Implementation Guide for

Value-based Intermediation

Issued on: 3 October 2018 BNM/RH/DP 034-4

 About the Implementation Guide
The Implementation Guide aims to facilitate adoption of Value-based
Intermediation (VBI) by Islamic banking institutions (IBIs) through the following:

Sharing of practical banking practices • How to translate the key

that are driven by impact creation to underpinning thrust of VBI
wider stakeholders into banking operations?

• What are the priorities?

Outlining 4 phases of implementation • How to know that we are on
that reflect gradual progression towards
envisioned financial landscape the right track?
• What is the end-outcome?

Deliberating key implementation • How to manage/address

challenges & issues as well as challenges or issues arising
pragmatic solutions from implementation of VBI?

This document does not intend to specify the ideal features of a VBI bank since
there is no one-size-fits-all approach given the different nature (structure,
business focus and level of readiness) of IBIs.
In the course of understanding this document, you may direct queries to the
following officers at 03-26988044:
Azren Rizuani Aziz ext. 7855 or azren@bnm.gov.my
Siti Nurul Ain Zakaria ext. 8332 or ain@bnm.gov.my
Noorizuan Shah Noorazlan Ong ext. 8329 or noorizuan@bnm.gov.my

DISCLAIMER: This is a non-binding publication and the views, findings,

interpretations and conclusions expressed in this document do not necessarily
represent the decision or the stated policy of the Bank Negara Malaysia, nor does
citing of trade names or commercial processes constitute endorsement.
 Table of Content

Overview: Overall Framework of Value-based Intermediation………. 1–3

Chapter 1: Guiding Principles of VBI Implementation………………… 4

Chapter 2: Phases of Implementation………………………………….. 5– 7

Chapter 3: Corporate Value Intent Framework………………………... 8–9

Chapter 4: Integrating VBI into 5 Key Operational Aspects………….. 10 – 32

Chapter 5: Implementation Challenges and Issues…………………... 33 – 35

Overview: Overall Framework of Value-based Intermediation (VBI)
• In March 2018, a Strategy Paper on Value-based Intermediation (Strategy
Paper) was finalised and issued by Bank Negara Malaysia (the Bank), in
collaboration with the members of the VBI Community of Practitioners (CoP)1.
• VBI is defined as an intermediation function that aims to deliver the intended
outcomes of Shariah through practices, conduct and offerings that generate
positive and sustainable impact to the economy, community and environment,
consistent with the shareholders‘ sustainable returns and long-term interests2.
• The Strategy Paper has provided a broad articulation of the underpinning
thrusts of VBI as well as the implementation approach and strategies in
advancing VBI as the next strategic direction for the Islamic banking industry.
• The Bank facilitates the implementation of VBI by establishing key enablers
such as the CoP, VBI Network, VBI Scorecard and series of Guidance. In
addition, the Bank promotes proactive transparency on the optimal set of
information that aims to trigger intended reaction (market discipline) from
relevant stakeholders towards existing banking practices & offerings.

Two–pronged approach in facilitating VBI adoption by industry players

1) Creating an enabling environment through regulatory guidance

• In addition to the establishment of the VBI CoP (including its strategic network)
as well as introduction of VBI Scorecard as the complementary performance
measurement, the following documents are produced to provide guidance on
how to translate articulation of VBI in the Strategy Paper into real banking
practices & offerings:

1 Comprising of 9 Islamic banking institutions (Bank Islam, Bank Muamalat, Agrobank, Maybank Islamic, CIMB
Islamic, AmBank Islamic, Alliance Islamic, HSBC Amanah & Standard Chartered Saadiq)
2 Strategy Paper on Value-based Intermediation: Strengthening the roles & impact of Islamic finance
(12 March 2018)

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 VBI Implementation Guide: Provides examples of practical
banking practices that illustrate the underpinning thrusts of VBI &
deliberates broader implementation issues

Corporate Value-Intent (CVI)3: Provides a structured

mechanism to formulate the strategic intent in delivering
Shariah propositions and monitor execution of implementation
strategies that aim to deliver the commitments

VBI Investment & Financing Assessment Framework

(VBIAF): Provides guidance on establishment of a robust VBI
risk management system which encompass governance, risk
identification, risk measurement and monitoring and reporting

VBI Scorecard: Provides a structured management tool that

guides self assessment on effectiveness and achievement of
implementation strategies as well as overall institution‘s
performance in delivering Shariah propositions

• These documents are developed in collaboration with the members of the VBI
CoP and relevant stakeholders. These guidance are meant to facilitate the
design process and make extensive use of examples to provide ideas of best
practices evidenced globally. As such, these guidance are robust documents
and rather be enhanced further in the future. Beyond these documents, other
guidance may also be produced as and when necessary.
2) Enhancing quality of transparency to trigger intended stakeholder
activism
• It is crucial to promote disclosure of the optimal set of information to key
stakeholders such as financial consumer, investor, government, non-
governmental organisations (NGOs) with an objective to generate the intended
market discipline that encourages Islamic banking institutions (IBIs) to
sharpen their focus on delivering Shariah propositions.
• At this juncture, VBI transparency expectations focus on intent/ commitment
(mission statement), implementation strategies and comprehensive
performance reporting (which eventually will cover impact of financial
intermediation).

3 Further explanation on the Corporate Value-Intent is embedded in the VBI Implementation Guide document.
There will be no separate document issued on this aspect.

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3 of 35
 Chapter 1: Guiding Principles of VBI Implementation
VBI advocates greater focus on delivering the Shariah propositions through
financial intermediation activities, which gradually strengthens the roles and
impacts of IBIs. Effective implementation of VBI requires solid understanding and
appreciation of Shariah propositions as well as for an IBI to be financially
sustainable and resilient so that it has the long term capacity and capability to
continuously drive VBI agenda. Based on this premise, implementation of VBI by
IBIs must observe the following guiding principles:

1) Fully Integrated

• Principles of VBI must be integrated at both levels: transactions & overall

operations (including conduct). VBI must not be implemented separately from
current banking operations & offerings. However, IBIs may focus on certain
aspect prior to the full integration VBI into overall operations.

2) Proportionality

• Implementation of VBI must commensurate with institution‘s internal capacity

(governance, capital, liquidity & risk management). IBIs are expected to
prioritise adoption of best practices that strengthen existing operations e.g.
effective underwriting process for asset quality management.

3) Comprehensive and Structured

• Comprehensive review & realignment of institution‘s overall policies,

procedures, conduct & offerings, so that IBIs can deliver their commitment on
VBI.
• Corporate Value-Intent (CVI) framework provides a structured mechanism to
formulate solid strategic intent, monitor the progression of implementation
strategy and measure the end-outcome (impact).
• Enhanced data-driven analysis to support operations & offerings – measuring
potential impact of negative externalities (real sector data) created by IBIs‘
clients to their sustainability.

