Holistic alignment of stakeholders the key

Islamic finance takes the next step in fulfilling potential

“Long-term value creation and spillover impact to the economy, society or environment are also integral considerations for value-based finance.” Tan Sri Nor Shamsiah Mohd Yunus

KUALA LUMPUR: A holistic alignment to the values of Islamic finance will be the next step to ensure the sector lives up to its promise and full potential, says Bank Negara governor Tan Sri Nor Shamsiah Mohd Yunus.

In her keynote address at the Global Islamic Finance Forum (GIFF) 2022 yesterday, she said there was a need for “whole-of-ecosystem” alignment to the values of Islamic finance, and called on all stakeholders in the sector including financial institutions, investors and regulators to understand and accept the fundamental goals of Islamic finance to harness its “beyond profit” proposition.

“For example, in deploying blended finance to extend impactful solutions for underserved segments of society, investors and consumers must appreciate that the return on capital invested might not be immediately realised, and that the returns should not be solely measured against a financial yardstick.

“After all, long-term value creation and spillover impact to the economy, society or environment are also integral considerations for value-based finance,” Nor Shamsiah said.

While acknowledging the sector has made significant progress in the last four years, especially with the Malaysian Islamic banking sector intermediating Rm146.6bil in value-based intermediation (VBI) and distributing over Rm65mil via Islamic social finance instruments between October 2020 and September 2021, Nor Shamsiah believes there remain huge opportunities for further growth.

Nor Shamsiah believes the three clear opportunities where a more holistic connectivity between the stakeholders would be beneficial to Islamic finance would be in the halal sector, community-based connectivity and syariah connectivity.

She said while the percentage of halal-certified companies utilising Islamic financing facilities had almost doubled to 41.3% in 2021 from 21.9% in 2018, more can be done to facilitate connectivity across halal value chains.

These include continuing to explore new sources of funds based on the concept of risk sharing and developing more impact-based funding, investment and trade facilities that can drive improvements in productivity and efficiency of halal companies.

“An example of community-based connectivity would be deploying blended capital – using social impact investment, donation, waqf and zakat – to enable funding to be more accessible and responsibly used to support entrepreneurship for innovation,” the governor added

She said mutual recognition of syariah standards and global acceptance of Islamic finance regulatory requirements will lay down more stable foundations for innovation.

She said through the Centralised Syariah Advisory Authorities in Islamic Finance or CSAA, there is a platform to facilitate consensus in syariah jurisprudence to enable worldwide acceptance and recognition, and hopes this would enhance syariah connectivity across the world.

The first day of GIFF oversaw the launch of the Value-based Intermediation Full Report 2021, published by the Association of Islamic Banking and Financial Institutions Malaysia or AIBIM.

The report highlighted that in 2020 and 2021, Vbi-related financing represented 22.2% of total financing accounts, up from just above 10% from 2017 to 2020.

Small and medium enterprises (SMES) and micro-smes were the largest recipients of Vbi-related financing in 2020 and 2021 with the outstanding amount of Rm51bil, a 25.6% increase from Rm40.6bil outstanding in 2017 to 2020.