Nor Shamsiah Mohd Yunus: Value based intermediation - beyond
profit
Keynote address by Ms Nor Shamsiah Mohd Yunus, Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the Global Islamic Finance Forum 2018 (GIFF) "Value Based
Intermediation - Beyond Profit", Kuala Lumpur, 3 October 2018.
* * *
Henry Ford, credited with revolutionising the American transportation industry in the 20th century,
once remarked that "Business must be run at a profit, else it will die. But when anyone attempts
to run a business solely for profit and thinks not at all of the service to the community, then also
the business must die, for it no longer has a reason for existence".
Nearly a hundred years since, these words of wisdom remain true. Perhaps, even more so now
than ever. Indeed, we have witnessed time and again, episodes of excessiveness, and the sole
and unchecked pursuit of profits, that have led to global financial crises. The theme of this
conference, "Value Based Intermediation - Beyond Profit", is therefore a fitting reminder of the
role of finance, and Islamic finance in particular, in helping build a more resilient and sustainable
future.
In the past half century, the world economy expanded sixfold, despite experiencing the worst and
most expensive financial crisis. Average per capita income more than doubled to about
USD11,000, compared to only about USD5,000 in 1967. People are living longer, with better
quality of life, greater access to basic necessities, improved health and medical care, and better
education.
Despite such progress, we are faced with daunting challenges. These include harmful effects of
environmental degradation and climate change that threaten global prosperity, stability and
sustainable living. Socioeconomic challenges such as rising inequality and lack of affordable
housing are affecting the well-being of many communities. At around 225% of global GDP, global
debt is at a record high level and may leave a heavy burden for future generations to bear.
It is increasingly clear that economic prosperity in the long run cannot exist without social equity
and environmental responsibility. While the governments of 150 countries are committed to
realising the United Nation's 17 Sustainable Development Goals (SDGs) by 2030, this must be a
shared responsibility. The private sector has a key role to play - a role, with finance at its centre,
that has yet to live up to its full potential.
With much at stake, the call to action for sustainable finance is one that the financial sector,
perhaps more particularly Islamic finance, cannot afford to ignore. Encouragingly, more, though
not nearly enough, Islamic financial institutions are moving beyond Shariah compliance to
performance and risk management practices that reflect social and environmental impacts. A
key question for us present today, and for those beyond this forum, is how the value propositions
of Islamic finance can be further developed, to bring us closer to the reality of "finance beyond
profit".
To my mind, the answers will invariably call attention to three imperatives - a rethinking of value;
a rethinking of risk; and a rethinking of human capital. Allow me to briefly address these in turn.
Key Message 1 - Rethinking value through a renewed focus on the fundamentals of
Shariah
First, rethinking value. The industry must elevate the fundamentals of Shariah to realise its full
promise. The business models of Islamic financial institutions should be guided by the
overarching objectives of Shariah (Maqasid Shariah) - which are to preserve and advance the
common interest of society at large, by preventing harm and maximising benefits. This is now
more important than ever to steer growth and development on a more sustainable path.
In Malaysia, the industry with the support of the Central Bank, is taking concrete steps to drive
strategies aimed at increasing the positive impact of finance on society. This is outlined in a
Strategy Paper on Value-based Intermediation (VBI), which was released in July last year. The
commitment to adopt VBI is a significant step by the industry to clearly identify Islamic finance
with sustainable practices, as it should. It has also set in motion initiatives that will raise the bar
for processes, practices, offerings and conduct that promote sustainable businesses and
communities.
We expect that over time, the adoption of VBI will have a significant impact on business models
of Islamic financial institutions, including the drivers of profitability and risks. Post-financing
expert advisory services which help borrowers mitigate the environmental impact of projects
financed by the bank will feature more prominently in the product and service offerings of VBI
banks. VBI-oriented Islamic financial institutions can, and indeed should, also play an important
role in mobilising resources to finance climate change mitigation and adaptation initiatives.
Funding for climate adaptation in particular, remains critically low, despite millions already at risk
from the effects of climate change and in need of assistance to cope with the effects. For
example, in the agriculture sector, resources can be channelled towards building flood defences,
and developing local structures and facilities that are more resilient to harsh weather conditions.
Takaful solutions also have an important role in strengthening resilience against climate events.
These developments are likely to see important changes to the way financial institutions make
decisions, and to the characteristics of banking and takaful portfolios.
In supporting these changes, two new tools will be published by Bank Negara Malaysia today for
public consultation - a VBI Impact Assessment Framework (VBIAF) and the VBI Scorecard. The
Assessment Framework provides guidance on the assessment of financing and investment
applications taking into consideration economic, social and environmental impacts, while the
Scorecard supports the implementation of performance measurement frameworks for Islamic
financial institutions that drive positive value and impact on society and the environment. I look
forward to receiving constructive feedback from the industry and interested parties, and to further
strengthen these frameworks to drive a renewed focus on sustainable financial solutions.
Key Message 2 - Rethinking risk
The second imperative calls for a re-thinking of risk by Islamic financial institutions.
Nontraditional forms of risks such as social, political and environmental risks are business threats
that simply cannot be ignored. Research indicates that there are material benefits to managing
these risks more proactively. An IFC survey of global banks showed that around 86% of
respondents which integrated social and environmental risks in their business have yielded
positive business results. There are also growing calls by shareholders for financial institutions to
play a more proactive role in the sustainability agenda.
