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In its “call to action” published in August 2022, IFAC asked professional accountancy organisations (PAOs) and stakeholders to identify how Islamic financial instruments have been used to advance Sustainable Development Goals (SDGs). Malaysia, an Islamic finance pioneer, is the first case study in this series reporting on government, regulatory and industry efforts to support the SDGs with Islamic finance principles.

The first part of the Malaysia case study published on 7 September 2022 focused on sukuk, which provides the means to deliver more infrastructure investment to emerging economies.

This second part of the Malaysia case study looks at the concept and purpose of Value-Based Intermediation (VBI) and how VBI advances towards the attainment of the SDGs.

Innovating Financial Intermediation with VBI

The VBI concept introduced by Bank Negara Malaysia in 2017 for the Islamic finance industry aims to deliver intermediation functions that embody the maqāṣid al-Sharīʿah (i.e., the intended outcome of Shari’ah) through ‘practices, conducts and offerings that generate positive and sustainable impact to the economy, community and environment, consistent with shareholders’ expectations of sustainable returns and long-term interests.

Drawing on holistic Islamic values, the VBI concept transcends wealth protection to encompass other essentials, particularly protection of religion, life, intellect, and progeny.

The intended outcomes of VBI—which are reflected in the triple bottom line framework of people, planet and profit/prosperity—are compatible with the sustainability agenda propagated by the SDGs and the Principles for Responsible Banking (PRB) promulgated in the United Nations Environment Programme Finance Initiative.

The first five SDGs, which are related to people, are consistent with the maqāṣid of protecting life, intellect, and wealth. Meanwhile, the six SDGs (6, 7, 12, 13, 14 and 15) that are related to planet and environment are pertinent to realizing the maqāṣid of protecting life, lineage, and wealth. The other four SDGs (8, 9, 10 and 11) are concerned with the protection of wealth.

VBI promotes a more holistic observation of Shariah by ensuring the offerings and practices of Islamic Financial Institutions (IFIs) not only comply with Shariah requirements but also achieve the intended outcomes of Shariah.

How VBI drives the SDGs

To drive the implementation of VBI, 15 Islamic banks along with BNM have formed the VBI Community of Practitioners (COP) to pool their resources and expertise to codify VBI.

One of the key achievements of the VBI COP is the development of the VBI Financing and Investment Impact Assessment Framework Sectoral Guides (VBIAF SG). It guides the incorporation of ESG risk considerations in the financing and investing decision-making process of Islamic banks and provides transparency to customers and investors in relation to their environmental, social, and governance (ESG) assessment considerations.

The VBIAF SG were developed jointly by the VBI COP and relevant stakeholders: among others, the Energy Commission (EC), Sustainable Energy Development Authority (SEDA), Malaysian Green Technology and Climate Change Centre (MGTC), Malaysian Palm Oil Council (MPOC), Malaysian Palm Oil Certification Council, World Bank Group, World Wide Fund for Nature (WWF) and Sime Darby Plantations Berhad.

The first cohort of the VBIAF SG on Palm Oil, Renewable Energy, and Energy Efficiency was issued on March 31, 2021 while the second cohort, covering Oil & Gas (O&G), Manufacturing, and Construction & Infrastructure was issued on March 22, 2022. The third cohort is currently being developed for four economic activities, namely, Mining & Quarrying, Agriculture, Transportation & Storage, and Waste Management.

Based on the latest data collected by AIBIM as of September 2021, the IFIs have contributed significantly to pursuing ESG and sustainability efforts domestically by intermediating RM146.6 billion of funds for VBI-aligned initiatives. These encompass green projects, affordable housing, education, public infrastructure, entrepreneurship supports for micro, small and medium enterprises (MSMEs), and distribution of financial support and aid through zakatsadaqah and waqf. (To learn more, please refer to the Value-Based Intermediation Full Report 2021 produced by The Association of Islamic Banking and Financial Institutions Malaysia (AIBIM).)

Transcending Finance for Social Benefit

VBI adoption has successfully pushed IFIs to reform their mindsets and rethink their role as an intermediary. IFIs are now going beyond their traditional function as financial intermediary to fuel the economy, to also intermediate the creation of social benefits for the stability and well-being of the community and society.

This is reflected in various Islamic social finance activities undertaken by Islamic banks in collaboration with State Islamic Religious Councils (SIRCs) and strategic implementation partners. As of September 2021, the IFIs had distributed over RM65.2 million by leveraging on the three core Islamic social finance tools; namely, zakatsadaqah and waqf.

