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Current Trends in Islamic Finance: The Emergence of Value-Based Intermediation

The Islamic banking industry in Malaysia is paving the way for a new phase of development. A comprehensive market infrastructure and a robust and progressive regulatory framework are already in place. Realising the need to explore new opportunities to bring Islamic finance to the next level, Malaysia has recently introduced value-based intermediation (VBI) principles. It is a strategy driven by Malaysia’s central bank, Bank Negara Malaysia (BNM), for socially responsible finance paradigm by propagating Islamic finance precepts, in consonance with the global demand for ethical finance, positive socio-economic impact, and value-based banking.

In 2017, Islamic banking accounted for 71% of the increase in Malaysia’s financial sector, overtaking conventional banks’ growth (RAM Rating Services Bhd). BNM defines VBI as “an intermediation function that aims to deliver the intended outcomes of Shariah through practices, conduct and offerings”[1] to contribute positively and sustainably to a wider range of stakeholders (environment, community and overall economy) without compromising shareholders’ financial returns and long-term interests.[2]


Comparisons with Established Precepts

The intended outcome of VBI is to encourage ethical values comparable to established concepts such as Corporate Social Responsibility and Corporate Governance;

Environmental, Social and Corporate Governance (ESG); and Ethical Finance and Sustainable, Responsible, Impact Investing (SRI) that support the triple bottom line measurement albeit underpinned by Shariah principles as its distinguishing factor. The emphasis is on the strengthening of the role and impact of Islamic Banking Institutions (IBI). Whilst VBI shares similarities with the abovementioned established frameworks such as ESG and SRI, VBI aims to ensure that the application of such concepts is Shariah-compliant with optimal dissemination such as facilitation of entrepreneurship and community empowerment.

Essentially, VBI sets a new global standard that determines the moral compass and underlying values in everyday business dealings by IBIs. The aim is to improve the products and services they offer by considering the impact of their activities not only to their consumers, but also to wider stakeholders.


Strategy Paper and Integration

BNM introduced VBI in a strategy paper that was issued in March 2018, setting out the definitions, proposed implementation approach, strategies, practices, offerings and conduct. It was developed and finalized by the founding members of Community of Practitioners, comprising of Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, Agrobank, CIMB Islamic Bank Berhad and HSBC Amanah Malaysia Berhad. To date, nine major IBIs has committed to integrating VBI principles into their own core practices.

For example, Standard Chartered Saadiq is now applying a risk-based approach that assesses environmental and social risks in identified sensitive sectors to meet the highest standards for its clients. Its Environmental and Social Risk Management (ESRM) specialist team, comprising of industry experts, will work with its clients and will stipulate target dates for the clients to fulfil the bank’s environmental and social standards.

Another example of an IBI integrating VBI principles is Agrobank’s collaboration with BERNAS on ‘Program Rakan Ladang BERNAS’ in a bid to launch an initiative to “improve productivity of paddy and farmers’ standards of living” in which the bank provides working capital to farmers and BERNAS provides free technical consultation[3].

VBI not only benefits financial institutions but also the community and customers. For example, Agrobank (AgroBakti) provides working capital financing to people with disabilities to run their agricultural related business thereby creating more jobs for disabled people, increasing income levels and equality as well as driving socio-economic balance. Banco Santader has also integrated VBI principles of environment safety by taking a stand against paper firm APRIL’s deforestation-linked operations in Indonesia, following a campaign launch by environmental organization, Greenpeace. In response to Greenpeace, Banco Santander stopped renewing financing and granting future financing to APRIL until the firm implements sustainability measures and zero deforestation objectives to ensure the safety of the environment.


VBI Scorecards

BNM is also developing a VBI scorecard to measure the progression of the initiative and as a success measurement. This is expected to be launched in October this year in conjunction with the Global Islamic Finance Forum in Kuala Lumpur.

The scorecards will be used as a self-assessment tool comprising of quantitative factors (e.g. real economy focus, financial viability, social, ecological and financial) and qualitative elements (e.g. strategic direction, governance, and talent development). These components are performance indicators and make up the overall performance index. It will also be publicly disclosed to allow stakeholders to compare the performance of IBIs.

The scorecard identifies the areas that require improvement and non-performing IBIs will be classified as “emerging adopter” (as illustrated in this “proactive rating approach” diagram):

BNM’s key strategies to create a conductive environment for VBI implementation include the following:

  • Nurturing potential champions or leaders to showcase success stories;
  • Enhancing disclosure on IBI’s commitment, implementation strategies and key performance indicators (KPIs);
  • Strategic networking by developing strategic collaboration with established value-based communities, key partners and stakeholders; and
  • Performance measurement by developing the value-based scorecards as a common and complementary measurement.


Relevance in Conventional Financial Institutions

Given the size of the IBI market share and the industry’s current level of maturity, Islamic banking players have the necessary capacity to drive this initiative to ensure sustainable growth. However, the intended outcomes of VBI are universal and may be relevant and beneficial to conventional financial institutions.

While VBI is an initiative driven primarily by Islamic banks, conventional banks/institutions may also adopt the VBI initiative if they choose to do so as it is the institution’s willingness and commitment that will drive the momentum in implementation.

It is already apparent that IBIs which focus on sustainability by adopting elements of VBI are experiencing higher return on asset and return on equity ratios, and are less volatile when compared with conventional banks.


Underpinning Thrusts

According to BNM, IBIs must ensure that their strategy manifests the four underpinning VBI principles:

  • Entrepreneurial mindset
  • Community empowerment
  • Good self-governance
  • Best conduct

Greater attention will be devoted to value creation and value-based businesses that reflect the true essence of Islamic finance“, says former BNM Governor, Muhammad bin Ibrahim.



The adoption of VBIs promotes transparency and fairness in doing business, thereby resulting in greater consumer confidence. Its impact – focused assessment encourages awareness of the socioeconomic impact of any action taken in order to ensure successful sustainability and to reduce negative externals. Nevertheless, in addition to committing to respective timelines in advancing this initiative, coordinated efforts amongst IBIs and collaboration between the industry’s key stakeholders are crucial for effective implementation of VBI in order to yield significant positive impact and sustainability on the wider, substantive financial ecosystem.


* This article was first published in Taylor Wessing UK’s ‘Lending Focus’, June 2018 edition.


  3. Ibid.


Written by:

Ahmad Lutfi Abdull Mutalip (Partner)

Syaizta Kamal (