4) Accountabilities

• Clear tone from the top (shareholders, board of directors and senior
management) is key prerequisite for VBI implementation. Establishment of
cross-functional working group with clear roles & responsibilities (including
key performance indicators) will ensure smooth implementation.
• Proactive role of Shariah committee & Shariah officer e.g. consideration of
impact in product development & relevant research on banking conduct (fair
dealings & transparency).

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 Chapter 2: Phases of Implementation

Rationales of business-driven approach and phased-in implementation

2.1 Adoption of VBI by the IBIs should be business-driven, depending on

individual institution‘s level of maturity (level of willingness & state of
readiness). This is mainly due to the implementation, to a certain extent,
will transform either the business modality, conduct, products and services
or banking practices. Such business-driven approach aims to provide
flexibility to IBIs to choose the most practical way to drive this initiative.
2.2 IBIs are expected to demonstrate proactive behaviour and strong
leadership in ensuring their transactions are not only Shariah-compliant
but also delivering the Shariah propositions. At this juncture, such agenda
will not be pushed through regulatory requirement.
2.3 Moving forward, it is envisioned that all IBIs will gradually embrace &
integrate principles of VBI into their operations & offerings since it is a
natural next step (progression) while ensuring compliance to Shariah
requirements.

Clarity on milestones of each implementation phases

2.4 In order to ensure that implementation of VBI by IBIs is leading towards the
right direction and consequently achieving the intended outcome of the
agenda, there is a need to provide clarity on key milestones of each VBI
implementation phases. Description of 4 key implementation phases aims
to provide guidance on the following:

Clarifies key Facilitates review of VBI

milestones of each Scorecard by considering
implementation phase institution‘s current position in
– How do we start and these 4 key implementation
what should be the phases
priorities now?

Identifies areas of
improvement necessary
to achieve intended
milestones – where are
we now & how to move
forward (right direction)?

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Progressive approach in advancing VBI implementation
i. Initiating
2.5 The first phase is a starting ground for IBIs where emphasis is given on
transparent commitment to integrate VBI into overall operations and
offerings and advocacy effort in creating awareness and instilling solid
understanding on VBI to both internal and external stakeholders.
2.6 IBIs are expected to reflect their VBI-related aspiration in the institution‘s
mission statement or any other medium relevant to institution to chart its
priority and focus area moving forward.
2.7 Also, IBIs may demonstrate commitment through participation in relevant
movement/association or voluntarily subject themselves to relevant
parameter/certification, either at international or domestic level e.g. VBI
Community of Practitioners (CoP), Sustainable Banking Network, UN
Global Compact, UN Principles for Responsible Investment and
Responsible Finance Investment (RFI) Foundation.
2.8 During the initiating phase, IBIs also begin to develop the following basic
tools (prerequisites) for VBI implementation:
i. Specific VBI implementation roadmap, which translates the ‗mission
into action‘. Such roadmap is supported with structured performance
tracking to ensure that meaningful changes are crystallised, not remain
as high-level aspirational statements.
Diagram 2: VBI Implementation Phases

4. Total change in
institutional
behavioural and culture

3. Active stakeholder
activism Established
Engaged

Emerging
2. Banking practices,
products and services
demonstrate principles
Initiating of VBI
1. Transparent commitment
& visible advocacy of VBI
adoption

source: Phases of implementation are adapted from Sustainable Banking Network (SBN) Global
Progress Report (Feb 2018)
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 ii. Internal infrastructure and capacity building necessary for execution
of the VBI implementation roadmap. This could be in the form of
improvement in banking infrastructure, talent or expertise and internal
governance structure & process.
ii. Emerging
2.9 ‗Emerging‘ phase witnesses IBIs gradually integrate principle of VBI in their
offerings and banking practices:
i. Development & offering of banking products and services that
are consistent with VBI. For instance, financial products & services
that aim to fulfill customers‘ needs in the right manner.
Consequently, IBIs are expected to monitor & manage any
unintended consequences of their offerings such as promoting
excessive consumption/ borrowing.
ii. Adoption of value-based banking practices – for example, broader
considerations (e.g. environmental & social risks) in credit
assessments in addition to the current credit-worthiness assessment
on customers.
iii. Engaged
2.10 Comprehensive review of existing banking offerings and practices will
eventually attract active stakeholders activism, where financial decision-
making of wider stakeholders is largely influenced by the enhanced
transparency strategy, specifically on IBIs‘ progression of VBI
implementation strategies & impact reporting.
2.11 In addition to considering views of wider stakeholders in IBIs‘ key decision
making process (inclusive governance), VBI promotes relevant strategic
partnerships between IBIs & other stakeholders with infrastructure &
competencies that reside beyond banking industry. Such practice will
enhance current operational efficiency.
iv. Established
2.12 The final phase of VBI implementation should observe total change in
institutional behaviour and culture, where IBIs inherently & continuously
aim to deliver positive & sustainable impact (including financial returns) to
the community, economy and environment through its day-to-day
operations.
2.13 Such impact-driven mindset will shape a different banking paradigm. IBIs
play a proactive role in realigning their business activities with the current
needs of community & overall economic agenda of the country, hence
resulting in minimal regulatory intervention.

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 Chapter 3: Corporate Value-Intent Framework

What is Corporate Value-Intent (CVI) Framework?

3.1 Consistent with the guiding principles of VBI implementation that

emphasise on the importance of a structured mechanism that
systematically integrate key underpinning thrusts of VBI into existing
banking operations, practices, conduct and offerings (products and
services), CVI Framework outlines key steps that IBIs are expected to
conduct during the initial phase of implementation.
3.2 Diagram 3 summarises the process flow, which consists of four activities,
and remains relevant throughout all phases of implementation (as
described in Chapter 2)

Diagram 3: Process Flow of Corporate Value-Intent (CVI)

Impact Transparent
Reporting Value-Intent

Key
Performance Strategies
Indicators

Step 1: Establishment of Value-Intent

3.3 IBIs are expected to establish and declare the ―value-intent‖ that is defined
as the institution‘s strategic intent (commitment), specifically in delivering
the Shariah proposition through financial intermediation activities.
3.4 The value-intent must be premised on the intended outcome (maqasid) of
Shariah. In principle, Shariah aims to prevent harm and enables all to attain
benefits and from the perspective of financial intermediation, value-based
intermediation should result in inclusive and fair wealth creation as well as
preservation.

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3.5 For IBIs who have already embarked on initiatives, which aim to bring
about similar outcomes of Shariah, this step expects such IBIs to articulate
and explain the linkages between those initiatives and Shariah and how
such initiatives actually deliver Shariah propositions.
3.6 Consistent with Shariah proposition that aims to prevent harm and attain
benefits to all, IBIs may use available references and tools from the
established initiatives such as the Equator Principles, UNEP-FI and the
United Nations Principles for Responsible Investment (UN-PRI) in the
course of delivering the Shariah propositions. For instance, IBIs may
embrace and adopt the comprehensive risk management framework under
the Equator Principles that considers environmental and social risks in
project finance or UN-PRI for the enhanced investment appraisal that
considers environment, social and governance (ESG) parameter.
3.7 In relation to paragraph 3.6, IBIs must ensure that those references,
principles and tools are consistent with Shariah.

