Abu Hassan Alshari Yahaya: Leadership, values, ethics and Islamic
finance - the next generation of Islamic financial institutions
Keynote address by Mr Abu Hassan Alshari Yahaya, Assistant Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the IFN Asia Forum 2019, Kuala Lumpur, 23 April 2019.
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Allow me to first begin by thanking the organiser for inviting me to deliver the keynote address at
this annual IFN Asia Forum. It is a pleasure to be here this morning in the company of such a
diverse gathering of Islamic finance professionals and weigh in on an important subject of which
the organiser had kindly assigned me; "Leadership, Values, Ethics and Islamic Finance: The
Next Generation of Islamic Financial Institutions".
For many of us, the 2008 global financial crisis will be one of the major events that stays with us
throughout our careers. In Asia, we had the Asian Financial Crisis in 1998 which was
momentous but given the scale and its far reaching impact, the 2008 crisis has left far larger
imprints. More than a decade has passed, yet we continue to live under its shadows. A world that
has grown at a slower pace, in a low inflation, bordering on deflationary risk environment for the
better part of a decade. Banking and financial regulations that undoubtedly have strengthened the
resilience of the system, but could have had unintended consequences on growth. During this
time, a multitude of financial misconducts have been uncovered that have deeply impacted the
global financial sector and damaged its reputation. In many parts of the system, not only has the
crisis sparked a rethinking of the economic architecture, the stability and resilience of the
financial sector, it has also laid bare, the absence or lack of values and ethics in finance. This
lack of moral compass and its role that contributed to the global financial crisis has resulted in a
loss of trust in finance, prompting a need to restore integrity and trust in financial institutions and
market players.
This should not greatly surprise us. After all, the influential works of economic thinkers that came
to shape many economic and financial policies before the crisis, had as its fundamental basis,
that people who are driven by self-interest, would be able to produce the best outcome for the
economy and society. This reminds of an earlier quote attributed to John Maynard Keynes;
'Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of motives, will
somehow work together for the benefit of all'. Today, this lack of moral compass and base
motivation for financial and economic decision making rings hollow. Society desires higher
motives and a greater sense of purpose. Supporting this must be a stronger sense of ethics and
values. In the mainstream or conventional financial system, many institutions and practitioners
have latched onto sustainability, environmental and governance themes and standards as a
manifestation of this. Finance must serve the good and is no longer about greed and
selfinterest.
Raising the impact of Islamic finance to the economy and society through stronger
leadership, values and ethics
Islamic finance has always been subjected to higher overarching objectives that place ethical
and moral conduct at its centre. The Maqasid Shariah first articulated by al-Ghazali in the 12th
century and developed further by later scholars, speaks towards preservation of religion, life,
family, mind and property with the ultimate aim of prevention of harm and attainment of benefits.
At the onset, such objectives entail the prohibition of any unethical or unlawful conduct in Islamic
finance while putting in place features of an embedded governance that support the highest level
of integrity and good conduct within Islamic finance. This is achieved through the branch of
Shariah of Fiqh Muamalat which governs business and financial relationships in the Islamic
economy. The main objective of Islamic economics itself is the human well-being, a concept that
not only cuts across the necessities of Maqasid Shariah, but also extends towards a more
comprehensive social and economic aspiration for the betterment of the material and spiritual
well-being of a society.
Islamic finance therefore naturally has the potential to take the lead striving towards an ethical,
moral and also sustainable model for finance in the global financial system. In developing the
Islamic financial system, these unique propositions are drawn out further from underlying Shariah
principles. Islamic finance practitioners in principle, are at a minimum, duty-bound to observe the
norms of high ethical conduct to uphold the values and the sanctity of Shariah. Principles alone
however, do not insulate Islamic finance from experiencing conduct risks. Examples in the past
from various cases of frauds, breach of trust and mismanagement have occurred, exposing
Islamic finance to reputational risks. Operational safeguards remain critical in the day-to-day
decision making and business operations. Islamic finance must also continuously reflect on
whether the governance arrangements, practices and business models of their institutions are
effective and impactful.
