Value-Based Intermediation- Islamic Banking with purposes

Value-Based Intermediation (VBI) is an intermediation mechanism to deliver the objectives of Shariah through conduct, practices, and offerings which will have a constructive and sustainable influence on the community, environment and the economy.

Value-Based Intermediation- Islamic Banking with purposes
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According to BNM (2017), Value-Based Intermediation (VBI) is a mechanism designed to deliver the intended outcomes of Shariah through the Islamic Bank's conduct, practices and offerings, with the aim of having a positive and sustainable impact on the community, environment, and real economy. VBI shares similarities with the principles of Islam, such as compassion (Ihsan), mutual consultation (Shura), and social responsibility, which can be achieved by fulfilling the shareholders' long-term benefits.

The Islamic finance industry especially the Islamic Banking sector has seen significant growth, but there have been criticisms about its slow involvement in sustainability and public well-being. Bank Negara Malaysia has taken the initiative of VBI for Islamic Banks to be more impactful. VBI addresses these criticisms by requiring Islamic Banks to be more impactful in terms of both economic growth and achieving the Sharia objective of societal well-being (Hassan and Nor, 2019).

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The Underlying Principles of VBI

Entrepreneurial Mindset: Offering products and services which facilitate entrepreneurial activities.
Community Empowerment: Financial solutions provided to the society which has a positive socioeconomic impact.
Good Self-governance: Developing the philosophy of self-discipline based on the principle of Ihsan and engaging all related parties in making important decisions based on the principle of consultation.
Best Conduct: Adopting practices to improve contributions, procedures, and treatments towards the stakeholders through adequate and transparent disclosure.

Shariah Principles and VBI

  1. According to Lahsasna (2013), Islam places emphasis on business activities through halal financial operations, aligning with the VBI objective of an Entrepreneurial Mindset. IBs can contribute to this objective by providing business networks, market infrastructure, and advisory services (BNM, 2017).
  2. The Islamic economic system makes sure that people are involved in those activities which bring benefits to society without harming others (MK, 2006). As a result, it is entrenched with the VBI principle of “Community Empowerment” where IBs can have a positive influence through delivering useful resolutions to the difficulties faced by society, for example, supporting new businesses through the integration of Sadaqah and Waqf within the financial transactions (BNM, 2017).
  3. Ihsan or the sense of compassion is actively encouraged in Islam which motivates the Muslims to go beyond the context of justice in order to pursue excellence and perfection in all activities and actions also the concept of Shura or the idea of mutual consultation is emphasized (Hassan and Nor, 2019, Asutay and Harningtyas, 2015). Hence, the VBI thrust of “Good Self-governance” is urged by Shariah principles and IBs can do it by creating a culture of organizational discipline and making sure of impactful participation of all related stakeholders (BNM, 2017).
  4. Shariah principles deliver a set of rules and guidelines to conduct business activities which include no cheating, unfair activities, disclosing all the related information, etc. Consequently, these guidelines help IBs to offer end-to-end financial services which are according to the Shariah rulings and prevent the arises of constant disputes because of unethical and unjust contractual conditions (Laldin and Furqani, 2013, Bakar et al., 2017). As a result, BNM has provided indicators to ensure the VBI principle of “Best Conduct” of IBs through having customer and employee contentment index, measurements on the customer and employee complaints, etc. (BNM, 2017).

