Abdul Rasheed Ghaffour: Value-based finance as catalyst for
sustainable growth and development
Keynote address by Mr Abdul Rasheed Ghaffour, Deputy Governor of the Central Bank
of Malaysia (Bank Negara Malaysia), at the Kuala Lumpur Islamic Finance Forum
2023, Kuala Lumpur, 19 September 2023.
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Distinguished guests,
Ladies and gentlemen,
Assalamu'alaikum w.b.t and good afternoon.
It is a great pleasure to be here at the 18th Kuala Lumpur Islamic Finance Forum
(KLIFF). Nearly two decades since its first inception in 2004, KLIFF has now become an
established global platform, where Islamic finance community gathers to discuss and
reflect on the way forward for Islamic finance. And so, I find the theme for this year's
forum, "Harnessing Islamic and Social Finance for A Sustainable Future", to be apt and
very timely.
The need to focus on this topic has never been more pressing. The latest United
Nations (UN) Global Sustainable Development Report provides a stark warning - at
half-way point to 2030, the world is not on track to achieve the Sustainable
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Development Goals, or in short, the SDGs. In fact, the UN has recently cautioned that
about half of the 140 SDGs are severely or moderately off-track, and around 30% of the
targets "have either stalled or gone into reverse below the 2015 baseline" that we hope
for. The race to end hunger and poverty, the fight against climate change and inequality
- all prove to be a daunting challenge. Income inequality has widened with nearly a
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billion people still facing hunger, far above pre-pandemic levels . The adverse effects of
climate change continue to aggravate poverty and food security concerns, with many
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low-income regions experiencing almost a third of agricultural productivity losses .
These are clear, perturbing signals that where the world is today in terms of sustainable
development, is not where we envisioned to be.
Let me touch on sustainable economic transformation and the role of financial sector.
For Malaysia, we are also not spared from significant challenges in our pursuit for a
more progressive, sustainable and just nation. We continue to face a challenging
operating environment with multiple headwinds, ranging in the form of tightening of
monetary policy, elevated inflation, moderating global trade and also, tech cycle
downturn. The Malaysian economy continues to show resilience against these shocks.
Malaysia has recovered well from the pandemic. Our economic growth has been
forthcoming. Fundamentally, growth is being supported by the diversified economic
structure, including in exports markets and products, and favourable labour market
conditions that continue to drive consumption as the key engine of growth for Malaysia.
While this being the case, the impact of the economic rebound from the pandemic
remained uneven, with vulnerable groups experiencing slower recovery. The World
Bank recently highlighted that nearly 70% of Malaysian lower-income households
assessed themselves as having inadequate financial resources to meet their monthly
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basic needs . It is clear that there are still more that we can and must do to tackle these
challenges. This entails prioritising policies to rebuild retirement savings, improve
targeting and effectiveness of social programmes, enhance social safety nets,
encourage active labour participation and facilitate orderly transition to a greener
ecosystem.
With the integration of SDGs in Malaysia's national development plans and monitoring
of its implementation, this brings together our efforts to elevate quality of life, reduce
inequalities, promote more inclusive growth and improve the country's global
competitiveness. The recently announced 'Ekonomi MADANI: Memperkasa Rakyat'
framework crystalises our aspiration and commitment in this endeavour to balance
economic growth with sustainable considerations. On the part of the financial sector,
new initiatives are also underway to accelerate progress towards sustainable
development through the introduction of tools for investors to find SDG-aligned
investment opportunities in Malaysia and new sustainable finance instruments to raise
capital.
Undoubtedly, the financial sector plays an important role in supporting sustainable
economic transformation. Delivering change at the speed and scale needed to achieve
the SDGs by 2030 demands a reorientation of investment priorities to align with more
sustainable and value-based principles. The UN Conference on Trade and
Development and the IMF estimate that a significant funding gap of approximately
USD4.3 trillion in global annual investments are needed to make strides in the SDGs.
While this may appear as a staggering figure, this is equivalent to only around 1% of the
USD379 trillion of the total financial assets held by banks, institutional investors and
asset managers.
The call for Islamic finance to shift from 'halal' to 'tayyib' as one of the key drivers of the
economic framework, which aligns closely with the fundamental values of Shariah that
underpins Islamic finance, is thus very timely. Shariah values ultimately strive
towards ihsan, or 'attainment of excellence', by delivering the highest standard in all
aspects of business with fair and transparent conduct, strong Shariah governance, and
equitable practices through the sharing of risk, and balanced wealth circulation.
