Abdul Rasheed Ghaffour: Unlocking full potential of Islamic finance
through sustainability
Welcoming remarks by Mr Abdul Rasheed Ghaffour, Deputy Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the RFI Roundtable on Responsible Finance "Unlocking Full
Potential of Islamic Finance through Sustainability", Kuala Lumpur, 23 September 2019.
* * *
It is my great pleasure to welcome all of you to the RFI Roundtable on Responsible Finance. I
would like to thank the RFI foundation and Dubai Islamic Economy Development Centre (DIEDC)
for organising such gathering of policymakers and captains of the financial services industry.
The chosen theme "Unlocking full potential of Islamic finance through sustainability" is indeed
very apt and timely. We are now in an environment where global aspirations are at risk -
1 2
indebtedness is high , inequality has widened , effects of climate change continue to
3
accelerate . Doing nothing is not a responsible option! Despite the growing focus in
sustainable finance, I am certain many within this room would agree that this transition in the
financial system, more so the Islamic financial system, is happening not at the desired pace,
scale and intensity. For the next five to ten minutes, allow me to highlight the catalytic role that
Islamic finance can play in advancing sustainability agenda.
Shariah embeds inherent features that make it natural for Islamic financial institutions to play
such role. The three main features:
i. First, Intended outcome of Shariah emphasises on minimisation if not
impact-driven.
prevention of negative impact and maximising positive value creation to wider stakeholders
namely people and planet. The dos and don'ts of Shariah aim to enhance people's
wellbeing by preserving five stipulated key outcomes of Shariah (maqasid) namely the wealth,
4
faith, lives, posterity (lineage) and intellect . In the context of financial intermediation,
preserving wealth entails beyond its literal meaning - to include encouragement to generate,
accumulate and distribute the wealth in a just and fair manner.
ii. Secondly, real economy. Islamic financial intermediation activities must be backed by real
economic activities, thus aligning innovation with the needs of productive activities.
Requirement to support the real economy thereby avoids element of speculation.
iii. Thirdly, Another distinct aspect of Islamic finance is the application of risk-
partnership.
sharing in financial transactions. This strengthens the incentives for both financial institutions
and business clients or investors to screen and monitor transactions for commercial viability
and risks.
The growing momentum in global trend towards sustainability agenda does not only sharpen the
focus on formulating necessary solutions to key global challenges such as poverty, food security
and inequalities. Most importantly, it creates a sense of urgency for financial institutions to
embrace long-term value creation mindset. Increasingly, stakeholders are setting higher
expectations on financial institutions to manage the threats of climate and environmental-related
risks that are real, with irreversible consequences. Failure to respond appropriately and in a
timely manner may have adverse implications on the economy and direct financial
consequences on financial institutions. A case in point is the reputational risk a financial
institution that provides financing to companies involved in environmental destruction activities
could face, which may eventually affect the institution's financial sustainability.
Malaysia's experience and approach
A question in mind is therefore whether Islamic finance has fully optimised on these value
propositions. Allow me to share this in the context of the Malaysian Islamic financial industry.
After three decades of development, the Islamic finance industry has progressed to become an
5
integral component of the Malaysian financial system . Most notably, Islamic finance has played
a catalytic role in financial inclusion - enabling access to formal financial services for the different
segments of the society. In charting its strategic direction, in 2017, a few Islamic financial
institutions began to explore value-based intermediation or VBI as a new operational model. The
VBI encapsulates the vision to focus on being more impact-driven, reinforcing the overarching
intent of Shariah to promote good and prevent harm. Islamic finance, moving forward, strives to
be relevant to all as a financial intermediation that creates positive and sustainable values for
broader stakeholders - consistent with the long-term value creation for shareholders and aligned
with the national targets of sustainable development goals (SDGs).
To date, 12 Islamic banking institutions have committed to integrate environmental and social
considerations in their offerings, practices and cultures. In facilitating the industry in this journey,
Bank Negara Malaysia collaborates with the industry to create an enabling environment for
smooth and orderly transition. These include the issuance of several guidance documents such
as VBI implementation guide, VBI Scorecard and Value-based Impact Assessment Framework
(VBIAF). More recently, the Bank and the VBI community of practitioners (COP) have embarked
on efforts to develop sector-specific guide on value-based impact assessment alongside
sectoral experts. As a start, the focus is on renewable energy, efficient energy and primary
commodity (palm oil).
