Immediate challenges for IFIs to make 
BNM’s VBI system work

Bank Muamalat’s Mohd Redza and INCEIF’s Mohamed Azmi speak at GIFF 2018 about impending changes with VBI


Getting bankers to tune into the new value-based realities and incorporating the sustainability agenda into the Shariah governance framework are among the immediate challenges for local Islamic financial institutions (IFIs) as they step forward to embrace the value-based intermediation (VBI) system.

The above views by a local Islamic bank chief and head of a Malaysian-based international Islamic finance university were heard at a major Islamic finance conference in Kuala Lumpur (KL) last week.

When discussing the advent of VBI as required by Bank Negara Malaysia (BNM), International Centre for Education in Islamic Finance (INCEIF) president/CEO Prof Datuk Dr Mohamed Azmi Omar said an immediate challenge was to incorporate the sustainability agenda in the Shariah governance framework.

“Moving forward, we incorporated the risk assessment framework. We looked at how we identify risk and what risk measurements are used to consider the sustainability agenda.

“We also looked at the management and mitigation of risk, as well as monitoring and reporting. At the end of the day, when a bank makes a decision, they have to incorporate these factors,” he said in a panel session at the Global Islamic Finance Forum 2018 (GIFF 2018) in Kuala Lumpur.

Mohd Redza also touches on how VBI differs from other common terms heard in the financial world, including principles like ESG, SDGS and Sri investing (Pic by Ismail Che Rus/TMR)

On the banking side, Bank Muamalat Malaysia Bhd CEO Datuk Mohd Redza Shah Abdul Wahid said the biggest challenge would come from the staff itself.

“How do you inculcate this culture of thinking about people and community when you have given him a key performance indicator (KPI)? The KPI does not say be good to
society, but how much profit you are going to make.

“That is my biggest problem, and it is still a problem. It has not been easy. But thanks to the regulators for coming up with the VBI guidelines, it makes my life easier,” he told another panel session at the same forum.

The two-day event carrying the theme “Value-Based Intermediation — Beyond Profit”, organised by the Association of Islamic Banking and Financial Institutions Malaysia, ended last Thursday.

VBI is being pushed by BNM, which released a strategy paper in July 2017, to give the local IFIs a new impetus.

In conjunction with the GIFF 2018, BNM launched two new tools for public consultation: VBI Impact Assessment Framework and VBI Scorecard.

The Assessment Framework provides guidance on the assessment of financing and investment applications taking into consideration economic, social and environmental impacts. The Scorecard supports the implementation of performance measurement frameworks for IFIs that drive positive value and impact on society and the environment.

Call To Action

In the keynote address, BNM governor Datuk Nor Shamsiah Mohd Yunus said at present policy documents developed on 14 Shariah contracts serve to provide a “clear and consistent” framework for lending, underwriting and investment activities of IFIs.

“I am encouraged by efforts among some IFIs to introduce value-adding innovations, building upon these Shariah contracts, and further differentiating their solutions from conventional offerings,” she said in her first major speech on Islamic finance since assuming office in July.

At this point of time, nine of the 27 IFIs in Malaysia have adopted the VBI system on a voluntary basis. They include Bank Muamalat, CIMB Islamic Bank Bhd, Bank Islam Malaysia Bhd, AmBank Islamic Bhd and HSBC Amanah Malaysia Bhd.

On risk and sustainability, Nor Shamsiah said: “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 views of risks reflect sustainability factors.”

Nor Shamsiah said the call to action for sustainable finance is one that the financial sector cannot afford to ignore.

“Encouragingly, more, though not nearly enough, IFIs are moving beyond Shariah compliance to performance and risk management practices that reflect social and environmental impacts,” she said.

On how the value propositions of Islamic finance can be further developed, she pointed to three imperatives: A rethinking of value; rethinking of risk; and rethinking of human capital.

“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 resources departments.

“It requires nothing less than strategic direction and resourcing decisions at the highest levels of the organisation,” she said.


In the panel discussion looking at VBI from the Islamic perspective, Mohd Redza said the key word in VBI was intermediation and not investment.

“We are an intermediary. We take money from people and we give it to another set of people,” he said.

He also touched on how VBI differs from other common terms heard in the financial world, including principles like environmental, social, and governance (ESG); sustainable development goals (SDGs); and sustainable, responsible and impact (SRI) investing.

“It is about showing your commitment towards the community, giving positive impact to the community and society, but doing it in a Shariah-compliant manner,” he said.

The panel also consisted of Dubai Islamic Bank CEO Adnan Chilwan and veteran Islamic finance Shariah advisor Sheikh Nizam Yaquby, who is the supervisory board chairman of Capital Management House BSC (C). It was moderated by National Australia Bank Ltd director for Islamic finance, corporate and institutional banking Dr Imran Lum.

Roadmap To Sustainability

We also look at the management and mitigation of risk, as well as monitoring and reporting, says Mohamed Azmi in respect of risk assessment framework (Pic by Ismail Che Rus/TMR)

On the part of the IFIs adopting VBI, Mohamed Azmi said the framework made available by the central bank would help the IFIs involved look at various criteria before making decisions for financing and investment purposes.

“So, when banks make decisions, they will look at both the negatives and positives. Previously, the approach was to look at the negatives, as long as they do not fall under the haram category.

“Moving forward, we are not looking purely at Shariah compliance, but beyond that,” he said.

He said the IFIs would take into consideration the overarching objectives of Shariah, or Maqasid Shariah, which are to preserve and advance the common interest of society at large by preventing harm and maximising benefits.

Mohamed Azmi spoke in the panel session entitled “Roadmap to Sustainability” along with World Wildlife Funds Inc sustainable finance engagement manager Anna Batenkova and London Business School strategy and entrepreneurship associate Prof Dr Ioannis Ioannou.

The forum had also presented a panel discussion on integrating sustainability and responsible financing into the financial sector. The panellists were Sime Darby Plantation Bhd chief sustainability officer Dr Simon Lord, De Nederlandsche Bank NV division director for supervision policy Prof Dr Olaf Sleijpen, KKR & Co Inc partner/South-East Asia head Ashish Shastry and Cagamas Bhd president/CEO Datuk Chung Chee Leong.

Last Tuesday, Mohd Redza also spoke at the second CIBAFI — World Bank Conference on Corporate Governance of IFIs. CIBAFI stands for General Council for Islamic Banks and Financial Institutions, the global umbrella of IFIs. Bank Muamalat was one of the event partners.