Islamic finance can lead in financial inclusion and governance
Today, Islamic finance has already established itself and garnered significance in many parts of
the world. Though much of this appeared as a natural outgrowth of growing prosperity in many
Muslim countries, it did require governmental support and regulatory pushes. In Malaysia, where
the modern form of Islamic finance has developed for over 40 years, the national strategy to
develop Islamic banking and finance was driven from two perspectives, as an initial strategy for
financial inclusion and to later on position the country as a leader in Islamic finance.
In financial inclusion, Islamic finance played an important role in bringing those who exclude
themselves from the conventional system on religious grounds. Demographically, Muslim
households make up the majority in our country, including that of the B40 income category.
There is a natural affinity to subscribe to Islamic finance. Nevertheless, outreach beyond the
urban areas always requires additional effort. Now, with the help of technology, Islamic finance is
playing a greater role in expanding outreach of financial services and increasing financial
inclusion. Digitally-enabled financial services are resulting in greater access, quality and usage of
financial services. Islamic banking and takaful customers are able to equally benefit from online
and mobile banking services, and enjoy seamless business transactions through digital
platforms for supply chain finance. Digitisation of Islamic products and instruments has even
contributed in specific initiatives of enhancing financial inclusion, such as the online application of
takaful products that offer affordable and easy to understand protection plans with a convenient
claims process. The Islamic banking industry's recent launch of the myWakaf portal is another
such initiative to enable easier and more effective wakaf contributions by individuals to selected
projects such as education, healthcare, investment and economic empowerment.
In our leadership aspiration in Islamic finance, key areas that were and are emphasised are in
governance and ethics. Strong corporate governance and leadership are crucial to uphold
Shariah values and raise the impact of Islamic finance to the economy and society. A robust
Shariah governance framework within Islamic financial institutions is a must to ensure that
Shariah values are internalised and upheld in business practices. The Islamic Financial Services
Act 2013 accords due recognition to the importance of governance structure within Islamic
financial institutions. In practice, Shariah compliance is supported in Malaysia under a two-tier
governance structure that operates at the industry and institutional levels. This comprises the
Shariah Advisory Council of Bank Negara Malaysia as the highest authority in the ascertainment
of Islamic law for Islamic financial business; and a Shariah committee setup in each Islamic
financial institution to advise the management and the board on all matters relating to Shariah
issues that are specific to the institution. Currently, we are in the midst of revising the Shariah
Governance Framework to further strengthen it by providing, among others, greater clarity on the
roles, responsibilities and accountabilities of the board, Shariah committee and key organs
involved in instituting a robust Shariah compliance risk culture. Through the governance,
application of Shariah will be more closely integrated with the business and risk strategies of
Islamic financial institutions.
These efforts, and many more, have culminated in an unparalleled growth in the Islamic banking
market share which grew six fold over the last 20 years. Islamic banking system now comprises
over 30% of the overall. Takaful has also grown in acceptance, registering double digit growth
rates outpacing the conventional counterpart for the past few years. Ar-Rahnu, Islamic
investment accounts are becoming more familiar products among Malaysians. We have also
become and have maintained a position among the world's largest sukuk issuers. Islamic
finance is thriving and competitive.
Islamic financial institutions should consider the wider impact of their activities
Beyond this, Islamic finance is also spearheading initiatives in sustainable finance with Islamic
banking institutions championing the implementation of Value-based Intermediation (VBI).
Through VBI, Islamic financial institutions adopt a highly structured framework to assess how
they create value and impact, for example, from economic, social and environmental
perspectives. VBI accords equal emphasis to economic value creation and upholding of ethical
values, and strengthens Islamic finance as a "uniting force for good". The VBI initiative is
currently bringing together the banking groups through a pioneering Community of Practitioners
(CoP) to advance the sustainability agenda in a collaborative, concerted and synergistic
approach. This includes forming close engagement with organisations that share similar
sustainability aspirations.
