On the 12th March 2018, Bank Negara Malaysia (BNM) published an updated version of a strategy paper titled ‘Value-based Intermediation (VBI): Strengthening the Roles and Impact of Islamic Finance’. The 36-page document defines VBI as: “An intermediation function that aims to deliver the intended outcomes of Shariah 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.”
The main idea of VBI is that it is possible to improve profitability while addressing social, economic and environmental issues. From that perspective, VBI creates value not only for Islamic finance institutions, but also for governments, regulators, customers and communities. There is obviously much common ground between VBI and the concepts of ‘shared value’, ‘impact investing’ and ‘environmental, social and corporate governance’. However, VBI’s uniqueness lies in its reliance on Shariah as a frame of reference.
From my experience with Islamic finance institutions, I feel that advocating the realignment of focus toward creating greater socioeconomic impact faces three challenges: The why, the when and the how. The strategy document sheds light on these important questions as follows.
1) Why should Islamic finance institutions adopt VBI?
Today, Islamic banks’ value proposition is dominated by Shariah compliance, which makes attracting customers on a non-religious ground challenging. Moreover, Islamic banks’ customers expect those banks to be strongly active regarding economic, social and environmental issues because such a position is in line with its core values. Hence, adopting VBI strengthens Islamic finance institutions’ value proposition.
2) When should Islamic finance institutions adopt VBI?
In many countries, Islamic finance institutions are relatively young and therefore face the following dilemma: should they wait until ‘the standard business model’ is implemented before adopting VBI? The document proposes two criteria to be considered when assessing an Islamic finance institution’s readiness. Firstly, the willingness based on the Islamic finance institution’s sustainability track record and based on the positive inclination of management and shareholders toward VBI. Secondly, the Islamic finance institution’s capacity to implement VBI depending on its financial performance.
3) How should Islamic finance institutions adopt VBI?
From the Islamic finance institutions’ perspective, the document does not provide a generic roadmap. However, we can depict some key success factors to be taken into account: (1) facilitating entrepreneurial activities through a holistic approach, (2) empowering communities through the provision of financial solutions that create positive impact, (3) having inclusive and self-governance and (4) having ‘best conduct’ which refers to an institution’s treatment toward its stakeholders (customers, employees, the public and investors).
Since the success of any strategy depends on the environment where it takes place, the document also discusses strategies to create an enabling environment for VBI implementation by regulators, namely by nurturing potential champions, enhancing disclosure, facilitating networking with key stakeholders and measuring performance.
Although the document focuses on strategic issues and therefore does not address all operational matters related to bridging the gap between sustainability and Islamic finance, BNM should be highly praised for this pioneering initiative that will hopefully encourage other regulators to move in the same direction.
Dr Mohamed Wail Aaminou is the general manager of Al Maali Consulting Group. He can be contacted at [email protected].