Zeti: Framework to assess economic impact needed in Islamic finance

-A +A

KUALA LUMPUR (Oct 4): The next stage for Islamic finance should be to provide a framework to assess its economic impact, said former Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz.

Zeti, who is now chairman of Permodalan Nasional Bhd — the country's largest fund manager, said greater interest in responsible financing emerged after the 2008 financial crisis, which was advantageous to Islamic banking as it shared similar principles to ethical financing.

Moving forward, she said proposed future financing should also be value adding and be value based.

"It needs to go beyond shareholder value, it needs to focus on impacting the economy, well-being of the society and environment," she said when delivering The Royal Award Islamic Finance Lecture at the Global Islamic Finance Forum 2018 today. She was named recipient of the award last night.

Zeti said there needs to be a set of performance parameters or matrices to measure these results.

"It also encompasses addressing the wider societal problems such as reducing the carbon footprint, strengthening the surrounding communities with economic empowerment and inclusion, as well as improving lives by bringing basic amenities to the community," she said.

Zeti also said financial intermediation should be simpler and easy to understand to reduce prospects for complex and opaque financial engineering.

More collaborative efforts by training and research institutions from different jurisdictions should also take place. These collaborations can work on designing and offering capacity building modules, she added.

Yesterday, Bank Negara published two new tools — an assessment framework and a scorecard — for public consultation on the value-based intermediation (VBI) approach it introduced in July for Islamic financial institutions. VBI is a function underpinned by syariah that aims to deliver, through practices, conduct and offerings, positive sustainable impact to the economy, community and environment without compromising shareholders' returns.

The assessment framework, according to Bank Negara governor Datuk Nor Shamsiah Mohd Yunus, provides guidance on the assessment of financing and investment applications, taking into consideration economic, social and environmental impacts, while the scorecard supports the implementation of performance measurement frameworks for Islamic financial institutions that drive positive value and impact on the society and environment.

Adoption of VBI by Islamic financial institutions is currently voluntary. Out of 27 Islamic banks in Malaysia, nine have done so, according to the Association of Islamic Banking and Financial Institutions Malaysia.