Step 2: Development of Implementation Strategies

3.8 IBIs are expected to formulate relevant strategies or action plans to support
the value-intent (strategic commitment).
3.9 The strategies must be integrated within the institution‘s business focus as
well as banking operations. Chapter 4 of this document provides examples
of relevant strategies as a reference for the IBIs, focusing on 5 key aspects
i.e. leadership and culture, operations, products and services, transparency
and stakeholder management.
Step 3: Key Performance Indicators – data compilation and measurement
3.11 IBIs are expected to identify measurable KPIs for each implementation
strategies. While developing the KPIs, IBIs are encouraged to minimise the
use of process-oriented indicators e.g. number of engagement session,
instead to emphasise on the impact created e.g. number of new
employment created in new growth areas.

Step 4: Impact Reporting

3.12 After an agreed period of time in operation, IBIs should assess the impact
of VBI-related initiatives and identify implementation gap & understand
challenges/ issues.
3.13 In order to ensure smooth implementation of key strategies, IBIs need to
analyse and review effectiveness of their current business strategies and
performance.

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 Chapter 4: Integrating VBI into 5 Key Operational Aspects
4.1 This chapter aims to provide further articulation on the four key
underpinning thrusts (as briefly described in the Strategy Paper) as well as
to enhance understanding through several illustrations of existing banking
practices, which to a certain extent demonstrate the thrusts.
4.2 Illustrations presented in this document are primarily centered on initiatives
that focus on sustainability, ESG and good conduct management.
4.3 While these concepts differ from one another on certain areas such as the
central position of Shariah in determining the underlying values, priorities
and moral compass for VBI which stems from the primary value of Shariah
in promoting attainment of benefit and prevention of harm, these concepts
demonstrate some elements resembling the key underpinning thrust of VBI
and hence present a good benchmark for IBIs who aspire to adopt VBI.
4.4 This guide is a living document, which may be updated from time to time so
that it remains relevant and achieve its objective that is to facilitate
adoption of VBI.
1. Leadership & Culture: Instilling self-discipline and striving for
continuous improvement
4.5 Leaders (board of directors and senior management) play an important role
in shaping the strategic direction and advocating positive culture within the
institution.
4.7 From VBI perspective, it is crucial for the leaders to set the right tone from
the top and ensure it cascades down to the operations & offerings. The
―right tone‖ here refers to ―doing the right thing‖ as specified by Shariah
even during difficult times (e.g. economic recession) or in situations where
there is no prevalent regulation set in place.
4.8 In reinforcing an appropriate tone from the top to shape desirable
organisational culture and behavior, there is an increasing need for a
sharper focus on individual accountability4. This would complement the
existing oversight role of personnel with senior roles in promoting good
conduct within the financial institution.

4 This is in line with the discussion paper on Responsibility Mapping issued by the Bank in February 2018

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 4.9 Promotion of such clarity on the roles, responsibilities and accountability
will incentivise leaders to take greater ownership in fostering a positive
culture and addressing misconduct risk. Meanwhile, transparent disclosure
of such individual accountabilities and responsibilities will also enhance
stakeholder activism in holding their financial institutions (or specific
individuals) accountable should a breach occur.
4.10 There are various ways to embed ―good self-governance‖ in existing
banking operations & culture. The following are the core strategies in
advocating VBI within the institutional leadership and culture:
Instilling self-discipline5 among leaders, staff & other stakeholders
through transparent commitment and continuous monitoring of
progression.
Examples of banking practices:
• Reflecting VBI-related aspiration in the institution’s mission
statement
• Disclosure of specific roadmap (or 3 – 5 year strategic plan)
on VBI
• Clarity in roles & responsibilities (including specific KPIs) of
Self-discipline
whom should implement VBI-related initiative & reporting line
– including roles of Shariah Committee & other functions
under Shariah Governance
• Decision-making framework that guides stakeholders doing
the right thing
• Specific strategic communication to enhance visibility on
institution’s effort in VBI-related initiatives (branding)
Shaping the right behaviour through positive culture and
improvement in the overall banking operations.
Examples of banking practices:
• Diverse background of leaders (professional background,
ethnicity, gender) – to ensure governance is well-represented
& balanced considerations to derive high quality decisions
• Transparent policy & procedure that aim to influence/
encourage the institution’s supplier & borrowers to adopt
Culture sustainable business practices e.g. promotion of social
procurement where social enterprises (i.e. business that
create positive impact to society through its business
activities) will be prioritised
5 The concept of self-discipline is in line with the principles of righteousness (ihsan) from the Shariah
perspective.

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 Examples of banking practices:
• Bottom-up approach: platform for staff to ideate, commit & be
involved in VBI-related initiatives (staff activism)
• Remuneration structure that incentivises right behaviour –
linking staff performance with additional considerations such
as customer’s feedback on staff services
• Awareness programme aims to enhance understanding/
appreciation among stakeholders
• Appearance that demonstrates VBI adoption e.g. branch
outlook, marketing tool, relevant publication
Striving to achieve continuous improvement through commitment to
adopt best practices & standards, either at international or domestic
level.
This strategy aims to create sufficient momentum to drive VBI agenda to a
higher phase of implementation. Such practice ensures that VBI is NOT a
one-off event but is deeply ingrained within the existing operations and
offerings.
Example of banking practice:
• Subscribing to relevant local or international standards or
best practices (e.g. VBI Community of Practitioners, Equator
Principles, ESG, Global Alliance for Banking on Values
Continuous (GABV), Integrated Reporting, UNPRI)
improvement

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 Illustration 1(a) : LBBW – Translating commitment to
real actions

• LBBW is one the largest banks in Germany and a universal commercial bank
operating worldwide based in Stuttgart. Its commitment to sustainability is
captured in its mission statement: ―As a company with regional roots, we are
committed to fulfilling our responsibilities. We do business in an environmentally
friendly manner and advocate for social issues‖. Such transparent commitment
in the mission statement is important in instilling a sense of self-discipline
and accountability throughout the whole organization.
• LBBW has adopted a comprehensive sustainability policy, providing a
framework for all business activities and set out in the ―Principles and
Guidelines for Implementation of LBBW’s Sustainability Policy and
Goals‖. They provide guidance on the operational implementation (business
area-specific guidelines and goals for investment, financing, business
operations and human resource management). For example, its Guidelines
for Business Operations set standards for its resource use that reflects
demonstrates sustainability adoption within the institutions (e.g. setting target for
usage of recycled paper usage for copies).
• In addition to the Guidelines for Sustainability, LBBW has also formulated a
climate strategy whereby it pledges to further reduce carbon dioxide
emissions.
• LBBW is also a signatory to the United Nations Principles for Responsible
Investment, which is a demonstration of its continuous strive for
improvement through leveraging on the various support and resources
that the global network of practitioners provides. Becoming a UNPRI signatory
also signals its commitment to publicly report on its responsible investment
activities, which is the mandatory requirement.