As the industry began to operationalise the VBI, the market has observed efforts to infuse key
elements of VBI in the offerings and practices. These include the launch of the first working
capital financing for women entrepreneurs this year. This collateral-free facility embeds financial
literacy sessions and focus group discussions to help entrepreneurs in managing and growing
their businesses more efficiently. Other examples include the launch of an Islamic Index-based
investment scheme embedding with environmental, social and governance (ESG) principles, as
well as a financing programme via matching fund platform between financial institution and public
contributions, which aims to empower communities through entrepreneurship.
The takaful industry is also taking steps to implement VBI. The industry has formed a VBI
Takaful Task Force to formulate the strategic roadmap for the takaful industry. Several takaful
operators, on their own, have also undertaken a comprehensive review of business strategies.
This review has begun to shape changes in the corporate value intent and strategic direction of
these takaful operators to be more aligned with VBI. Additionally, some of these takaful operators
are beginning to formulate more value-based protection solutions.
Role of technology in optimising potential of Islamic finance
One final point before I conclude - technology makes the impossible possible. Recent
financial technology advancements enable Islamic finance industry players to deliver practical yet
6 7
value-adding solutions. For instance, application of blockchain to address challenges in
managing endowment fund (waqf). Fintech is rapidly changing the facets of the global financial
industry, reshaping expectations of consumers and businesses on financial services. There are
untapped opportunities of fintech to develop financial solutions that can help drive Islamic finance
to deliver even greater, wider and deeper positive impact - particularly in realising its promise in
risk-sharing and providing support for genuine and productive economic activities. Technology
can also widen access to and increase outreach of social finance instruments through
digitisation of collection and disbursement of the proceeds. Fintech startups such as
LaunchGood and SkolaFund are already making their name in social impact initiatives, which is a
promising start.
Conclusion
Financial institutions need to look beyond short-term profitability. It is imperative for financial
intermediaries to be seen fulfilling the needs of the economy, society and environment at large.
Moving forward, 'change of mindset' is eminent. While considering profit, financial institutions
should not forgo the element of being socially and environmentally responsible. I believe setting
the 'Tone from the top' is key in this process.
The organisation of today's roundtable forum is indeed very apt. It serves as a networking effort
while creating opportunities to exchange views, explore mutually beneficial opportunities, and
most importantly, implement positive changes in the financial systems. It is not too far-fetched to
envisage the generation of breakthrough thinking for future collaboration that is solution-driven;
practical; and innovative. Collective effort is also key to success and the industry should aim to
work closely with other key stakeholders. These include government agencies, civil societies and
the public to increase awareness and encourage more active participation in supporting further
development and offerings of sustainable financial solutions in the market. Strong technical
know-how in dealing with the changing dynamics of the financial landscape and the arising risks
is also essential for industry players to navigate itself in this journey.
To end, I wish to reiterate that "sustainability is indeed a journey, and one that is best
navigated collectively". Sustainable development can be best served by re-connecting finance
and element of value creation that is reinforced by bringing benefit to society, environment and
prosperity. On that note, I wish all of you a beneficial and productive session today.
1
Around 30 least developed and other vulnerable countries are exposed to debt distress - limiting their ability to
invest in the sustainable development goals (SDGs).
2
Countries home to most people in the world and global growth in real wages is only 1.8% - the lowest since
2008 (Source: United Nation (2019). Financing For Sustainable Development Report 2019)
3
Air pollution was a cause of almost 5 million deaths worldwide in 2017 while 62 million people were affected by
natural hazards in 2018, with 2 million needing to move elsewhere due to climate events (Source: NGFS (2019).
A call for action: Climate Change as a source of financial risk).
4
Imam Al-Ghazali, Al-Mustasfa fi 'ilm al-Usul, page 174.
5
Islamic banking assets has grown to 31.4% (RM916.7 billion) of total banking assets (as at end 2018,
compared to only 14.1% in 2008)
6
A blockchain is a digital ledger that holds any kind of information (e.g. transactions, contracts, assets or
identities) that can be stored in a digital format. Entries in the digital ledger are permanent, transparent and
searchable.
7
Reference: The Edge Malaysia Weekly (4 - 10 June 2018). Personal Wealth. These challenges include lack of
data (value of the endowment), limited transparency, lack of clarity in accountability, lack of proper auditing and
poor planning for waqf assets development