Top five advantages of Islamic social banks

ACCORDING to Islamic Finance Development Indicator (2016), the Islamic banking assets (USD million) are still controlled by Malaysia with a value of $159, 985, followed by Indonesia with a value of $20,081 and Brunei Darussalam with a value of $4,978 in the Southeast Asia Region (SAR). This fact, indeed, does not divulge the composition of profit and social contributions that have been made by Islamic banks to society at large.

Today, however, there is a growing trend among Islamic banks in the world including Malaysia to promote a so-called ‘Islamic social bank’ where the operation of Islamic banking is not only done on the basis of profit maximisation but also the people’s welfare where the communities they serve. The term Islamic social bank has an eclectic meaning compared to the term Islamic bank. Earlier, one has an acuity that the term bank captures a view of profit maximisation at the expense of society though the term Islamic is put at the beginning. This is a fallacy!

In actual situation, however, the operation of Islamic banks is impugned to mimic their conventional counterparts although this perceptual perception is groundless but the motive is to please a few individuals for personal gains. The bad form of misconception when it is emanated from a muslim who constantly argues the current’s is nothing but conventional.

Anyway, I believe that the term Islamic social bank is timely to rethink for the benefits of stakeholders involved in the industry. I define the term as a financial intermediary where accepting deposits, investment from public are brought into play and the proceeds generated are used to make financing and investment at large. Specifically, the term bank captures profit generation that is allowed when the second condition that is the term social follows where the zakat is performed, market segmentation is captured and the implementation of social measures, to mention a few, are in the list of the bank’s operations.

This week I aim to explicate the term Islamic social bank. One question is addressed. What are top five advantages of Islamic social banks? My stances are provided as follows:

Generally, Islamic social banks like the existing Islamic banks promote Islamic and ethical consumptions and investments. The banks capture the golden principles of Islamic banking where the list of proscriptions is not only in direct dealings of the banks but in financing customers who embark on the activities with the commodities. The coverage may also include any customers whose activities include intolerable mutilation to the environment and society. Unethical practices must be avoided covering the following but are not confined to: casino gaming, beer production, pornography production (i.e. widely produced in the United States, South Korea, Japan and China) and the production of tobacco and weapon. On the other hand, halal-based industries are promoted like halal food sector, halal tourism and hospitality and halal education, to mention some.

There is also a claim that Islamic social banks can balance the need of different customers available in the banking market. Customers are composed into three: affluent, modest and poor/needy. The current Islamic banks have met the financial needs of the first and the second effectively but not the third owing to a various factors like the requirements of collateral and creditworthiness - These criteria are also used in the conventional banking. The assertion that suggests an Islamic bank will go bankrupt if they serve the third segment is totally wrong. I believe that every good deeds are rewarded by Allah (SWT) with multiple benefits, so do Islamic banks. On 20th July 2017, Bank Negara Malaysia (BNM) has proposed a strategy paper on valuebased intermediation (VBI) that is magnificent and realistic! By definition, VBI is 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 without compromising the financial returns to stakeholders.

Hence, re-introducing the Qardhul Hassan Financing (QHF) to serve the poor and needy customers is worthy to consider. It has two significant benefits: Firstly, it makes a stronger relationship between Islamic banks and customers as the complaints about the former is of reducing. Secondly, it generates new customers, which in turn, generate more profits to the banks. I am wondering why, but you have the right points to judge.

The advent of Islamic social banks also provides an enhanced practice of Islamic accounting. Typically, Islamic banks mobilise funds through the contracts of al-wadiah yad dhamanah, tawarruq, bay al-inah and murabahah, to mention but a few. The proceeds are then used to finance a project or investing in halal industries for profits in return. The intermediary functions are now enhanced where future funds are not only generated from the conventional yardsticks but also from Islamic redistribution measures like sadaqah, waqf, manihah and zakat are embraced. As the names imply, these measures are not generating liabilities for the banks but ‘trust’ to manage them Islamically and ethically.

The funds must be used for the benefits of poor/needy without hoping profits in return that compose poor/needy as new users of financial accounting information of Islamic banks. In return, however, the banks are targeted by foreign investors for charity based projects and improving their public image where new profit segments and customers are captured, respectively.

In line with the above-mentioned, do Islamic social banks have a holistic banking function? Islamic banks normally consider deposit taking, financing function, asset transformation, liquidity role, e-payment function and wealth management. In contrast, Islamic social banks are viewed to have a holistic function with the inclusion of social function. This explains that the banks perform social services whether through the QHF as mentioned earlier or the zakat and charity fund consistent or other social-based environments activities with Islamic teachings. Highly, the banks play an active role in the development of their balanced talents that contributes meritoriously to the fortification of environment and ummah’s rights.

All in all, Islamic banks have indirectly inculcated the worth of ‘Islamic social bank’ in their operations. Many banks have considered these elements to reflect their advocacy to the term - good action is ibadah, good Islamic banking action is ibadah and these require correct intention, knowledge where the observance of all Shariah requirements are pondered. With a proper measure, Islamic banks are able to tap into the Islamisation of Banking Transactions (iBT) where the deliberation of three priorities dharuriyyat (necessities), hajiyyat (general needs) and tahsiniyyat (complementary needs) are upheld, at least.

*The author is an Associate Professor/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at hanudin@ums.edu.my