of Tourism for 2017 and 2018, respectively. Jerusalem was picked in 2014 as the OIC Capital City of Tourism for 2016. 

Interested?

View the OIC Tourism Report 2015 online in English, Arabic, or French (PDF)

Contemporary challenges for Islamic finance discussed in Singapore on 22 October

Source: Event website.

Islamic Finance: Contemporary Challenges Conference 2015, to be held on 22 October at the Suntec Singapore Convention & Exhibition Centre, will debate the transition of Islamic finance into the mainstream, its value proposition for contemporary businesses, and its role in ethical finance.

Organised by RHT Academy, RHT Compliance Solutions, and RHTLaw Taylor Wessing, the full-day event will cover:

• Opportunities in Asia 
• Value proposition for businesses 
• Cross-border financial transactions 
• Governance and compliance 
• Financial innovations 
• Fintech in the Islamic financial landscape 
• Whether Islamic finance is more relevant in the era of ethical finance

Interested?

Register. Registration closes on 12 October 2015
View the agenda

Nobel Peace Prize winner Muhammad Yunus to keynote the EFICA awards 2015

The 2015 Ethical Finance Innovation Challenge Awards (EFICA), which are supported by Abu Dhabi Islamic Bank (ADIB) and Thomson Reuters, has confirmed Nobel Peace Prize winner Muhammad Yunus as the keynote speaker at the third annual EFICA awards. The awards will be held on 4 October, 2015 at the Westin Dubai Mina Seyahi Beach Resort, Dubai, UAE.

The EFICA awards, which offer prizes of up to US$175,000, are given in three categories: development of Islamic finance, ethical finance initiatives, and lifetime achievement. This year’s focus is on ideas that will help broaden the appeal of ethical finance to a global audience and to reward initiatives that have created tangible benefits for society.

Tirad Al Mahmoud, Chief Executive Officer of ADIB commented, “Muhammad Yunus is recognised globally as a pioneer in the ethical finance space and has been leading the way particularly in terms of financial inclusion across the financial services sector for many years. He is rightly credited as the one individual who brought microfinance to a level where it became a viable business enabler in his native Bangladesh and in many other developing countries. We can learn a great deal from his inspirational approach in our own attempts to develop innovative ethical finance initiatives to make a broader social impact.”

Nadim Najjar, Managing Director, Middle East and North Africa, Thomson Reuters said: “The EFICA awards are a positive force in finance, recognising innovation that sets a strong example of ethical action, and can be replicated across the industry. Muhammad Yunus will share his experiences with those attending and explain the importance of promoting ethical finance and the significance that innovation plays in developing a more equitable financial system for future generations.”

Muhammad Yunus, who is also known as 'the world's banker to the poor', has dedicated his life’s work to proving that a lack of wealth is no barrier to credit-worthiness. His revolutionary microcredit system is estimated to have extended credit to more than seven million of the world's poor, many of them in Bangladesh. He is one of only seven people to have won the Nobel Peace Prize, the US Presidential Medal of Freedom and the Congressional Gold Medal, placing him alongside leaders and visionaries such as Nelson Mandela, Martin Luther King Jr, and Mother Teresa.

In its third year, EFICA received over 200 entries from across the globe. This year, entrants were asked to submit projects that have helped broaden the appeal of ethical finance to a global audience and initiatives that have created tangible benefits for society. 

The shortlisted applicants for the Ethical Finance Initiative award category and the Islamic Finance Industry award presented in front of a panel of judges in Abu Dhabi on 9 and 10 September, after which three finalists from each category were selected. The finalists will present in front of an audience at the Gala dinner of the Ethical Finance Innovation Challenge on the 4 of October which is being held on the sidelines of the Global Islamic Economy Summit in Dubai. The audience will choose the winners through a public vote.

Halal economy stymied by significant challenges: Datamonitor

Datamonitor has released Halal: Boom market held back by significant challenges, an October report about the rise of the halal economy.

A rapidly growing Muslim population, coupled with rising consumer affluence and increasing halal awareness is making consumers pay a premium for products that meet their ethical and religious beliefs, the research firm said. There is growth globally, but Asia and the Middle East are driving the halal market forward.

"The approach to explain and promote halal in much the same way as organic products, focusing on wholesomeness, safety for consumption and use, and higher quality of ingredients is attracting shoppers from more diverse ethnic backgrounds and religious beliefs," Datamonitor said in a description of the report.
According to Datamonitor, a combination of factors are driving demand, spelling good news for the large multinational players which control 90% of growing halal market globally. A rapidly growing Muslim population is expected to make up more than a quarter (26.4%) of the global headcount in 2030, and their rising disposable income is creating increased demand for halal products. At the same time halal is the new 'organic', attracting non-Muslim buyers.

Some figures shared include:

• The global halal market was worth US$1.7 trillion in 2012
• The halal food and beverage segment is worth over US$1 trillion today
• Halal cosmetics sales are growing 15% annually

However, there are significant challenges for the further development of the halal market, Datamonitor says, pointing to the lack of halal certification, lack of support for halal companies in financial and investment services, as well as a negative political climate associated with Muslims which has led to bans on halal products.

The company noted in particular that 'halal' is difficult to control and guarantee especially since there are limited possibilities in the sourcing and substitution of raw materials. Halal accreditation agencies are starting to appear, but the halal regulatory framework remains patchy. At the same time, halal-related companies are struggling to find support in financing and investment. 

Halal-consciousnessness remains low in non-food segments, even though pharma is an emerging growth sector of the halal market.

The product code for this report is ML00017-056.