Value-Based Intermediation In The Sustainability Journey
Value-based Intermediation (VBI) shapes sustainability journey of Islamic finance in Malaysia
The Value-based Intermediation (VBI) initiative, embraced widely by the Malaysian Islamic finance industry, signifies the long-term commitment of the industry to raise the value propositions and impact it delivers to the economy and society. Through this initiative, the industry has undertaken to elevate the processes, practices, offerings, and conduct that will also promote sustainable businesses and communities. The distinguishing factor of VBI lies at its root, which is the objectives of Shariah in determining Islamic finance underlying values, moral compass and priorities. This is then demonstrated by its significant impact on business models of Islamic financial institutions (IFIs), including the drivers of profitability and risks. These fundamental principles of Shariah provide IFIs with a purpose beyond profit. It also calls for the mobilisation of financial resources towards productive economic activities, particularly those that are consistent/aligned with the Sustainable Development Goals. Four underpinning thrusts of VBI are ─ entrepreneurial mindset; community empowerment; good self-governance; and best conduct.
Since the issuance of the VBI Strategy Paper in 2017, VBI has evolved from a broad conceptual aspiration to an anchoring strategy for many IFIs in Malaysia in driving organisational transformation, i.e. corporate mission, business practices, financial solutions, network building and performance measurement. Diagram 1 provides a snapshot of the VBI journey in Malaysia.
The fundamental principles of Shariah provide Islamic financial institutions a purpose beyond profit
An important facet of this journey is the impact-based risk management system for assessing financing and investment activities of IFIs in line with their respective VBI commitments. On this front, the Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF) serves as a reference for other financial institutions beyond Islamic finance intending to incorporate environmental, social and governance (ESG) risk considerations in their own risk management system. The first cohort of VBIAF sectoral guides on energy efficiency, renewable energy and palm oil detailing ESG risk considerations in the financing and investment decision-making process was issued on 31 March 2021. This guidance document aims to further develop the industry's capacity and capability to progress further in the sustainable finance journey (see Diagram 2). Three additional guides for manufacturing, oil and gas, construction, and infrastructure are also underway with targeted finalisation by 2021.
VBI has evolved from a broad conceptual aspiration to an anchoring strategy for many Islamic financial institutions in Malaysia
Islamic finance is intrinsically rooted in delivering a higher overarching objective (Maqasid Shariah) to preserve/advance the common interest of society by preventing harm and maximising benefits. These value propositions are not only consistent with universal and ethical values but seek to achieve economic aspirations through continuous elevation of the overall well-being. On the global front, the growing intensity of sustainable finance provides opportunity for IFIs to take stewardship and influence financial development, which is in line with its catalytic role in promoting inclusive and sustainable economic growth, as well as providing a moral motivation in steering growth and development on a more sustainable path.
VBI implementation in Malaysia has pivoted gradual behavioural change on industry players to be more 'conscious' in their business practices.
Several new innovations by IFIs, which consider social and impact-driven considerations, are also anchored by VBI aspiration. These include offerings of a blended finance programme combining social finance instruments (waqf, zakat and sadaqah), microfinancing and capacity-building assistance to empower B40 micro-entrepreneurs to generate sustainable income; introduction of social impact deposit accounts that enable customers to provide financial relief by voluntarily preceding a portion of their returns to those whose incomes are affected by the Covid-19 pandemic; and customised financing packages bundled with complementary value-added services, e.g. application for halal certification, business advisory and market access to assist halal entrepreneurs.
VBI implementation in Malaysia has pivoted gradual behavioural change on industry players to be more conscious in their business practices
The Malaysian takaful industry has also started to explore integrating VBI into products and business practices that can deliver a more significant and more constructive impact for Malaysian households/businesses. In collaboration with the takaful industry players, the Malaysian Takaful Association (MTA) has recently released the VBI Framework for Takaful (VBIT) on 23 June 2021 to guide VBI adoption by the takaful industry.
The above is evidenced by several key measured outcomes reported in the VBI Preview Report 2017-2020. The Islamic banking industry has intermediated over USD37.3 billion of VBI-related aligned initiatives that stretch over financial inclusion, business empowerment and environmental sustainability. More than 4,500 renewable energy and green projects were financed over USD2.1 billion funding; more than 100,000 SMEs & Micro-SMEs were supported via USD9.6 billion financing; and nearly 35,000 deserving families now own affordable homes in over 190 projects approved financing, among others.
The financial sector plays a catalytic role in accelerating an orderly transition towards economic, environmental and social sustainability. This journey requires policy planning, coordination, execution and communication as every stakeholder has a role to play within its circle of influence and capacity. The VBI progress and developments in this challenging and competitive environment lead to promising steps for Islamic finance to take stewardship in sustainable finance – to create greater socio-economic impact and to align innovation with the needs of productive activities and social well-being.