VBI adoption to strengthen Islamic banks, says BNM

According to the deputy governor, VBI is expected to have a positive impact towards Islamic banking institutions


The adoption of value-based intermediation (VBI) by Islamic banking institutions (IBIs) is expected to further strengthen the element of self-discipline within Islamic banks, said Bank Negara Malaysia (BNM) deputy governor Abdul Rasheed Ghaffour.

“VBI is perceived as a catalyst for growth with positive impact towards IBIs, and the adoption of the practices is expected to further strengthen the element of self-discipline within Islamic banks,” he said in his keynote address at the VBI dialogue session in Kuala Lumpur yesterday.

Abdul Rasheed believes that the way to propel the Islamic finance (IF) industry to the next level of growth is by embarking on VBI practices among industry players.

The dialogue is in pursuant to the strategy paper on VBI issued recently by BNM, for the financial industry players and relevant stakeholders to articulate the strategic direction and common vision for the Islamic banking industry.

“Today, there are diverse industry players, both local and foreign. And prior to 2000, there were only two Islamic banks and two takaful operators in the country with a total market share and takaful penetration rate of less than 5%.

“Islamic banking assets have now grown to capture more than a quarter of the total banking system, while the takaful sector has increased its penetration rate to 14.6% of the population,” Abdul Rasheed said.

In the sukuk segment, he said Malaysia is also the market leader with a market share of more than 50% in sukuk outstanding since the year 2000.

According to BNM, the Islamic banking asset growth has been phenomenal — increasing from RM495 billion in 2012 to RM685 billion in 2015, to RM742 billion last year.

The growing impact of the industry on the Malaysian economy is further highlighted by its market share of the total financing of the economy through consumer and corporate loans.

Last year, Islamic financing accounted for a third of all bank financing at RM550 billion, some RM55 billion up from the previous year.

“The move towards embracing VBI is another hallmark in Malaysia’s journey to manifest the larger aspiration of IF,” Abdul Rasheed added.

According to the central bank, the VBI initiative will be adopted in phases by the Islamic banking industry players based on each of the institution’s respective timeline and capacity.

To date, nine IBIs — namely Bank Islam Malaysia Bhd, Bank Muamalat Malaysia Bhd, CIMB Islamic Bank Bhd, Agrobank, HSBC Amanah Bhd, Maybank Islamic Bhd, AmBank Islamic Bhd, Alliance Islamic Bank Bhd and Standard Chartered Saadiq Bhd — announced their collaboration in forming the VBI Community of Practitioners (CoP) that would serve as a key driver for the adoption and implementation of VBI at the industry level.

The CoP also acts as the inner core of the value-based network that links the adopters of VBI with other components of the VBI ecosystem.

Towards this end, the CoP — in collaboration with BNM — is in the middle of developing a value-based score-card that will act as a common and complementary measurement tool of VBI adoption outcomes.

Abdul Rasheed added that there are four underpinning thrusts of VBI: An entrepreneurial mindset, community empowerment, good self-governance and best conduct.

“Through the embodiment of these principles in the business strategies of Islamic banks, there would be greater appreciation on the need to create a positive impact on stakeholders, as called for by Shariah and Islam itself.

“The more sustainable banking practices that would be developed based on VBI concepts encourage the creation of new business opportunities and provide the foundation for more sustainable returns for Islamic banks over the long term.”

He highlighted that customers, particularly businesses and entrepreneurs, would benefit from the opportunity to be more involved in the design of more innovative products and services that are best tailored to meet their needs and circumstances.

“Business propositions from new sectors such as the small and medium enterprises, would also benefit from VBI-based practices where financing applications would be assessed by Islamic banks based on their potential value creation, not just their credit scores.

“In Malaysia, I believe Islamic financial institutions are now at the right stage of development to drive this important change,” he said.

BNM also expects that Islamic banks would take the lead in the VBI initiative and to embrace the new principles in their business strategies and operations.

According to Abdul Rasheed, a number local Islamic banks have already started applying principles of VBI in one way or another.

“What is needed now are strategies to realise the full potential and amplify the impact of VBI in creating positive outcomes for shareholders, as well as broader stakeholders in IF,” he said.