Islamic banks need to create more value-based products

Otherwise, they are unable to achieve the sustainability goals target 


ISLAMIC finance players need to create more value-based products to reach sustainability goals, a conference was told. 

Speaking at the 18th Kuala Lumpur Islamic Finance Forum (KLIFF 2023) in Kuala Lumpur, Malaysia Building Society Bhd group CEO Mohamed Rafe Mohamed Haneef said he has observed that Islamic banks have sustainability targets but they need more effort. 

“A lot more effort needs to be made in creating value-based products. More Islamic banks have sustainability targets, but often these targets need a lot more effort and currently, the resources are limited,” he told the panel session dissecting the question if Islamic finance can be the key to driving sustainable growth. 

Joining Mohamed Rafe in the panel session were Hong Leong Islamic Bank Bhd CEO Dafinah Ahmed Hilmi, PwC Malaysia risk assurance services partner Nik Shahrizal Sulaiman, International Shariah Research Academy for Islamic Finance senior researcher fellow Prof Dr Younes Soualhi, and Trowers and Hamlins partner Elias Moubarak. The session was moderated by Standard Chartered Saadiq CEO Mohd Suhaimi Abdul Hamid. 

The three-day annual KLIFF 2023 last week, with the theme “Harnessing Islamic finance and social finance for a sustainable future”, was officiated by Bank Negara Malaysia Governor Datuk Abdul Rasheed Ghaffour. 

Clear Direction 

Mohamed Rafe noted that Islamic banks have strived hard in their sustainability efforts, noting that most banks are actually progressing decently towards achieving the sustainable goals. 

“But the problem is that sustainability is so broadly defined that most of the banks end up doing a lot of work in measuring the impact or actually measuring the risks involved. My simple advice is, let’s have a clear direction. So, at the end of the day, we know by 2030, we have helped the government to achieve the conditions,” Mohamed Rafe said. 

He also warned that companies that volunteered to meet the government’s requirements but are unable to reach their targets will be imposed a carbon tax in the future. 

Putrajaya plans to introduce a carbon tax to achieve carbon neutrality by 2050, although no specific implementation date has been announced. 

The Sustainable Development Goals (SDG) are embedded in the 2030 Agenda, a framework developed by the United Nations (UN) and officially launched during the UN General Assembly on Sept 25, 2015. The 2030 Agenda sets out a 15-year plan of action to end poverty, protect the planet and improve the lives and prospects of everyone, everywhere. 

In his opening speech, Abdul Rasheed noted the need to focus on themes picked by the conference. 

He said the latest UN Global Sustainable Development Report provides a stark warning — at the half-way point to 2030, the world is not on track to achieve the SDGs. 

“In fact, 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 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 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 it to be,” he said. 

Mohamed Rafe warns that companies that volunteered to meet the govt’s requirements but are unable to reach their targets will be imposed a carbon tax in the future

Set featured imageRole In Sustainability 

During her presentation, Dafinah spoke about how organisations need to strengthen their governance and oversight to ensure integrity. She felt that sustainability is important in terms of how Islamic banks develop their products and solutions. 

“As an Islamic financial intermediary, it is really within our gift to ensure that whatever we do is to elevate the social safety and standing of the communities that we support. 

“So, whether we start from supporting the micro, small and medium enterprises (MSMEs) or even look into school children, every stage there are different requirements,” she said. 

However, she explained that Islamic banks need to also diversify and innovate their product offerings to differentiate themselves from conventional banks. 

“If there’s one thing that I would like to highlight, it’s really on product innovation. I think that this is something which is the key for us to have more diversified product offerings. 

“As a financial intermediary, that really means channelling the access to financing, to capital, to supporting MSMEs, SMEs, uplifting the social status of the individuals so they become bankable credits,” she said. 

Driving Sustainable Growth 

In order for Islamic banks to drive sustainable growth, PwC Malaysia’s Nik Shahrizal tells industry players to look at the mega-trends which are climate change, corporate trust and digitalisation.

He shared three-pointers. First, one cannot run away from the topic of climate change as the whole economy is heading towards decarbonisation, which means more focus is given to transitioning to renewable energy. Second, corporations are focusing on accountability after a number of corporate scandals and greenwashing issues have occurred. Third, digitalisation, an area where many Islamic banks have shown keen involvement.

“I think, overall, I see that the concept of Islamic finance model is very well placed to take into account all these threats. For example, Islamic finance has always been very strong in terms of the social justice and community narrative.” he said. 

There are certain things in the SDGs and ESGs the Islamic finance players cannot adopt, Younes says (pic source:

Lacking Standardisation 

On his part, Younes highlighted that there are still certain concepts that are yet to be cleared. 

“What we are seeing nowadays, we are seeing a kind of confusion. That’s why we have to talk about another dimension and another layer, which some call Toyyiban. Some call it Maqasid-based, and some call it value-based. 

“At the end of the day, one of the challenges is the lack of standardisation of these frameworks. There’s a kind of confusion in the market with all these frameworks,” he said. 

When aligning their value proposition of Islamic finance with the existing sustainability framework, he warned that players need to be careful as there are certain things in the SDGs and ESGs they cannot adopt. 

Tan Sri Mohd Daud Bakar (second from left), a Shariah scholar and executive chairman of the Amanie Group, introducing Abdul Rasheed (centre) to some of the KLIFF 2023 guests

Searching For Harmonisation 

Elias, a partner at Trowers & Hamlins’ international banking and finance department, pointed out how there is a lack of harmonisation when looking at cross-border compliant financing in Islamic finance. 

“From a legal perspective, one of the key issues we face when we are looking at cross-border compliant financing is harmonisation of principles. 

“Having different standards applied in different jurisdictions results in inefficiencies, it drags out transaction timelines. It increases costs, sometimes legal fees,” he said. 

If there is harmonisation on a global scale, he said this would allow transactions to be executed more efficiently and actually helps to draw the blurred lines between Islamic finance and conventional banking. 

  • This article first appeared in The Malaysian Reserve weekly print edition