Practical Applications of VBI by IBs

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  1. In order to empower the local community through the usage of Islamic social finance, six IBs named RHB Islamic Bank, Bank Islam Malaysia, Bank Kerjasama Rakyat Malaysia, Affin Islamic Bank, Bank Muamalat Malaysia, and Maybank Islamic have entered into a collaborative initiative in September 2017 to develop a fund from cash Waqf. This fund will be invested in Shariah-compliant instruments and the returns will be used to finance projects which encourage health, economic empowerment, and education.
  2. To meet the demand for affordable housing, Maybank Islamic has initiated a product named HouzKey which uses the concept of Rent to Own (RTO). This will empower society and open the paths for future innovation.
  3. Intending to utilize Islamic social finance, Bank Islam commenced Sadaqa house in 2018 which allows customers to contribute through digital banking and crowdfunding. This program aims to finance underserved projects like entrepreneurship, healthcare, and education.
  4. CIMB Islamic was the first Malaysian bank to join the UN Environment Program Finance Initiative which ensures to reduce the focus on the negative impact on environmental projects. This scheme helps banks to conduct Responsible Banking which is also an objective of the VBI.
  5. Based on equator principles, MUFG Bank Malaysia launched a risk management framework in order to evaluate and manage social and environmental risk in a project. Based on this principle, the bank focuses on the conservation of cultural heritage as well as the native people living around the infrastructure developments. By blending it with the VBI, the bank now also focuses on the outcome of the ventures.
  6. Standard Bank Saadiq uses a risk-based approach in order to evaluate the social and environmental risks related to the sensitive sectors and it is done through the thrust of VBI.
  7. To provide information on VBI and related initiatives to its employers, HSBC Amanah Malaysia issues a quarterly e-newsletter which is named “VBI Digest”. A solution for financial legacy preparing designated “Takaful Future Secure” is also launched by the bank to have a positive impact on society.
  8. The adoption of investment accounts and the Investment Account Platform (IAP) has enabled IBs to mobilize funds for entrepreneurial activities like financing SMEs. BNM has set guidance in order to make sure that these investment accounts will perform as “risk capital” instruments. Through IAP, the Islamic banking industry developed a multilateral framework for providing a smooth, efficient and suitable experience for new investors through mutually recognizing customer due diligence among the IAP banks (Muhammad and Zada, 2018).

It can be seen that there are expectations from IBs that it will move forward to fulfil the objectives of Shariah and to do so implementing the VBI strategy seems the right direction. Even though the introduction of VBI is very recent, we can see some successful implementations by IBs. Therefore, if these projects are supported and rewarded as mentioned in the strategy paper by VBI, we can see IBs moving towards socially and environmentally responsible banking.

The VBI community of practitioners, including these financial institutions, is dedicated to delivering the intended outcomes of Shariah, creating a sustainable and impactful impact on the real economy.

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BNM 2017. Value-based intermediation: Strengthening the roles and impact of Islamic finance. Kuala Lumpur: Bank Negara Malaysia.

LAHSASNA, A. 2013. Maqasid al-Shari'ah in Islamic finance. IBFIM.

LALDIN, M. A. & FURQANI, H. 2013. The Foundations of Islamic Finance and the Maqāṣid Al-Sharīʻah Requirements. Journal of Islamic Finance, 176, 1-14.

MK, L. Accountability and Islam. Fourth International Conference on Accounting and Finance in Transition, 2006.

MUHAMMAD, M. & ZADA, N. 2018. Value-Based Intermediation: Its Scopes and Implementation in Malaysia. 13th Interntational Shariah Scholars Forum. Kuala Lumpur, Malaysia: ISSF.

BAKAR, N., YASIN, N. M. & TEONG, N. How Does Values-Based Banking Counter Unfair Terms in Consumer Contracts and Notices in Islamic Banks in Malaysia. Proceeding of the 4th International Conference on Management and Muamalah, 2017. 1–14.

ASUTAY, M. & HARNINGTYAS, A. F. 2015. Developing Maqasid al-Shari’ah Index to evaluate social performance of Islamic Banks: A conceptual and empirical attempt. Uluslararası İslam Ekonomisi ve Finansı Araştırmaları Dergisi, 1, 5-64.

HASSAN, R. & NOR, F. M. 2019. Value-Based Intermediation: An Analysis from The Perspective of Shariah And Its Objectives. International Journal of Fiqh and Usul al-Fiqh Studies (IJFUS), 3, 81-89.

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