KUALA LUMPUR, Oct 5 ― The Islamic financial sector has yet to realise its full potential of value-based finance to address contemporary economic and social needs, and there is a continuing need to foster an appreciation of Shariah’s fundamental values among market participants as well as their embodiment in financial solutions, services, and conduct, said Bank Negara Malaysia (BNM).
Governor Tan Sri Nor Shamsiah Mohd Yunus said value-based intermediation (VBI) has become more entrenched in the corporate value intent and business strategies of Islamic financial institutions, but it appears that value-based finance is still in its early stages.
“Many financial institutions, conventional and Islamic alike have yet to make important changes to how they operate and do business to fully deliver on value-based finance. Five years since the launch of the VBI initiative in 2017, the majority of Community of Practitioners members are only at the ‘Emerging’ phase of implementation,” she said during her keynote address at the two-day Global Islamic Forum 2022, which started today.
Nor Shamsiah also emphasised that the efforts to diversify value-based capital, which include funding of new ventures and other VBI-aligned outcomes are far from full realisation, with only 4.2 per cent of investment accounts intermediated by Islamic banks being suitable to finance transformation, such as in supplying growth capital to industries of the future or new business models.
“We have also yet to make the most out of the full range of Shariah contracts in finance application today. Benevolent contracts, risk-sharing contracts and other asset-based contracts have yet to be fully utilised to offer a broader spectrum of funding, investment and protection solutions,” she said.
Citing a VBI report by the Association of Islamic banking and Financial Institutions Malaysia, she said RM146.6 billion in financing, investments and deposits were intermediated by Islamic banks in VBI-related or VBI-aligned initiatives between 2020 and 2021.
She explained that in order to take Islamic finance values to the next level, there is a need for a whole-of-ecosystem alignment to Islamic finance values, which requires Islamic financial institutions, as well as shareholders, investors, businesses, households, regulators, and all players, to understand and accept the fundamental goals of Islamic finance in order to fully harness the beyond profit proposition.
The Shariah Advisory Council of Bank Negara Malaysia has identified seven fundamental values of Islamic finance.
“They are the prevention of harm and attainment of benefit; money only as a store of value or medium of exchange; attainment of profit from accepting or sharing risk; balanced wealth creation with wealth transfer and circulation; assurance of transparency and traceability; Shariah compliance, and fairness and attainment of excellence,” she said.
Elaborating further, Nor Shamsiah said the second imperative that reinforces the first one is action-oriented leadership, which is important in further advancing Malaysia as an International Islamic Financial Centre.
“With the maturity of the Islamic financial sector in Malaysia, we believe that the industry is now well-positioned to drive the Malaysia International Islamic Financial Centre (MIFC) agenda. Thus, it gives me great pleasure today to announce the establishment of the MIFC Leadership Council, a joint initiative of BNM and the Securities Commission Malaysia.
“The Council will provide thought leadership, drive strategy formulation and implementation to enhance Malaysia’s position as an international gateway for Islamic finance,” she added.
The governor also said that the third imperative is strengthening connectivity for greater innovation and impact, particularly in three areas, which are the halal sector and the role that the Islamic finance industry can play in supporting its growth and expansion.
“While the percentage of halal-certified companies utilising Islamic finance facilities has been on a rapid uptick, nearly doubling to 41.3 per cent in 2021 from 21.9 per cent in 2018. More can be done, especially to facilitate connectivity across halal value chains.
“The industry should continue to explore new sources of funds based on the concept of risk sharing and develop more impact-based funding, investment and trade facilities that can drive improvements in productivity and efficiency of halal companies.
“Technology can also be leveraged to embed financial services into the halal ecosystem, where Islamic finance solutions are seamlessly integrated into the offering of halal products or services. Apart from being more efficient and frictionless, it can also offer a more complete proposition to businesses and consumers,” she concluded. ― Bernama
