Bank Negara Malaysia Governor Highlights Value-Based Finance for Sustainable Growth at KLIFF 2023

Kuala Lumpur, Malaysia – In a pivotal address at the 18th Kuala Lumpur Islamic Finance Forum (KLIFF), the Governor of Bank Negara Malaysia emphasized the transformative potential of value-based finance in steering the global economy towards sustainable growth and development. The Governor’s remarks resonated deeply with the forum’s theme, “Harnessing Islamic and Social Finance for A Sustainable Future,” as he explored the critical role that Islamic finance can play in addressing some of the most pressing global challenges.

Bank Negara Malaysia

The Governor began his keynote speech by referencing the United Nations’ stark warning that the world is off track in meeting the Sustainable Development Goals (SDGs) by 2030. The SDGs, a set of 17 global objectives established in 2015, aim to end poverty, protect the planet, and ensure prosperity for all. However, recent assessments indicate that progress towards these goals has been uneven, with many countries, including Malaysia, facing significant hurdles.

The Bank Negara Malaysia Governor highlighted several key challenges that the world must address to achieve the SDGs, including income inequality, food insecurity, climate change, and social disparity. He noted that while Malaysia has demonstrated resilience in the face of economic shocks—such as the global financial crisis and the COVID-19 pandemic—the nation still struggles to ensure an inclusive and sustainable recovery. This is particularly evident in the slower recovery rates among vulnerable groups, who continue to face significant socio-economic challenges.

The Governor’s address underscored the importance of rethinking traditional economic models to prioritize sustainability. He called for a paradigm shift in how countries approach development, emphasizing that economic growth must go hand in hand with social and environmental responsibility. This approach, he argued, is not only ethical but also essential for long-term economic stability and prosperity.

Malaysia’s Commitment to Sustainable Growth

Reaffirming Malaysia’s commitment to sustainable development, the Governor outlined the government’s efforts to integrate the SDGs into the country’s national development plans. He introduced the ‘Ekonomi MADANI: Memperkasa Rakyat’ framework, a strategic initiative designed to balance economic growth with sustainability considerations. The framework aims to empower the people of Malaysia by ensuring that economic development benefits all segments of society, particularly the underserved.

The Governor of Bank Negara Malaysia explained that the Ekonomi MADANI framework is built on six core pillars: sustainability, inclusivity, resilience, innovation, competitiveness, and shared prosperity. These pillars reflect Malaysia’s holistic approach to development, which seeks to create a resilient economy capable of withstanding future shocks while ensuring that the benefits of growth are distributed equitably.

According to recent estimates, approximately USD 4.3 trillion in annual investments is needed globally to achieve the SDGs by 2030. The Governor stressed that bridging this funding gap will require a concerted effort from both the public and private sectors, with a particular focus on mobilizing Islamic finance as a key driver of sustainable development.

The Role of Islamic Finance in Sustainable Development

A central theme of the Governor’s speech was the potential of Islamic finance to play a transformative role in achieving the SDGs. He argued that Islamic finance, which is grounded in Shariah values, offers a unique and ethical approach to financial intermediation that can help bridge the funding gap for sustainable development. Unlike conventional finance, which often prioritizes short-term profit, Islamic finance emphasizes risk-sharing, ethical investments, and social welfare.

The Governor called for a reorientation of investment priorities within the Islamic finance industry to align with sustainable principles. He urged stakeholders to focus on projects that generate positive social and environmental outcomes, rather than solely pursuing financial returns. This, he argued, is not only in line with Islamic teachings but also essential for creating a more just and sustainable global economy.

In addition to Investment Accounts, the Governor encouraged the Islamic finance industry to explore the use of other Shariah-compliant instruments, such as Sukuk (Islamic bonds) and Waqf (endowments), to finance sustainable development projects. He argued that by leveraging these diverse instruments, the industry can engineer solutions that address the specific needs of different communities and contribute to the overall goal of sustainable development.

Strengthening Social Finance and the iTEKAD Program

The Governor also praised ongoing efforts in the realm of social finance, particularly the success of the iTEKAD program. Launched in 2020, iTEKAD is a social finance initiative that provides microentrepreneurs and financially excluded businesses with access to capital and capacity-building support. The program is designed to empower these businesses to grow and thrive, contributing to Malaysia’s broader economic recovery.

The Governor highlighted the impact of iTEKAD on the lives of beneficiaries, many of whom have been able to improve their livelihoods and achieve financial independence through the program. He noted that instead has not only provided financial support but also offered training and mentorship to help participants develop the skills needed to succeed in their ventures.

Given the success of iTEKAD, the Governor called for the scaling and expansion of similar programs across Malaysia. He argued that social finance has a critical role to play in fostering an inclusive economic environment, where all members of society have the opportunity to participate in and benefit from economic growth. The Governor urged financial institutions to integrate social finance principles more deeply into their operations, thereby enhancing their contribution to national and global sustainability goals.

Challenges in Implementing Value-Based Intermediation

Reflecting on the progress made since the introduction of the Value-Based Intermediation (VBI) strategy framework in 2017, the Governor acknowledged the significant strides that the Islamic finance industry has taken in adopting value-based principles. Value-based intermediation, which emphasizes the alignment of financial activities with ethical and social objectives, has gained traction among financial institutions in Malaysia, leading to the development of products and services that generate positive societal impact.

The Governor commended industry associations such as the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM) and the Malaysian Takaful Association for their leadership in advancing VBI initiatives. These associations have played a key role in promoting the adoption of VBI across the industry, providing guidance and support to financial institutions as they transition towards value-based practices.

However, the Governor also highlighted the ongoing challenges in fully embedding VBI principles within financial institutions. He noted that while progress has been made, there is still work to be done to ensure that value-based principles permeate all aspects of operations. The Governor emphasized the importance of a holistic change driven by leadership at the board level, arguing that top-down commitment is essential for the successful implementation of VBI.

To support the continued growth of VBI, the Governor called for the development of robust impact measurement frameworks. These frameworks, he argued, are critical for assessing the effectiveness of VBI initiatives and ensuring that they deliver tangible benefits for society and the environment. The Governor urged financial institutions to adopt these frameworks as part of their VBI strategies, allowing them to track progress and demonstrate the value of their contributions to sustainable development.

A Vision for the Future of Islamic Finance

In concluding his address, the Governor expressed a strong belief that value-based finance can serve as a powerful catalyst for sustainable growth and development. He urged the wider adoption of sustainability principles within the financial industry, emphasizing that the future of Islamic finance lies in its ability to contribute meaningfully to global sustainability efforts.

The 18th Kuala Lumpur Islamic Finance Forum (KLIFF) continues to be a vital platform for leaders and stakeholders in the Islamic finance industry to discuss and shape the future of the sector. As the world faces increasingly complex challenges, the insights and initiatives shared at KLIFF 2023 underscore the critical role that Islamic finance, underpinned by value-based principles, will play in building a sustainable and equitable global economy.

This year’s forum highlighted not only the progress made but also the potential that remains untapped in leveraging Islamic finance to drive sustainable development. With continued commitment from industry leaders and regulators alike, Malaysia is poised to remain at the forefront of this global movement, demonstrating how finance can be a force for good in achieving the world’s most urgent goals.

As the Governor of Bank Negara Malaysia aptly noted, the path to a sustainable future requires a collective effort. Through value-based finance, the Islamic finance industry has the opportunity to lead the way, showing that finance, when aligned with ethical and social objectives, can be a powerful tool for positive change.