Islamic Finance

INTERVIEW-Malaysia central bank working on implementation guide, scorecard, for Value-Based Intermediation

| 09 November, 2017 | Interview
 Emmy Abdul Alim
INTERVIEW-Malaysia central bank working on implementation guide, scorecard, for Value-Based Intermediation
Photo: Bank Negara Malaysia, the central bank, building in Jalan Sultan Salahuddin in Kuala Lumpur, Malaysia, on September 23, 2016. Gwoeii/Shutterstock

Malaysia’s Value-Based Intermediation (VBI) initiative will be a “game changer” to provide growth opportunities for the nation’s slowing Islamic banking sector but the hard work is to translate the strategy into measurable components, the nation’s central bank assistant governor Marzunisham Omar told Salaam Gateway on October 22.

The VBI approach goes beyond financial returns to also measure positive and sustainable impact of Islamic banking to the economy, community and environment, according to its strategy paper released in July this year.

The strategy paper says the VBI shares similarities with Environmental, Social and Corporate Governance (ESG), Ethical finance and Sustainable, Responsible, Impact Investing (SRI) specifically on the intended outcomes.

The key difference between VBI and these concepts, adds the paper, is that VBI relies on Shariah to determine its underlying values, bringing up Malaysia’s long-term goal of growing a more 'Shariah-based’ Islamic finance industry as opposed to one that is ‘merely’ Shariah-compliant.

“We have reached a stage where we have critical mass and Islamic finance has become a major part of the financial system. It co-exists with the conventional system, it offers a comprehensive range of products and competitive pricing,” said Omar.

“The question is: What’s next for Islamic finance? Can we still maintain the kind of double digit growth that the industry has been recording? We’ve seen some moderation in growth in Islamic finance,” he added.

The market share of Islamic banks in Malaysia rose from 7.1 percent in 2010 to 28 percent in 2016. However, while still expanding, the growth of Islamic banking assets hit single digits in 2016 when it dropped to 8.6 percent from 24.2 percent in 2011, according to Bank Negara Malaysia (BNM), the central bank.


The challenge for BNM is translating the qualitative requirements of the VBI into measurable components. “The hard work is to provide the details, which are being worked on,” said Omar.

The strategy paper cites examples of “value-based banking practices” including impact-focused disclosure to enhance confidence in the sector among customers and the public, inclusive governance to better align between stakeholders’ expectations and business focus, and constructive collaboration to give wider opportunity and knowledge in improving business impact.

“What we would like to emphasise is that [the VBI] started as macro and broad and now we’re working with the industry to come up with the various aspects such as their financing practices, their relationships with customers, even their commitment to their employees and how they deal with other stakeholders, governance, and transparency,” said Omar.

At this early stage Omar said the central bank is working on three key areas.


“One is the articulation of the practices that the banking institutions could adopt as part of the VBI initiative; this will be the so-called implementation guide.

“We are working on the implementation guide together with the industry, to help the banking institutions individually look at how they can adopt some of these practices or all of these practices into their business strategy,” said Omar.

The central bank is also working with the industry to develop a value-based intermediation scorecard.

“This is where we will come up with the areas where we will measure to what extent an Islamic banking institution has adopted the VBI initiative,” he added.

Omar said the scorecard will be ready in about six to nine months.

To develop the scorecard, BNM is working with nine institutions - Agro Bank, Alliance Islamic, AmBank Islamic, Bank Islam, Bank Muamalat, CIMB Islamic, HSBC Amanah, Maybank Islamic, and Standard Chartered Saadiq – that have come together to form a group called the Community of Practitioners (COP).

BNM is also currently working on another component of the VBI, the corporate value intent (CVI), which is a statement from Islamic banks as to how they are incorporating the VBI into their operations.


The VBI is rooted in Shariah which determines its underlying values and priorities.

The Shariah-based approach aligns products and services to maqasid al Shariah, or the goals of Shariah, which seek to protect and preserve the benefits and interests of society and the acquisition of wealth in a fair, transparent and accountable manner.  

Most current Islamic financial products and services originate from conventional finance but are structured in such a way that they comply with Shariah. 

The aim of the VBI is not to discriminate against non-Shariah-based products and services but to move the whole Islamic banking industry to becoming Shariah-based.

“You look at financing activities – they can be equity-based or debt-based. What we are stressing is that you should take into account the value, the sustainability of your financing activities.

“The VBI is not dictating that you should do this model or that model, it’s more of the impact that your activities, your business strategies, your business would have on the real economy, on the community you serve and on the environment,” said Omar.

The initiative has started with the nine Islamic banks and will gradually roll out to include other Islamic banks and then takaful operators, said Omar.


The VBI is a voluntary initiative and banks that choose to incorporate its elements into their operations can do so in part and in phases, depending on their levels of readiness and capacities.

“At this stage, it is not the direction we are thinking about, to put [the VBI] as a mandatory requirement. We are comfortable at the moment for it be voluntary,” said Omar.

He said he doesn’t believe Malaysia’s banks are ready at this stage to adopt everything in the VBI strategy paper.

“At this stage, it is in the interest of the industry and the economy not to come up with a regulatory requirement which says that ‘you finance this activity’ or ‘don’t finance to this activity’,” he added.

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