Value-based intermediation: Remaking Islamic finance to parallel sustainable

Value-based intermediation (VBI) is a set of guidelines formulated by Bank Negara Malaysia (BNM), the Malaysian central bank, for the domestic Islamic banking industry.

As a concept rooted in values-based banking, VBI promotes real economic activities resulting in positive social and environmental benefits to a range of stakeholders. In this sense, VBI is seen as a natural progression for Islamic banking given that its Shariah fundamentals are very much in line with the goals of secular sustainable finance.

While the introduction of VBI is a step in the right direction, BNM’s approach to its execution is misconceived. For one, it is being promoted to Islamic banks primarily as a novel competitive strategy to rejuvenate slumping growth rates in the industry — when the emphasis should be on adopting sustainability as the principal measure of business success.      

But more importantly, BNM’s trust in banks is misplaced. It has taken a soft stance on the implementation of VBI, allowing for indefinite timelines and loose interpretations. Such instituting of broad measures leaves open the prospect of greenwashing and ineffectiveness.

Formal regulation, on the other hand, promises to accelerate the transition towards sustainability through explicit objectives and strong incentives for the private sector to comply.

Beyond regulation — be it moral suasion or formal legalistic controls — the proposed evolution of Islamic banking into VBI is a litmus test for bank leaders to take up the ineluctable modern challenge of doing business responsibly

More broadly, the convergence of standard modi operandi with those espoused by values-based banking should become a long-term business imperative for sensible financial stewards everywhere in the world.

Inspiration

Values-based banking — defined by the Global Alliance for Banking on Values (GABV) at its founding in 2009 — is a precursor to VBI. Over ten years on, GABV is an alliance of 63 financial institutions with more than $210 billion of combined assets under management.

Corporate decisions at any financial institution that subscribes to values-based banking are guided by a set of principles that centre around real economy, social welfare, environmental impact and transparency.

The evidence gathered by GABV over the recent decade proves that values-based banking is beneficial in a number of practical ways. Not only do such banks contribute to social betterment and protection of the natural environment, but their focus on the real economy results in more consistent financial returns and greater resilience in the face of economic challenges. They have also been able to expand more meaningfully over the years to add to their various impacts. 

Despite the strong business case for values-based banking, the model is still profoundly unpopular on a global scale. To a degree, it is because the virtues of values-based banking are still unknown to many practitioners.

But equally evident is the financial industry’s resistance to this knowledge even when it becomes available. There are also other reasons at play, mainly the complacency of bank executives and boards who cling to the shareholder-centric perspective in defense of existing benefit plans.

Motives

Originally, VBI was an idea devised by the industry to revitalise slumping growth rates in Islamic banking, from the high teens in the years following the global financial crisis to single digits recently.

In the face of stagnating performance, sustainable banking — an increasingly favoured alternative across capitalist economies — was regarded as an existential opportunity to leverage.

With an impetus from the industry, the Malaysian regulator jumped on the sustainable banking bandwagon in late 2017. Early movers included Bangladesh, China, Indonesia, Mexico, Nigeria, Turkey, among other founding members of the supranational Sustainable Banking Network that was set up in 2012. BNM was assisted in its early…