Transparent
Mission statement commitment

Sustainability Policy & Goals Overarching policy &

goals
Exclusion criteria Guidelines
Internal procedures
General principles Business area-specific guidelines
 Compliance  Sustainable investment
 Human rights  Sustainable financing
 Climate strategy  Sustainable HR Policy
 Biodiversity  Sustainable Business Operations

source: LBBW Sustainability at a Glance, LBBW 2016 Sustainability Report

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 Illustration 1(b) : LBBW & Rabobank – Effective organisational
structure to drive implementation of strategic agenda

i. Cross-functional committee driving sustainability agenda

• Clear roles & KPIs in overseeing

Board of Directors (BD) and driving implementation of
sustainability initiatives.
Sustainability Committee (SC) • Structure is inclusive of all divisions
*consist of division heads and involves a multi-stage process.
• Chairman of the BD of LBBW (as
Sustainability Project head of the SC), is responsible for
Management Office
the implementation.
• SC functions as communications
Sustainability Working
Working Groups bridge between the BD and the
Group (SWG)
specialized divisions.
• SC consolidates & shapes the
Spec. Spec. Spec. Spec. Spec. Bank’s opinion or stance
div 1 div 2 div 3 div 4 div 5 concerning strategic sustainability
issues. Members of the Committee
source: LBBW Sustainability at a Glance, LBBW 2016 are division heads.
Sustainability Report • The Sustainability Working Group
(SWG) consists of the
representatives of all of the relevant
specialized divisions.
ii. Centralised coordinator function managing conduct risk
throughout banking institution

Ethics Committee • Dedicated committee with a specific

role and accountability. An
Assess & deliberate situations that have
example of this is Rabobank‘s Ethics
underlying ethical issue. Chaired by the Office and Ethics Committee.
Chairman of the Executive Board. • Such structure promotes healthy
dialogue and helps raise ethical
awareness within the bank and
Ethics Office consequently encourages
Provides guidance & advice to employees
employees to act responsibly in
on ethical issues based on the bank‘s their day-to-day work.
Code of Conduct, external codes and
guidelines such as human rights and the
environment to which the bank subscribes.

source: https://www.rabobank.com/en/about-rabobank/in-
society/ethics/index.html

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2. Operations: Enhancing current management systems to deliver VBI
related commitment
4.11 Any commitment that is developed to pursue the following key
underpinning thrusts of VBI: ―entrepreneurial mindset‖ and ―community
empowerment‖, to a certain extent, will affect IBIs‘ business priority and
risk appetite. Based on this premise, IBIs are expected to review and
ensure that banking operations have capacity to deliver their commitment
to VBI agenda:
i. ―entrepreneurial mindset‖ – IBIs are expected to play a greater role in
facilitating entrepreneurial activities through holistic offerings (including
financing, advisory, market infrastructure and business network); and
ii. ―community empowerment‖ – IBIs have a balanced consideration
between commercial and social aspects, especially in navigating their
strategic decisions.
4.12 There are three key components of operations, namely resource allocation,
risk management as well as asset-liability management. In addition to
profitability perspective, IBIs should also consider impact of the proposed
transactions (e.g. financing or investment applications) to wider
stakeholders in allocating their key resources such as capital, risk appetite,
funding and human resources
Resource allocation: In addition to profitability perspective, IBIs
should also consider impact of the proposed transactions (e.g.
financing or investment applications) to wider stakeholders in
allocating their key resources such as capital, risk appetite, funding
and human resources.
Examples of banking practices:
• Allocation of capital, risk appetite, funding, budget &
human resource that considers impact of underlying
activities
 Integrating environmental & social consideration into
Resource credit assessment & investment appraisal
allocation  Development of business strategy & budget allocation
that is aligned with VBI-related mission statement/
aspiration
• Resource allocation that considers insights from real sector
(new opportunities, upcoming/obsolete technology &
current issues) by in-house or external specialists

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 Risk management: IBIs are expected to analyse potential impact of
negative externalities (to wider stakeholders) arising from underlying
transactions to their viability (from financial and reputational
perspectives)6. Also, IBIs should adopt best practices that enhance
current risk management capability especially for exposures, which
are affected by external factors e.g. agriculture.
Examples of banking practices:
• A credit risk management which provides transparent
negative list that specifies sectors which provision of
financing is prohibited due to negative impact to wider
stakeholders, is an example of a risk management specific
Risk to VBI bank.
management • Environmental and Social Risk Management (ESRM)
integrates environmental & social impact assessment
throughout the cycle of risk management that includes
adoption of risk-based approach through internationally-
recognised sustainability frameworks and industry-specific
reference (policies and procedures), capabilities and
expertise to conduct impact assessment (governance),
monitoring of customers to adopt sustainable practices,
Management Information System to track and measure VBI
portfolio exposures (monitoring) and impact disclosure
(reporting).
Asset-liability management: IBIs need to explore alternative funding
that can match the maturity and expected returns of VBI-related
assets.
Examples of banking practices
• Exploring alternative funding instruments to finance the
varying nature of VBI assets which are of long term, high
risk exposures and illiquid. For example, Socially
Responsible Investment (SRI) sukuk, investment account &
social finance (e.g. zakat, sadaqah & waqf).
Asset-liability • Liquidity management framework that prioritises impact
management investing instruments and socially responsible investments.
• Proactively identifying available funds in serving targeted
segment which will not be funded by depositors or
shareholders. For example, leveraging on external funds
such as the United Nations Development Program
administered trust funds7 which focuses on funding social
developmental projects.
6Further guidance on this aspect is provided in a separate document (Value based Impact Assessment
Framework)
7 source: http://www.undp.org/content/undp/en/home/funding/funding-channels.html

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 Illustration 2: HSBC Sustainability Risk Management

Through its sector-specific sustainability risk policies, HSBC works with their
business customers to help them understand and manage their
environmental and social impact. Each sector policies essentially contain:
 Possible impacts/risks of activities within the sector
 Scope (exclusion on certain business clients. for example, suppliers of power
generation is excluded from the energy sector policy)
 Overarching policy commitments
 List of prohibited business and activities
 Additional due diligence requirements on certain projects

To ensure that their sector policies are implemented consistently, HSBC invested in
more than 75 Sustainability Risk Managers across their business. These risk
managers are tasked with advising on and managing environmental and social
risks, and play a key role in the approval process for high-risk relationships or
transactions.

