Integrating sustainability into finance is good for business

Institution : Bank Negara Malaysia - BNM, Association of Islamic Banking Institutions Malaysia - AIBIM
03 October, 2018      300



OCTOBER 3, 2018, Kuala Lumpur: The sustainability agenda needs to be incorporated into the Shariah governance framework of Islamic financial institutions to encourage them to adopt value-based financing that will result in a more positive social impact, said a panellist at the Global Islamic Finance Forum 2018 (GIFF2018).

Professor Datuk Dr Azmi Omar, President and Chief Executive Officer of INCEIF, said this will push the sustainability agenda up to the Board level of these institutions, and compel them to adopt an agenda that goes beyond profit.

"The key thing is that you need the support of the Board. In some banks, the Board may not fully embrace it. They are looking at the dollar and sense. So you need to get the Board support, and you also need the nudge from the regulators," he said.

He was speaking after addressing a panel on 'Roadmap to Sustainability' at GIFF2018 that carried the theme 'Beyond Profits' as it sets out to discuss the adoption of Value-Based Intermediation (VBI) by Islamic banks.

VBI aims to reorient Islamic finance to focus on channeling financing to sectors that have a positive impact on the economy, community and environment.

According to Bank Negara Malaysia Governor, Datuk Nor Shamsiah Mohd Yunus, who delivered the keynote address, research shows that there are material benefits when banks manage non-traditional risks proactively. Managing non-traditional risks such as social, political and environmental factors are a key feature of VBI financing, along with broadening the concept of value.

In her speech, she said an International Finance Corporation survey of global banks showed that around 86 per cent of respondents which integrated social and environmental risks in their business have yielded positive business results.

The VBI system is also aimed at helping the Islamic banks to explore new opportunities for sustained growth as its rapid growth rate in Malaysia has declined from a double digit in 2011 to eight per cent in 2016.

Azmi said Islamic financial institutions are encouraged to regard a sustainability agenda as an opportunity for innovation, rather than an initiative that will affect their bottom-line.

For instance, he said they are encouraged to work with companies that do not fully meet the sustainable criteria by assisting them in their progress, rather than automatically rejecting their financing requests.

He said as there was generally a lack of skills and knowledge on implementing this system, INCEIF had worked with Bank Negara to come up with guidance documents to guide the banks to get on board. Implementation is on a voluntary basis.

Nine of the 27 Malaysian Islamic financial institutions have pledged to adopt VBI. Two innovative products – rent-to-own housing loans and cheaper financing for green hybrid vehicles – have already been introduced.

Another panellist Dr Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship in the London Business School, said regulation of this sector can bring about the creation of common best practices.

"As a society, we want to bring all of them to at least the best minimum standards, and then, give the space to the best ones to innovate," he said.

Anna Batenkova, Sustainable Finance Engagement Manager of WWF Singapore, spoke about banks needing to build good relationships with their clients to understand the issues, and to develop the tools to help the clients address those issues after the financing is disbursed.

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The Association of Islamic Banking and Financial Instititions Malaysia (AIBIM) was established in 1996 as the Association of Interest Free Banking Institutions Malaysia. Currently, AIBIM has 26 member banks. The organisation promotes sound Islamic banking system and practice in Malaysia; represents interest of members locally and abroad; provides advice and assistance to members partinent in the development on Islamic banking and finance at local, regional and global level; coordinates human capital development initiatives, and promotes public awareness.

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