Through VBI, Islamic banks are taking the lead in advancing finance for the good. While these
banks are still at early stages in their journeys, there are already concrete examples of VBI being
put into action today as we see progress in embedding its elements in their financial products,
practices and operations. Though VBI has a far wider scope, these early applications capitalise
on contemporary sustainability themes. These include preferential financing rates for hybrid
vehicles and green buildings, specialised financing scheme for women entrepreneurs and
issuance of the world's first Sustainable Development Goals (SDG) sukuk. Where VBI goes
beyond are in provision of non-financial services bundled in financial solutions such as advisory,
business network and relevant infrastructures to groom small clients with business potentials
such as SMEs and micro finance. Alongside this move towards responsible financing, the CoP
members are actively reviewing their business portfolios, identifying and prioritising VBI issues
within their institutions and building the required capacity. The banks' progress and effectiveness
of VBI-related initiatives would be captured through the VBI Scorecard. The underpinning thrusts
of VBI are also gaining relevance in the takaful industry as takaful operators are taking initial steps
in exploring value-based protection for their customers. Given the universal nature of VBI, I
believe that its adoption by financial groups which comprise the conventional financial institutions,
as well as issuers and investors would be a natural evolution in the financial ecosystem.
Expectations on the next generation of Islamic financial institutions
The next generation of Islamic financial institutions would thus be driven by values and not just
profit. With a moral outlook for the ultimate good, strengthened by self-discipline, greater
accountability and integrity, Islamic financial institutions will have stronger consideration of the
impact of decisions made. There should be greater drive to continuously improve their offerings
and treatments towards customers and employees, which include fair and transparent
disclosure in order to increase the positive impact of their activities. Development of banking
practices based on VBI concepts are also anticipated to encourage the creation of new business
opportunities and provide the foundation for better returns for Islamic banks over the long term.
An example is assessment of financing application by Islamic banks based on value-creation
instead of mere credit scoring which would benefit business propositions from new sectors such
as SMEs. Another example is refocusing, strengthening and repositioning of personal financing
by Islamic banks to best meet the needs and circumstances of customers. In time, there may
emerge greater differentiation between VBI and non-VBI institutions which will be better
understood by shareholders, fund providers and financial markets more generally. Furthermore,
the more comprehensive and holistic approach of VBI in advancing the good for society could
prove to be a key competitive advantage that will influence and shape the future of the financial
industry.
The drive for positive changes in the Islamic financial services industry however requires a major
paradigm shift in many institutions. It takes a long view to recognise returns beyond financial
profits where social and environmental gains are also highly valued. It will also take increasing
professionalism and high quality talent that will contribute to this transformation of mind and
culture. In Malaysia, we can readily leverage on the available Islamic finance talent development
ecosystem, which has a comprehensive and diversified range of offerings, spanning tertiary and
professional education, research, training and consultancy services which are
globallyrecognised. The implementation of VBI has already galvanised many stakeholders including
institutions of higher learning such as the International Centre for Education in Islamic Finance
(INCEIF) and International Shariah Research Academy (ISRA) to undertake impactful applied
research that advances the implementation progress of VBI by the financial industry. Indeed,
Islamic finance has greatly benefited through these institutions that have contributed towards
enlarging the pool of Islamic finance professionals and deepening expertise through various
programmes and initiatives. At the same time, these institutions have also grown in recognition.
INCEIF for example, has been awarded the prestigious accreditation by the Association to
Advance Collegiate Schools of Business (AACBS) International in recognition of its excellence in
various areas, including its diverse programmes that have benefitted students from more than 80
countries.
Besides talent, strong and visionary leadership in particular at the Board and Senior Management
will be crucial for success in this paradigm shift. This leadership and strong professionalism
must continuously be complimented with the right ethics to transform the culture, systems and
people. Nurturing talent also needs to be extended to the board level. In Malaysia, directors can
gain greater appreciation on the dynamics of Shariah principles through programmes such as
the Islamic Finance for Board of Directors Programme. This specialised Islamic finance training
programme builds on the core foundations on corporate governance as set out in the Financial
Institutions Directors' Education programme. Directors would also be exposed to diverse
perspectives from within and beyond the Islamic banking community on contemporary issues in
the industry.
Let me conclude. The Islamic financial sector has made great strides over the recent decades.
The next growth frontier in Islamic finance however lies in realising its potential to create greater
socio-economic impact. Values and ethics, strongly instilled would strengthen trust between
people and the system. For the Islamic finance industry, the move towards embracing VBI
manifests the larger aspiration of Islamic finance. In shaping positive behaviour amongst industry
players, Islamic finance can become a leading agent of change and bring about sustainable
positive impacts to the economy and society. Translating this vision into reality then requires our
collective efforts, steered by strong and capable leadership.
On that note, I wish you a productive forum ahead.