The business activity, where it falls under our policies, is given a Sustainability
Risk Rating for its potential impact on people or the environment of High,
Medium or Low.

Continuous engagement with customers and stakeholders (industry experts,

shareholders, NGOs, etc) are conducted so as to improve their policies and the way
they are implemented. Development of independent certification schemes is also
supported for selected sectors.

HSBC makes information available publicly to inform stakeholders of its policies

and of its record in implementing them. Sometimes they simplify complex
technical terms so that relationship managers – with their varied languages and
cultures – can easily understand their aims.

In terms governance structure, the Conduct and Values Committee has

responsibility for oversight of the policies to ensure that businesses are conducted
responsibly and consistently adhere to HSBC‘s Group Values.

On that note, HSBC ensures solid governance structure with regard to

implementation of its sustainability initiatives by assigning individual
accountabilities to its leadership. Key responsibilities and specific KPIs are also
outlined (as per Illustration 2).

sources:
1. https://www.hsbc.com/our-approach/risk-and-responsibility/sustainability-risk
2. HSBC Introduction to Sustainability Risk Policies

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 Illustration 3: Agribusiness Finance Programme by Yoma Bank

In addressing constraints of small businesses in the rural areas of Myanmar to

purchase agricultural equipments, Yoma Bank has benefitted from a significant
grant from Livelihoods and Food Security Trust Fund (LIFT), a multi-donor, UNDP
administered trust fund.

Through the Agribusiness Finance Programme (AFP), Yoma Bank has teamed up
with LIFT to expand its hire-purchase offerings by addressing the pain points
farmers who are subjected to asymmetric shocks, for example, through lowering
the down payment. Instead of paying down 30% on the first day, which is
customary in the market, farmers pay down as little as 10%. This allows them to
buy larger equipment which generate more income. In the first 3 months of its
rollout, Yoma Bank has financed agricultural equipment valued at USD3.8million.
This widened access to finance will enhance productivity in the sector, thereby
contributing to rural development and raise overall standards of living.

Yoma Bank use their own funds to finance these loans, while the increased risks
are shared with LIFT. Moreover, LIFT pay for technical expertise to set up and
manage the programme. Technical assistance for this program is provided by
RaboBank, a Dutch agricultural bank.

source: https://www.lift-fund.org/project/yoma-bank-agri-business-finance-program-afp

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3. Products & Services: Delivering impact & values to wider stakeholders

4.13 IBIs (who indicate commitment to embrace VBI) are expected to ensure
their products and services have distinct features that demonstrate
relevant VBI‘s key underpinning thrusts. The distinct features can be
reflected in three ways:
Design of Products & Services
i. Provision of financial solutions that are designed to deliver
pre-identified outcome of national agenda or aspirations
such as achieving specific Sustainable Development Goals
(SDGs);
Offerings
ii. Offering of financial solutions that are bundled with non-
financial services such as advisory, business network and
relevant infrastructures (e.g. marketplace, space & related
facilities for networking). Such non-financial services are
structured to ensure customers become successful;
iii. Innovative products and services focus on providing
solutions to specific pain points of specific segment of
customers. For example, rent-to-own scheme offered by
Maybank to increase home ownership in prime locations
among young professionals; and
iv. Structured corporate social responsibility (CSR) activities
or application of social finance (waqf, sadaqah & zakat) with
a long term plan to transform the beneficiaries (usually the
non-bankable segments) into bankable clients or projects.
Adoption of best practices in product development, marketing, sales,
product delivery and after-sales services, which aim to create more
values to customers.
Examples of banking practices:
• Product development is backed by robust research &
development (R&D) which considers insights on recent
trends and opportunities from real sectors.
Value-based • Establishment of Product Research & Development
practices Department/Unit to generate product and infrastructure
innovation ideas.
• Leveraging on strengths of relevant strategic partners for
their expertise, infrastructure and network that reside
beyond banking institutions.
• Grooming existing high-potential clients to become “anchor
companies”, which eventually will act as guaranteed buyers
for smaller (less capacity) customers.

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 Infrastructure – enhancement of existing infrastructure that aims to
improve customer’s experience
Examples of banking practices:
• Providing space & facilities e.g. free Wi-Fi, meeting rooms &
networking area for businesses & community partners to
Infrastructure connect with bank’s clients and other members in the supply
chain.
• Enhancement in infrastructure or capacity building
(expertise) that aims to improve customer’s experience e.g.
digitisation e.g. mobile banking apps & OKU-friendly
branches & auto-teller machine (ATM).

Illustration 4: Program Keusahawanan by Taylor’s

& CIMB Islamic

Program Keusahawanan (PK) Taylor‘s-CIMB Islamic is a community empowerment

programme which develops entrepreneurial abilities among B40 communities. By
transforming the CSR activity into a microfinancing programme by equipping entrepreneurs
with the skills, know-how and opportunity to jumpstart their ventures. To date, 107 small
business owners have benefitted from close to RM500,000 in business grants.

The PK is structured with 3 different phases – motivational, educational and implementation

that aims to guide and equip small business owners with core skills and equipment needed
for their business. Following from the awarding of grant to successful businesses at the end
of the incubation period, appointed implementation partner (Yayasan Salam Malaysia)
monitors business progression of grant recipients for the first 3 months. Strategic
partnership with Taylor‘s Education Group enabled CIMB Islamic to leverage on the
former‘s forte on teaching and education to complement the provision of financing solutions
with non-financial services such as workshops on social media marketing skills, life skills
and also individual business coaching.

The focus on continuous learning and linking to business opportunities inspired PK

Marketplace which is essentially a platform to facilitate networking for business amongst
programme alumni. Meanwhile, PK Digital serves as a marketing platform for all PK alumni
to share learning and success stories.

source: https://csr.taylorsedu.my/taylorscommunity/the-next-of-program-keusahawanan-taylors-
cimb-islamic/

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 Illustration 5: Agrobank’s Integrated Value-chain
Financing Approach

What is it?
An 'end-to-end' financing model that supports the whole value-chain from financing
input supply, agricultural production, trading & logistics, processing & manufacturing
(from farm to table), up to assisting its Agropreneurs in identifying efficient
market distributions for respective supply.

The goal of this financing scheme is to provide a full range of products and services
in fulfilling client needs as well as meeting the products demand along the
agriculture value chain catering to each level of the chain financing needs from
production inputs to marketing/wholesale. The products and services include
advisory services and financing products for term financing, working capital,
machinery, equipment and trade working capital.

This wide range of financial solution to cater to the entire agriculture value
chain aims to support higher output (production) and achieve self-sufficiency level
and food security in the long-run.

Example on Agrobank’s comprehensive financing facilities to the entire value

chain of pineapple production from seeds preparation to upstream including
export activities

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Creating distinction from other supply chain models via nurturing approach
By leveraging on the strength of its in-house market intelligence and strategic
network built with existing clients & other stakeholders, Agrobank is able to design
and implement a nurturing mechanism, which eventually benefits smaller
Agropreneurs.