Integrating the value of 'balanced wealth creation with wealth transfer and circulation' as
a business aim can fundamentally drive Islamic financial institutions to actively
reorientate and facilitate more equitable financial resources allocation for productive
and sustainable use. This in turn can boost productive economic activities that support
Malaysia's transformation towards a high-income nation, reducing economic disparities
and fostering intergenerational equity, in line with the vision of "raising the ceiling" and
"raising the floor".
The tenet of a 'just economy' through balanced wealth circulation is also clearly
emphasised in the Holy Quran, as mentioned in verse 7 from Surah Al-Hasyr
that "wealth should not circulate solely among the rich". Full realisation of these values
can contribute towards addressing socio-economic imbalances and promote financial
stability to catalyse a more sustainable, inclusive and progressive economy. These
values are universal and transcend geographical boundaries. At a global level,
embracing these values call for collective actions and solidarity in facilitating more
balanced development of all economies, particularly the developing and emerging
economies among Islamic countries, to achieve a just and orderly transition towards
sustainable and inclusive growth. These can be in terms of investment in infrastructural
development, facilitating trade policies, and encouraging talent or technology exchange.
With these in mind, I would like to take this opportunity to share my thoughts on two
important foundations for the Islamic financial sector to deliver more tangible impact
through value-based finance. This is also a call to action for the financial community to
take charge with greater leadership in catalysing sustainable growth of our nation and
beyond.
1. First is the unlocking impactful innovations for economic and sustainability
transformation.
2. Second, doubling-down on value-based finance implementation.
Let me begin with the first foundation on unlocking impactful innovations for
economic and sustainability transformation. The space for innovation in Islamic
finance is vast, and yet, to this day, the full potential of Islamic finance has not been
fully optimised as a tool for meaningful change to meet the world's financial needs. We
have diverse Shariah contracts and instruments which can be tailored to engineer
solutions that can serve varying needs of different segments of society. In Islamic
finance, we have the ability to "blend finance" using different forms of capital such as
philanthropic capital and risk capital, thus expanding its intermediation role beyond
credit provisions and risk transfers.
We can all draw upon and seek to embody the willpower and purposefulness
exemplified by renowned Muslim scholars at the height of Islamic civilisation such as
AlKhwarizmi, Al-Battani and Ibn Sina, whose works in mathematics, astronomy and
medicine had reshaped the course of human civilisation in numerous ways.
AlKhwarizmi, for example, with the improvements to algebra, has laid the ground for
modern financial mathematics and accounting. Their innovations catalysed progress in
diverse fields, with enduring impact that continue to inspire generations of society. We
should also take inspiration from our scholars such as Tan Sri Dr. Mohd Daud Bakar
who has continued to emphasise the application of multi-disciplinary knowledge in
economics, technology and ethics, combined with practical approach in advancing
financial innovation. This interdisciplinary and pragmatic approach paves the way for
more impactful financial solutions that can solve macro-critical challenges while
adhering to Shariah principles.
Looking ahead at the economic and financial needs of today and in the future, the
funding, investment and risk protection needs of businesses and society today are
much more diverse and complex. For example, in the latest national economic
transformation plans including the National Energy Transition Roadmap and New
Industrial Master Plan, funding Malaysia's economic and sustainability transition is
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estimated to require about RM1.4 trillion by 2050 , and thus, necessitating more adept
use of wider funding mechanisms. The immediate funding needs involve projects that
are nascent and are much more varied in terms of its market return profiles. There is
significant opportunity for Islamic finance to demonstrate its catalytic role and impact by
making full use of the tools available for financial innovation in addressing these
evolving needs of the country. These include instruments such as sukuk, syndicated
financing and blended finance on a much larger scale.
One such tool available to Islamic banks in Malaysia is leveraging Investment Accounts
(IA) to intermediate impact-driven investments. The industry can more actively mobilise
new sources of funding while expanding the underlying assets funded by IA towards
SDG-aligned projects. The features of IA can be versatile - it can even "blend" well with
social finance mechanisms, taking inspiration from notable innovations in SRI-sukuk
structures.
At the Bank's end, we are committed to provide a conducive regulatory environment for
innovation to take place. The Financial Sector Blueprint 2022-2026 outlines our
regulatory focus on fostering market dynamism. We are progressively reviewing
relevant standards including the Investment Account Policy Document to enable the
industry to advance unique, purposeful and innovative propositions - guided by the
principles of parity, proportionality and neutrality. The Bank is also embarking on a
holistic review of the standards on Shariah contracts to simplify the framework's design
and policy approach to spur innovation while ensuring effective application of Shariah
principles as an important enabler of value-based finance. With a combination of the
right mindset and approach, Insha'Allah, purposeful innovations in Islamic finance can
be accelerated and driven to greater heights.
