Bank Negara issues guidance on value-based banking

Bank Negara building in Kuala Lumpur.

KUALA LUMPUR: Bank Negara has issued guidance documents to encourage the nation’s Islamic financial institutions to adopt a value-based system to generate positive social impact, while helping to propel the industry into a new growth pathway.

The documents issued provided guidance to banks on implementing the value-based intermediation (VBI) system, creating a financing and investment framework, and a VBI scorecard. 

These documents build on the Strategy Paper on VBI which it released in July 2017. Bank Negara Governor Datuk Nor Shamsiah Mohd Yunus said with the support of the central bank, the industry in Malaysia has been taking concrete steps to drive strategies to increase the positive impact of finance on society.

“The commitment to adopt VBI is a significant step by the industry to clearly identify Islamic finance with sustainable practices, as it should,” she said in a keynote address at the Global Islamic Finance Forum 2018 (GIFF2018) today. 

With the theme ‘Beyond Profit’, GIFF2018 brings together a panel of experts in Islamic finance and sustainability to lead the conversation in encouraging the banking industry to progress from syariah-compliant banking towards a more holistic practice of syariah-based financing that generates a positive impact on the economy, community and environment.

The growth of Islamic finance in Malaysia has been a remarkable success story, with the market share of Islamic banking assets in Malaysia having reached the 30% mark. 

This has, however, since slowed, signalling the need for a fresh direction.

“The Islamic finance industry today faces a strategic choice - to either continue on a path that largely ignores the stark social and environmental realities that confront humanity, or to thoughtfully chart a new path that fully embraces the idea and philosophy of finance beyond profits.

“The latter will be an unfamiliar path in many respects, but one that is far closer to the fundamental premise of syariah on which Islamic finance is based upon,” Nor Shamsiah said.

Towards this end, she said it will require a rethinking of the concepts of value and risk, and human capital needs. On value, she said a rethinking of the concept of value will have a significant impact on how Islamic banks make decisions, and to the banking portfolios. 

For example, expert advisory services to help borrowers mitigate the environmental impact of projects will be a bigger part of the offerings of a bank. 

On the rethinking of risk, she said non-traditional forms of risks such as social, political and environmental risks are business threats, and there are material benefits to managing these risks.

“As natural stewards of sustainable finance models, Islamic financial institutions are well placed to develop richer perspectives of social and environmental risks,” she added. 

On human capital, Nor Shamsiah said there has to be concerted focus to build the skillsets to implement sustainable financing including at the management levels. 

These includes engineering and technical skills in the design, construction and assessment of technology; science skills; and monitoring skills.

Meanwhile, President of the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) Datuk Adissadikin Ali said nine of the 27 Islamic financial institutions in Malaysia have adopted the VBI system.

“It is on a voluntary basis, and the form and manner will differ between the institutions,” he said. AIBIM is the organiser of GIFF2018.