• Robust intelligence on the market and up-to-date technical know-hows are

provided by its in-house Economic and Industry Research (EIR) function.
• Strategic network with ―anchor companies‖ as well as relevant stakeholders to
provide assistance in areas outside the bank’s capacity e.g. technical
capacity building – ―anchor companies‖ refer to clients who are nurtured and
groomed by Agrobank to guarantee the purchase of products produced by
smaller clients.

In addition, borrowers are expected to undergo relevant capacity building

programmes and utilise business advisory services provided by in-house
Agrobank expertise in collaboration with relevant development agencies, which
focuses on 3 areas:

i. Training Programmes, which are issues-driven and focus on business

skills, marketing and financial management (Agrobank leverages on other
agencies such as FAMA for the technical knowledge)
ii. Business Advisory Services is more geared towards hand-holding
programs for clients who are facing challenges. The services include
assessments and suggestion for area of improvement either in terms of
business, operations and/or financial management.
iii. Intervention is identifying the gap in the current business practices of highly
potential Agropreneurs in comparison to best market practices (this is done
through benchmarking visits to successful clients)

Agrobank believes in rewarding entrepreneurs that have successfully achieved

significant progress to be an icon in agriculture. They also provide infinite
opportunities for clients to further expand their businesses and market access
through Agrobank‘s network of strategic partners such as Teraju and SME
Corporations.

source: Agrobank

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 Illustration 6: Westpac Energy Efficient Financing

Westpac is helping businesses reduce their energy costs and manage their
environmental footprint by providing solutions for energy efficient equipment
through the Westpac Energy Efficient Financing scheme. This financing scheme is
supported by a $200 million financing arrangement entered into with the Clean
Energy Finance Corporation, which enabled a 0.70% p.a. discount on the interest
rate to be applied.

Another unique feature is bundling of non-financial services in which customers

can choose to receive specialist advice through external energy experts Verdia,
to help them design energy efficient projects. Flexibility is accorded to customers
whereby they may choose from 3 equipment finance products based on their
needs – Westpac finance lease, commercial loan and commercial hire purchase:

Finance Lease Commercial lease Commercial Hire Purchase

What is it? Westpac purchases Customer source and Westpac purchases the asset at
the asset at own the asset and customer‘s request and
customer‘s request Westpac provides a customer buys it by paying
and rent it out to loan secured by the installments
customer for an asset
agreed period
Who owns Westpac does and Customer does and Westpac does until all
the asset? customer rents it Westpac hold security installments have been paid at
over it which time ownership is
transferred
What is the Rental payments Interest on the finance Interest on the finance and
potential may be tax and depreciation of depreciation of the asset may be
tax deductible the asset may be tax tax deductible
benefits? deductible

With a minimum financing amount of $15,000, finance could be structured over

the life expectancy of the asset. Customers may also get certainty either with
the fixed payments on a finance lease and commercial hire purchase, or a fixed
interest rate on a commercial loan. Depending on the equipment finance option
chosen, potential tax benefits could also be earned.

source: https://www.westpac.com.au/business-banking/business-loans/equipment-finance/energy-
efficient-finance/

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4. Transparency: Enhanced disclosure of impact & forward-looking
information to trigger stakeholders activism
4.14 IBIs are expected to be proactive in enhancing their level of transparency,
specifically on the three core aspects:
Transparent internal policies and procedures, which aim to shape
the right behaviour among key stakeholders (including borrowers,
suppliers, investors and industry analysts). Transparent policies and
procedures enhance awareness and understanding of stakeholders
(including public) on IBIs‘ specific strategies in delivering their
commitment on VBI agenda.
Examples of banking practices:
• Details of implementation strategies that are supported with
specific initiatives or projects and key performance
indicators (KPIs).
Transparent • Environmental & Social Risk Management – Statement of
policies and Position for high-risk sectors.
procedures • Assistance for customer with financial difficulty – specific
platform that encourages customers with financial difficulties
to reach out and engage with banking institution prior to
default event.
• Social procurement policies – prioritising suppliers or
vendors who share similar aspiration as VBI.
Impact-driven performance reporting that covers both financial and
non-financial aspects, aims to facilitate stakeholders‘ further
understanding on IBIs‘ contribution beyond numerical reporting.
Integrated Reporting8 is an example where IBIs begin to assess and
address connectivity across their business and describe their value
creation in the short, medium and long term.
Examples of banking practices:
• Progress report of VBI-related initiatives or projects.
• Impact-driven performance report (either through Integrated
Reporting, Sustainability Report, dedicated VBI report, or
section in Financial Report).
Impact-driven • Sharing of success stories –stories of successful business
report clients (who adopt sustainable practices) or enhancement to
banking operation that facilitate greater impact creation to
wider stakeholders.

8 https://www.pwc.com/my/en/services/assurance/integrated-reporting.html

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 Information & knowledge sharing that benefits wider stakeholders
through a dedicated knowledge repository. For example, sharing of
information or insights on real sectors which IBIs have exposures on –
such transparency enhance awareness of business clients & general
public on key information such as location, industry, products and
services offered as well as on the sector‘s recent issues and updates
e.g. emerging issues & new application of technology in agriculture.
Examples of Banking Practices:
• Sharing of information/insights of real sectors which banking
institution serves for e.g. agriculture, manufacturing sectors.
• Sharing of business clients’ key info such as location,
Knowledge industry, products & services, subject to business client’s
repository permission.
4.15 Key objective of proactive disclosure of information that is not required by
current regulation is to trigger greater stakeholders‘ activisms – where the
better-informed stakeholders will prefer and positively react to unique
value propositions offered by IBIs. This is also a demonstration of IBIs‘
best conduct in safeguarding the rights of stakeholders to have better
access to certain information.
4.16 The inclusion of forward-looking information or indicators in IBIs‘
reporting also sheds greater transparency for their stakeholders on the
IBIs‘ internal performance targets and the strategic priorities and resources
being employed to achieve those targets. The use of forward-looking data
shall also provide better tools for future judgment especially with regard to
making risk management decisions.

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 Illustration 7: Agrobank –Knowledge Management Roadmap

Agrobank embarked on a journey to design & implement its

Knowledge Management roadmap that focuses on
knowledge creation, dissemination, sharing and ultimately,
the establishment of its very own Centre of Excellence.
A landmark project under this roadmap is the Agrobank
Community & Entrepreneur Development in Agriculture
(ACEDiA) that functions as a one-stop knowledge hub
containing information and insights on the agriculture and
banking sector, which contributes to the up-skilling and
capacity building of the agropreneur community and
beyond.
With frequent publication of free-for-all content that is
presented in infographic-centric manner and supported by
robust research on the current trends and developments
in the agriculture sector, Agrobank stands on a strong
position to attract potential customers among the
agropreneurs who could benefit from one-to-one,
personalised capacity building programme which could be
offered by the bank on top of its financing provision.
Available in various modes i.e. print (magazine), digital and in its mobile banking app,
Agrobank has strived to position agriculture as an attractive sector especially amongst
the younger generations.
source: Agrobank Annual Report

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 Illustration 8: Bank Islam – Integrated Reporting

Based on the principles of Integrated Reporting, which recognises other forms of

capital (in addition to the generic financial capital) such as manufactured, intellectual,
human, social and relationship, and natural, Bank Islam encapsulated its renewed
business model which draws on various capital inputs and shows how its strategies
and activities transform them into valuable outputs in its inaugural Integrated Report.