Another prime area for innovation (one that is close to my heart) is social finance, which
can be harnessed towards lifting vulnerable groups out of the poverty and low-income
trap. The effort by the industry and various implementation partners to progressively
integrate Islamic social finance mechanisms as part of Islamic finance solutions is
commendable and very much welcomed. The iTEKAD programme has since its
inception in 2020 benefited over 3,000 microentrepreneurs and traditionally excluded
businesses by providing greater access to finance and value-added skills to elevate
their financial well-being and business resilience. The network of implementation
partners has grown to over 60 entities. To maintain this positive momentum, it is
important for iTEKAD to scale further, leverage on technology and expand the network
of implementation partners, all while ensuring effective delivery of the programme that
can be a life-changing opportunity for the beneficiaries. On this note, I wish to commend
the industry's effort in continuing to enhance the myWakaf initiative with additional
participation of Islamic banks and State Islamic Religious Councils under myWakaf 2.0.
With a sharper focus on community and economic empowerment and more coordinated
monitoring mechanism, myWakaf has significant potential to drive socio-economic
developments of the country.
I am also pleased to note that MIFC Leadership Council has set the demonstration of
impactful innovation in Islamic finance as one of its key priorities. This aligns well with
the vision for Malaysia's Islamic finance marketplace to be knowledge-based and
innovation-driven. I believe the MLC will continue to engage stakeholders widely as
they refine their strategic focus and begin implementing strategies to advance
Malaysia's proposition as international gateway for Islamic finance.
The second important anchor in delivering tangible impact is doubling-down on value-
based finance implementation. It has been six years since the introduction of the VBI
strategy framework in 2017, and I acknowledge that it is not an easy feat to progress
from "Emerging" phase, where finance solutions gradually demonstrate principles of
VBI, to the "Established" implementation phase, where the whole institutional behaviour
and culture is fully aligned towards the fundamental values of Shariah in delivering
sustainable impact. Nonetheless, the industry must remain steadfast and strive forward
to effect positive and lasting change. A step-change in the "tone at the top" is of utmost
importance to create a domino-effect of positive actions that permeate throughout the
institution - from corporate value intent to business strategies and operations, business
conduct, performance measurement and also, impact reporting. This holistic change
must be driven from the boardrooms with cascading effect to the frontlines for positive
impact to be felt by customers and wider stakeholders.
I wish to acknowledge the commitment shown by AIBIM and the Malaysian Takaful
Association in leading VBI initiatives thus far. The industry continues to further expand
the application of Value-based Intermediation Financing and Investment Impact
Assessment Framework through the upcoming issuance of the 3rd cohort of Sectoral
Guides this year, focusing on agriculture, mining & quarrying, road transportation and
waste management sectors. On the takaful front, I hope the VBIT Roadmap issued last
year will be useful in guiding takaful operators to implement changes to business and
operating strategies, introduce more value-based solutions and strengthen capacity to
deliver positive impact to people, planet and environment. I note that both associations
are also making strides to develop better impact measurement frameworks - such as
the Maqasid Scorecard and VBI Impact Report evaluation. I look forward to the
upcoming report by VBI Community of Practitioners on improvements to its VBI impact
measurements. These initiatives are critical to address the real risk of "impact-washing"
that can affect the integrity and effectiveness of VBI implementation.
With VBI principles being universal, our hope is that going forward, we will see wider
adoption of value-based finance beyond the Islamic finance community of institutions,
so as to further promote a more inclusive and sustainable financial ecosystem in
Malaysia. Adopting sustainability principles in financial business is no longer a "niche",
but a business imperative, one that is aligned with global movement that encourages
value-driven financial and investment decisions.
It is my firm belief that value-based finance can indeed be a strong catalyst for
sustainable growth and development. By prioritising values in our financial systems, we
can elevate the purposefulness of finance and create a more enduring financial system
that contributes to the well-being of our planet and its people. On that note, I wish
everyone a beneficial and productive session for the rest of the conference.
Thank you.
1
The Sustainable Development Goals Report 2023: Special Edition, Towards a Rescue
Plan for People and Planet, 10 July 2023.
2
The State of Food Security and Nutrition in the World 2023.
3
Climate Inequality Report 2023, World Inequality Lab.
Malaysa Economic Monitor: Expanding Malaysia's Digital Frontier, February 2023.
5
National Energy Transition Roadmap, page 57 and Prime Minister's Speech For The
Launch Of The New Industrial Master Plan 2030 (NIMP 2030) delivered on 1
September 2023, paragraph 22.