I am among those who believe that the true mark of a sustainable financial system ultimately lies
in the extent to which, the market's and management's view of risks reflect sustainability factors.
In June 2017, the Financial Stability Board published recommendations, for helping businesses
disclose climate-related financial information. In the context of "finance beyond profit", this was a
significant development by a global standard setting body, and the broader G20 community, to
encourage the provision of better information on climate-related risks and their financial impact.
For many, this is both a reflection of, and catalyst for, the closer examination of risk- and
impactadjusted returns, by capital and funding providers.
As natural stewards of sustainable finance models, Islamic financial institutions are well placed
to develop richer perspectives of social and environmental risks. This calls for a review of internal
risk decision-making processes and inputs within financial institutions, alongside enhanced
disclosures to market participants. Yet little, if anything, is done today to consider how such risks
need to be managed - both for existing portfolios and future growth strategies. Actions taken by
financial institutions to mitigate, transfer or control the risks have the potential to generate
corresponding, broader responses by policymakers, businesses and other financial institutions.
This in turn can create new markets for sustainability services, and a virtuous cycle of mutually
reinforcing market forces, that promote sustainable business practices across the economy.
As we further develop the VBI systems for Islamic finance in Malaysia, this will be an area of
important focus. This work will also address the role of domestic regulations, in creating a level
playing field, for value-based banking practices, where appropriate. To date, policy documents
developed on 14 Shariah contracts, serve to provide a clear and consistent framework for
lending, underwriting and investment activities of Islamic financial institutions. I am encouraged
by efforts among some Islamic financial institutions to introduce value-adding innovations,
building upon these Shariah contracts, and further differentiating their solutions from conventional
offerings. I would of course like to see much more traction in this direction going forward.
Key Message 3 - Rethinking human capital
My third point relates to rethinking human capital. Despite growing awareness on the importance
of sustainable business practices, in creating long term value and reducing risks, the challenges
of building internal human capacity to support sustainable practices continues to be left largely
unattended to. For Islamic financial institutions, this goes beyond strategy alignment and culture,
which has been the primary focus to date, to building or acquiring the fundamental skillsets,
required to implement sustainable financing and risk management practices. Without these, VBI
cannot hope to progress very far.
To illustrate, a study by the National Bureau of Economic Research found that jobs requiring a
higher intensity, and concentration of "green skills" to support the transition to greener
economies, lies among high-skilled professional profiles. In other words, if Islamic financial
institutions are serious about adopting VBI, the complement of skillsets at the management
levels of the organisation will need to be fundamentally re-assessed. Relevant skills that need to
be brought into the organisation include engineering and technical skills in the design,
construction and assessment of technology; science skills; and monitoring skills focusing on
observing compliance with environmental laws and standards. Even boards too have to learn
and adapt to the demands of the new operating environment.
Relevant skillsets are also critical to support innovation within the financial sector to capture
opportunities and improve the delivery of Islamic financial solutions. Indeed, technology can be
better optimised to revolutionise the way Islamic finance operates and offer innovative solutions
to customers. For example, blockchain or artificial intelligence applications hold enormous
potential for simplifying documentation requirements associated with Shariah contracts, thus
improving the overall efficiency of business operations.
It should be abundantly clear by now to any financial institution that is serious about VBI, that, the
task of building the human and intellectual capital to achieve and sustain value-based business
models cannot be left solely to the human resource departments. It requires nothing less than
strategic direction and resourcing decisions at the highest levels of the organisation.
Changing mindsets
Einstein once said "The world as we have created is a process of our thinking. It cannot be
changed without changing our thinking". The world today continues to push the limits of social
and environmental thresholds, that are posing increasingly serious threats to humanity. VBI is
therefore, much more than a current and passing fad, but a deeper conviction of the critical need
to begin the process of changing mindsets in a lasting way. Financial institutions are a key, but
not the only catalysts in this process.
Customers and investors need to be supported with relevant information, along with the means
and ability to compare such information, in order to better understand the value propositions of
Islamic finance. The encouragement of pension and institutional funds with a sustainable
investment orientation, particularly in markets where such funds remain largely underdeveloped,
would be important to provide a stronger impetus for VBI. Credit rating agencies could also be
important contributors to a new landscape, with stronger emphasis on economic, social and
environmental sustainability in assessment frameworks and methods. And regulators and
policymakers need to be appropriately responsive to the adoption of sustainable practices.
Conclusion
In conclusion, the Islamic finance industry today faces an important, strategic choice - to either
continue on a path that largely ignores the stark social and environmental realities that confront
humanity, or to thoughtfully chart a new path that fully embraces the idea and philosophy of
finance beyond profits. The latter will be an unfamiliar path in many respects, but one that is far
closer to the fundamental premise of Shariah on which Islamic finance is based upon.
Embarking on this path will require deep conviction and visionary leadership across financial
institutions, governments and policymakers. But the pay-offs will be immeasurable. For many in
society, it will also make the difference between economic freedom and opportunities, and a
lifetime of hardship.
Thank you.
See also:
1. Implementation Guide for Value-based Intermediation
2. Value-based Intermediation Financing and Investment Impact Assessment Framework
(Consultative Document)
3. Value-based Intermediation Scorecard (Consultative Document)