Notable examples of industry-led initiatives that innovate through VBI are:

  • The myWakaf initiative, which is a collective effort of six Islamic banks to empower the community through waqf. myWakaf enables SIRCs to tap into a larger pool of potential contributors and improve implementation efficiency and effectiveness for waqf projects. All waqf projects can be viewed here while the impact reporting can be accessed here;
  • MyZakat initiative, which pools zakat from participating financial institutions to support asnaf (groups eligible to receive zakat) microentrepreneurs in partnership with Amanah Ikhtiar Malaysia (a micro-credit organization) and Agensi Kaunseling dan Pengurusan Kredit (a credit counselling and debt management agency set up by BNM) by providing up to RM3,000 seed capital to start a business; and
  • iTekad microfinance, which is a blended social finance programme by Islamic banks offering seed capital, microfinancing, and structured training to micro-entrepreneurs in collaboration with implementation partners. Read more on the impact of iTekad here.

VBI Prospects for Islamic Finance

The initiatives above demonstrate that Islamic finance can leverage on VBI to champion the social finance aspects of the SDGs.

However, not all is smooth sailing. The key challenge that IFIs face in implementing VBI towards achieving SDGs is the reluctance to embrace ESG and sustainability among some clients, particularly the non-listed commercial entities and MSMEs. Their smaller sizes and resources can hinder the additional reporting, efforts and costs required to transition to sustainable strategies and outcomes. This understandably limits the VBI-aligned assets that can be considered by IFIs.

Having to manage the exposure and concentration limit to a given green project or sector further caps how much IFIs can do.

Social Finance will be a Game Changer

The VBI COP believes that the strength and future potential of VBI are differentiated by its championship of the social finance agenda. VBI, as advocated by the IFIs, complements the other parallel sustainability initiatives being driven by the wider financial sector, such as the Joint Committee on Climate Change (JC3) and the Task Force on Climate-Related Financial Disclosures (TCFD). VBI pushes the Islamic Finance industry to go beyond green, Corporate Social Responsibility (CSR) and philanthropic activities by focusing on creating wider sustainable positive impacts from commercial activities.

As Malaysia’s financial landscape matures, social finance is envisioned to play a greater role with VBI and Islamic finance lighting the torch for positive change. Social finance is expected to complement public sector finance and commercially driven financial solutions to promote greater social resilience and well-being.

Importantly, social finance has three unique qualities that can advance financial inclusion in a transformative manner and address constraints typically associated with traditional finance.

One, social finance instruments can be designed for greater flexibility, thereby increasing the level of risk absorbency (in contrast with traditional debt-based finance). These range from allowing more flexible repayment terms that accommodate irregular income streams and do not impose repayment obligations on beneficiaries (e.g., financing funded by zakat funds).

Two, in donation-sourced financing, there is usually minimal or no financing cost attached (e.g., beneficiaries are only required to repay the benevolent financing provided). Social finance can thus improve access to funding for segments that face challenges in accessing commercially driven finance. The use of more flexible and innovative financial structures can also avoid deepening existing financial vulnerabilities (e.g., indebtedness) faced by such individuals or businesses. This is in line with Islamic values of minimizing indebtedness and supporting the disadvantaged in society.

Three, social finance initiatives can be coupled with impact monitoring and “pay-it-forward” mechanisms. Effective implementation of these mechanisms can build trust among the fund providers and target groups, as well as foster a virtuous cycle that encourages past beneficiaries to be part of efforts to support future ones. This in turn can potentially create a robust and valuable network of support, thereby strengthening the upsides of social finance solutions. (See BNM Financial Sector Blueprint 2022-2026 on Social Finance)

By integrating VBI and social finance into the larger Malaysian financial ecosystem, IFIs are anticipated to play a larger and more innovative role in the long-term sustainable development of economy and society.

Announcement: The Malaysian Institute of Accountants, together with IFAC, is planning a virtual Global Roundtable event in 2023 with representative stakeholders from various regions to discuss how Islamic Finance tools and concepts can be utilized to achieve SDGs. Stay tuned! Please contact to be added to the invitation list.  

Muazzam Mohamed

Chairman of the Islamic Finance Committee of the Malaysian Institute of Accountants (MIA)

Muazzam Mohamed is the Group CEO of Bank Islam Malaysia Berhad, President of the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM), Chairman of the Islamic Finance Committee of the Malaysian Institute of Accountants (MIA) and Chairman of VBI Community of Practitioners.