Such impact-driven reporting discloses information that is beyond regulation, which

provides its stakeholders with meaningful insights through combination of both
qualitative and quantitative information into how the bank values other forms of
capitals beyond that which gives its gain in the short term.

Key Inputs Strategy Key Outputs

source: http://www.bankislam.com.my/home/assets/uploads/BI_IAR17_Eng_Corp.pdf

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 Illustration 9: Triodos “Know Where Your
Money Goes”
Recognising the significance of transparency for a value-based bank that is based
on trust, Triodos integrated into its website an interactive map (through
deployment of geo-tracking functionality) showing the location of the bank‘s
investments and lending around the globe.

Nestled in a section named ―Know Where Your Money Goes‖, Triodos embarked
on this journey of proactive, impact-driven reporting in which meaningful
information and insights of real sectors which the bank finances and invests in are
shared with detail. Depositors and other stakeholders can now align their
money with their values when they are able to see each loan as well as link to
specific information about the business of Triodos‘ customers. Another prominent
benefit is the promotional feature of its clients‘ business and success stories
which may be aligned with investors‘ interest. Such level of transparency, besides
enhancing trust and loyalty of customers toward the bank also improve
reputation of Triodos that benefits greatly from relationship banking.

Adoption of technology has also enabled the availability of this feature in its
mobile banking app.

It goes without saying that customers first have

to give permission for their details to be
published. In addition, the details must be both
complete and correct. The thought process of
coming up with such level of transparency is
backed by numerous research which suggest
that consumers are generally increasingly
demanding of information regarding how and
where the products they buy are sourced and
produced. However, when it comes to banking,
recent research shows that 30% of bank
customers admit having no idea what their
bank is doing with their money.

The desktop version of ―Know Where Your

Money Goes‖ can be accessed at
www.knowwhereyourmoneygoes.co.uk

source: https://www.triodos.co.uk/en/about-
triodos/news-and-media/colour-of-money/do-you-know-
where-your-money-goes/

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 Illustration 10: TeamBank – Finding Profit in Fairness and Transparency

TeamBank, has successfully developed a

profitable business model that is based on
fair dealing and transparency through
easyCredit, its flagship consumer credit
product. Both elements were visible in the
product characteristics and operating
processes.

On the product development front, the process in coming up with easyCredit

began with a market analysis which revealed that although customers were
price-sensitive, they also wanted ―fairness‖. That was understood to mean
more flexible repayment options and greater transparency around the
processes for managing and policing loans.

To further illustrate this, TeamBank has committed to not carry any hidden
charges and vowed to be flexible and sensitive to unexpected changes
in the borrower’s circumstances, such as illness or the loss of
employment. In addition, TeamBank also offers a 30-day customer retraction
period, make repayment insurance optional rather than mandatory, eliminate
the penalty on partial repayments, and even offer a ―protection package‖ that
would allow short repayment extensions in the event of unforeseen
difficulties.

Another values-driven innovation that TeamBank has introduced a different

and more compassionate approach to customer engagement that was
unusual in the consumer credit business. Although many TeamBank credit
processes are automated to ensure an efficient customer experience, many
others are handled personally by customer advisers. For example, when
customers fall behind in making payments, advisers work with them to find a
solution—by allowing no payments for three months, rather than threaten
legal action.

The rather unconventional approach to lending has proven to be viable for

TeamBank. Despite not offering the lowest interest rates, German consumers
who are known for being financially literate have voted with their wallets to
endorse its strategy of competing on fairness rather than on price.

source: https://hbr.org/2012/09/finding-the-profit-in-fairness

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5. Stakeholder Management: Proactive & inclusive governance aim to create
win-win situation for all

4.17 Comprehensive and holistic stakeholder management is a central element

in advancing VBI agenda to ensure inclusive governance in IBIs‘ key
decision making processes. Rationales for IBIs to conduct proactive
engagement with multi-stakeholders:
 To achieve greater alignment between expectation of stakeholders
and business focus of IBIs by considering wider stakeholders‘
interests and issues in IBIs‘ key decision making processes (e.g.
product development, risk management & resource allocation);
 To leverage on technical competencies, skills and infrastructure that
are critical but not owned by the IBIs through strategic
collaboration with partners (beyond financial community) who share
similar aspiration; and
 To attract, engage and retain the “right talent” (human capital)
through emphasis on pursuing the shared values and aspirations as
well as better staff treatment (best conduct). High quality talent that is
self-motivated serves as the backbone for sustainability of VBI
initiative.
4.18 Scope of stakeholder management should cover both internal (employee)
and external stakeholders namely customers and other stakeholders
such as vendors, community, NGOs, regulators, government and etc.

• Providing co-working
spaces & innovation hubs
as well as organising
capacity-building
Islamic Banking programmes
Institutions
(IBIs)
Strategic partners
• In addition to providing
financing, organising (e.g. MDEC, SME
networking events, Corp)
accelerators & mentoring
schemes, given their wide
network with corporates

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Staff (Human Resource Tools)
Examples of Banking Practices
• Hiring – considering applicant’s existing knowledge/
expertise of relevant real sectors
• On-boarding – incorporation of VBI in online training to new
and existing staff
Staff • Partnering with universities to build a pipeline of talents and
enhance marketability of Malaysian graduates
• Establishment of a platform where staff can escalate ideas,
suggestions and feedbacks to management (bottom-up
approach to promote staff empowerment)
• “Awesome Wednesday” – an initiative that connect the
bank’s staff with the bank’s client where staff are served with
healthy food and beverages supplied by relevant clients
Customers
Examples of Banking Practices:
• Proactive engagement with customer who demonstrates
potential sign of financial difficulties/ stress
• Establishment of a platform that connect depositor with the
bank’s borrower (business clients) to ensure transparency
on banks’ activities
Customers • Benchmarking visits to successful companies (the bank’s
borrowers) where smaller/ younger companies can learn
best market practices
Other Stakeholders
Example of Banking Practices:
• Transparent & structured stakeholders engagement
framework – where input/ insights obtained from
engagement will be considered in key decision makings e.g.
Other product development, materiality assessment (sustainability)
stakeholders and resource allocation

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 Illustration 11: Maybank – Structured engagement
framework addressing interests of multi-stakeholders

