KUALA LUMPUR: Malaysia is second only to Saudi Arabia in terms of Islamic banking in the world. Of the US$71 billion Syariah-compliant asset funds managed, 33 per cent are in Malaysia.

The largest sukuk or Islamic bond market in the world is in Kuala Lumpur.

As the country’s central bank, Bank Negara Malaysia (BNM) continues to raise awareness of Malaysia as an international Islamic financial centre, only this time the strategy involves industry players to carve the brand further.

It is no longer a top-down purely regulator approach, assures BNM assistant governor Marzunisham Omar in an interview.

The next area of focus is quality growth, where the 16 Islamic banks and 11 takaful operators see value-returns by embarking on initiatives through Syariah-rooted Value-Based Intermediation (VBI).

This will help them better understand customer needs and market requirements, such as growing demand for wealth management.

Here are excerpts of the interview:

Q: What role does Bank Negara Malaysia envision in shaping the future of Islamic finance?

A: Islamic finance has made significant strides both domestically and globally over the past two decades and we can say it has reached a critical mass now – accounting for 28 per cent of total banking assets, 34 per cent of financing, 33 per cent of deposits.

In the bond market, sukuk accounts for 57 per cent of the total outstanding bonds in Malaysia.

Today Islamic finance is a competitive financial system offering a wide range of products and services to meet the various needs of the customers, ie. individuals or businesses.

Interestingly, a majority of business customers are non-Muslims which reflects that Islamic finance is widely accepted and no longer confined to Muslims looking for Syariah compliant products.

Q: Islamic finance has made significant progress. In your view, what is next for Islamic finance. Can it sustain its growth?

A: From BNM’s perspective, the future of Islamic finance is in the direction of “quality” growth. By this, banking institutions and takaful operators look from the perspective of the value they can create and impact through business activities on a sustainable basis.

This is where Value-Based Intermediation (VBI) — a critical approach we launched in July — comes to be more impactful and sustainable.

VBI is a business strategy by Islamic financial institutions, driven by a desire to create value and make an impact through their activities on the real economy, community and environment, rather than focus on short-term objectives.

Q: What does it mean to the customers?

A: Obviously through VBI, it is the value you can offer to customers. Essentially, Islamic banking will be putting customers first.

As living standards in Malaysia continue to improve, the industry has more financial assets which need to be managed properly.

When an Islamic financial institution adopts VBI, it will be a paradigm shift in the way they approach and manage their customers, unlike the past when they rather push their products.

To understand the customers’ financial needs, technology is critical and, through data mining, banks can understand the customer needs.

As for small and medium-sized enterprises (SMEs), Islamic finance is a key value proposition for equity financing and risk sharing.

Risk sharing differentiates Islamic finance from conventional finance because of risk transfer and debt accummulation and would naturally meet the needs of SMEs and also entrepreneurs in new growth areas.

One key lesson learned from the recent global financial crisis is that total debt globally, which was 250 per cent of global GDP, could be a key risk to financial system and economy. Debt accumulation has only increased further to 325 per cent of GDP.

Through VBI we believe the institutions provide complete product and services including advisory services, supply chain management where supply chain financing is part of it.

Q: How will this affect the profitability of the banks

A: VBI is a business strategy and also provides the business operations sustainability.

In essence, it will help support the bank's business, helping it move forward.

So, it will have to make business sense and it will have to generate substantial returns to the financial institutions.

VBI is not Corporate Social Responsibility (CSR). All corporates and financial institutions have CSR but that is based on funds provided separately.

Here VBI is a business strategy of the institution to drive growth and sustain growth.

Q: What are the next steps of VBI?

A: We are excited about VBI; the value proposition and business aspects of VBI, positive impact to our economy, our community, on a sustainable basis.

We are also excited because it is a collaborative effort by the central bank together with Islamic banking institutions.

Today, we have nine Islamic banks which are already on board, what we call, Community of Practitioners (COP) and the document we put publicly is a joint effort between BNM and nine financial institutions.

Now we are working to develop a value-based scorecard (to measure the success of banking institutions).

The VBI initiative is a non-regulatory requirement. It is a collaboration between the financial institutions and regulator. One aspect is Syariah compliance and we will not compromise on that.

With VBI we emphasise to move beyond syariah compliance towards achieving the intent of syariah.

Islam encourages to do good and prevent harm, and therefore Islamic finance can move into VBI as it is all about achieving the objectives of Syariah in the first place.

Bank Negara assistant governor Marzunisham Omar says Value-Based Intermediation Initiatives (VBI) help Islamic banks improve the way they approach and manage customers. NST photo by MUHD ZAABA ZAKERIA
Bank Negara assistant governor Marzunisham Omar says Value-Based Intermediation Initiatives (VBI) help Islamic banks improve the way they approach and manage customers. NST photo by MUHD ZAABA ZAKERIA