Value Based Intermediation: Malaysia showing the way forward

On March 12^th 2018, Bank Negara Malaysia (BNM) published an updated version of a strategy paper entitled “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 are obviously many common grounds between VBI and the concepts of “Shared value”, “Impact Investing” and “Environmental, Social and Corporate Governance”. However, the VBI uniqueness lies in its reliance on Shariah as a frame of reference.

From my experience with Islamic finance institutions (IFI), I feel that advocating the realignment of focus towards creating greater socio-economic impact faces three challenges: The why, the when and the how. The strategy documents shed light on these important questions.

• Why should IFI 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 on economic, social and environmental issues because such a positioning is in line with its core values. Hence, adopting VBI strengthens IFI value proposition.

• When should IFI adopt VBI?

In many countries, IFI 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 IFI readiness. First, the willingness based on IFI’s sustainability track record and on management and shareholders positive inclination towards VBI. Second, the IFI’s capacity to implement VBI depending on its financial performance.

• How should IFI adopt VBI?

From the IFI perspective, the document does not provide a generic roadmap. However, we can depict some key success factors to be taken into account. First, facilitating entrepreneurial activities through a holistic approach. Second, empowering communities through provision of financial solutions that create positive impact. Third, inclusive and self-governance and finally, ‘best conduct’ which refers to an institution’s treatment towards its stakeholders (customers, employees, 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, 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 into the same directions.

This article was published in IFN (volume 15. issue 16 ) https://www.islamicfinancenews.com/value-based-intermediation-malaysia-showing-the-way-forward.html?access-key=b89f2e9bda166c97fa4afe09d24caba8