• Maybank engages with its stakeholders through various channels, both formally
and informally (surveys, roadshows, reaching out to the community through
employee volunteering, etc.) .
• The engagement activities conducted, issues of interest and Maybank‘s response to
these issues are documented and reported in its Sustainability Report –
demonstrating that it values the views of its stakeholders and addresses them in a
transparent manner. In addition, concerns of stakeholders are regularly reported
to management.
• The materiality survey and assessment conducted to identify & prioritise the key
matters pertaining to sustainability and have meaningful conversation with both its
internal and external stakeholders.

source:
https://www.maybankfoundation.com/images/pages/whoweare/sustainbility_report/maybank_sust
ainability_report_2017/Maybank_SR17.pdf
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 Chapter 5: Implementation Challenges & Issues
Implementation of VBI may, to a certain extent, transform existing banking practices,
business modality and risk profile. Such transformation usually require major capacity
building, which may adversely affect operational efficiency and competitiveness of
industry players. This section deliberates several key challenges & issues that were
highlighted by members of the VBI CoP as well as explores potential solutions to
these implementation challenges & issues.

1. Structural Issue

• Resource allocation & strategic direction of Islamic subsidiaries are subjected to

Group‘s policies, hence changes in business modality & internal capacity building
are restricted. Majority (11 out of 16) of industry players are operating as a
subsidiary.
• Lack of autonomy and gap in leadership will impede the full integration of VBI into
existing banking operations & offerings.

Potential Solutions: It is envisioned that Islamic financial system to be competitive

in delivering value proposition of Shariah, therefore the following measures may be
considered during the initial stage of implementation for Islamic subsidiaries:
• To focus on a function (e.g. product development) that is currently controlled &
managed by Islamic subsidiaries with a long-term view to create success stories
and hence justify the need to gradually realign other functions towards conformity
to principles of VBI; or
• To demonstrate leadership in driving any of Group‘s existing agendas that allow
Islamic subsidiaries to achieve similar outcome e.g. sustainability reporting,
integrated reporting (IR), ESG integration, etc.

2. High Risk Segment

• Impact-driven mindset may drive Islamic banking institutions to explore and serve
the underserved segment or new business opportunity such as SME & renewable
energy which attract higher level of risks or exposures.
• These high risk segments will require different risk management capabilities and
attract more capital requirement, which will be translated into higher pricing.
Potential Solutions: Adoption of VBI in business activities & banking practices must
be proportionate with risk management capability and capacities (capital).
Enhancement in internal capacity building could be efficiently accelerated through:
• Investment in collection of data points (through adoption of technology such as data
analytics) which will facilitate better understanding on the risk associated with such
segments in developing its Internal Rating Based (IRB) Approach.
• Leveraging on strategic partners‘ technical competencies & risk management
infrastructure.
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 Chapter 5: Implementation Challenges & Issues

3. Market Competitiveness

• Assessment of impact created by underlying activities of potential borrower may

affect competitiveness of Islamic banking institution in the following situations:
 Subject to the internal policies & procedures, Islamic banking institution may
―exit‖ from borrowers that do not adopt sustainable practices. Such exit may
eventually result in smaller customer base.
 Longer turn-around time (ease of making transaction) to approve financing or
1. Structural
investmentIssue
application due to additional considerations in existing credit or
investment appraisal.

Potential Solutions:
• Islamic banking institutions are expected to manage the unintended impact of
VBI implementation to their business through the following measures:
 nurture existing or potential customers to adopt sustainable practices,
instead of immediately exit from the transaction;
 provide financial & non-financial solutions (e.g. advisory) that facilitate
customer to adopt sustainable practices;
 explore the underserved or totally new segments (e.g. M-KOPA solar panel
financing)
• Islamic banking institutions may explore relevant application of technology that
improves processing time & costs.

4. Lack of awareness & demand

• Current financial decision making is driven by commercial consideration i.e.

pricing. Such mindset
1. Structural Issue of customers and investors may result in low take-up of VBI
product, which possibly be more expensive due to its value-added propositions.
Potential Solutions:
• Islamic banking institutions are encouraged to conduct targeted awareness
programme. There are pockets who share similar aspiration::
 A customer service index survey conducted in Malaysia9 reveals that a large
number of banking customers are willing to pay extra for better service.
 Investors are increasingly expecting & demanding their investee companies
to operate in a manner that generates positive & sustainable impact on wider
stakeholders (impact investing).
9 Customer Satisfaction Index for Malaysia Banking Industry, Malaysian Productivity
Corporation, 2017.
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 Illustration 12 : ShoreBank – Too Good to Fail

In 2010, ShoreBank declared insolvency in the face of a troubled asset ratio of 300%
(compared to a national average of all banks in the US of 15%). The bank‘s model of
socially responsible lending is premised on an ability to turn people with poor credit
histories into profitable clients by offering care and attention to each loan.
Multifaceted root cause
An examination of its financial statements and accounts by relevant personnel show
that ShoreBank was treading on dangerous waters through its ambitious business
expansion without sufficient buffer to handle consequences of stressful event, i.e.
the severe recession. An untimely, aggressive expansion at the height of the credit
bubble, a persistent entrance into risky markets, and an unwillingness to
foreclose on troubled loans form a concoction of disaster for the bank to the point
that regulators had to intervene and order a major recapitalization.
Imbalances between social mission vs financial viability
Over-emphasis on the bank‘s social mission without considering the bank‘s capacity
to manage risks arising from proposed business activities, have led to several bad
practices that placed the entire operation at risk:
i. Asset quality management: Despite the deterioration in loan quality, ShoreBank
has steadfastly sought to avoid loan foreclosures. At the end of first quarter of
2010, the bank had amassed $250.7 million in non-accrued loans – a tenfold
increase from the $22 million at the end of 2006. It also held only about $2.5
million in real estate obtained via foreclosure at the end of March 2010.
ii. Asset-liquidity management (ALM): ShoreBank moved aggressively into
brokered deposits (i.e. fast-moving money that rebounds from bank to bank,
pursuing high interest rates paid for deposits), which raise a bank‘s cost of funds
and bring instability to operations. Over the period of three years, ShoreBank‘s
brokered deposits increased nearly 40%, accounting for 30% of deposits –
compared to 6% average among its peers.
iii. Weak capital position: Total risk-based capital, an important measure of a
bank‘s health, had fallen from 11 percent of assets at the end of 2006 to barely
above 3 percent, a measure considered dangerous.
iv. Lax in governance: ―It was the desire to expand that got them into trouble,‖ said
Richard Taub, who advised ShoreBank‘s board of directors for nearly 30 years.
He added, ―ShoreBank suffered from an overly zealous commitment to its
original mission and a lack of scrutiny by the bank’s board of directors.‖

source: https://www.nytimes.com/2010/05/23/business/23cncshorebank.html

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