Malaysia nudges Islamic banks towards sustainable finance

Kuala Lumpur

MALAYSIA'S central bank issued guidelines on Wednesday to encourage Islamic banks to become more involved in socially- and environmentally-themed activities in a bid to give the sector a new direction and address slowing growth rates.

Islamic banks have built a 30 per cent share of total banking assets in Malaysia, but the regulator wants them to grow further by using the guidelines for their decision-making and design of financial products.

The industry must make a choice of either continuing to ignore social and environmental issues or embrace a philosophy of "finance beyond profits", central bank governor Nor Shamsiah Mohd Yunus said in a speech. "The latter will be an unfamiliar path in many respects, but one that is far closer to the fundamental premise of sharia, on which Islamic finance is based."

The guidelines could rekindle an old debate on whether Islamic banks are fully aligned with religious teachings that shun gambling and speculation. Some analysts say these banks are only passively following such teachings; a more active approach would involve them in a wider range of activities, from microcredit to financing affordable housing projects.

But the guidelines are not compulsory; so far, only nine out of the total of 27 Islamic finance bodies in Malaysia have adopted the system.

The central bank is also seeking the public's views on two documents - one discussing a financing- and investment-impact assessment framework and the other, a value-based intermediation (VBI) scorecard.

Malaysia's capital market regulator is also encouraging the development of green Islamic bonds, or sukuk, incorporating sharia-compliant principles into financing projects with environmental or social benefits. Islamic lenders incorporating VBI into their operations include CIMB Islamic and Maybank Islamic.