KUALA LUMPUR: Islamic finance in the country has yet to make the most of the full range of Shariah contracts in financial applications today.
Bank Negara Malaysia governor Tan Sri Nor Shamsiah Mohd Yunus said that although the Islamic financial sector has continued to advance, the sector still faces challenges in its adoption.
She noted that many conventional and Islamic financial institutions have yet to change how they operate and do business to fully value-based finance.
"It appears as if we are still in the early days of value-based finance.
"Five years since the launch of the value-based intermediation (VBI) initiative in 2017, the majority of Community of Practitioners members are only at the 'emerging' phase of implementation," she said in her keynote address at the Global Islamic Finance Forum 2022.
Another challenge highlighted by the governor was that the efforts to diversify value-based capital, such as to fund new ventures and other VBI-aligned outcomes, are far from full realisation.
She said that only 4.2 per cent of investment accounts intermediated by Islamic banks are suitable to finance transformation, such as in supplying growth capital to future industries or new business models.
"We have also yet to make the most out of the full range of shariah contracts in finance applications today.
"Benevolent contracts, risk-sharing contracts and other asset-based contracts have yet to be fully utilised to offer a broader spectrum of funding, investment and protection solutions.
"This means we do not realise the full potential of value-based finance to address contemporary economic and social needs," said Nor Shamsiah.
The industry was told to continuously 'strive for the attainment' of excellence' to elevate the values of Islamic finance to the next level.
Involvement of all stakeholders is crucial to harnessing Islamic finance's fundamental goals fully, said Nor Shamsiah.
She also said there is a need to strengthen connectivity for greater innovation and impact through Islamic finance, which can be utilised in the halal sector.
"While the percentage of halal-certified companies utilising Islamic finance facilities has been on a rapid uptick, nearly doubling from 21.9 per cent in 2018 to 41.3 per cent in 2021, more can be done, primarily to facilitate connectivity across halal value chains.
"The industry should continue to explore new sources of funds based on the concept of risk sharing and develop more impact-based funding, investment and trade facilities that can drive improvements in productivity and efficiency of halal companies," she said.
Meanwhile, the Malaysian Islamic banking sector intermediated RM146.6 billion in VBI-aligned initiatives and distributed over RM65.2 million via the Islamic social finance (ISF) instruments between October 2020 and September 2021.
According to the Value-based Intermediation Full Report 2021, published by the Association of Islamic Banking and Financial Institutions Malaysia (AIBIM), VBI-related financing represented 22.2 per cent of total financing accounts of 2020-2021, from just slightly above 10 per cent in 2017-2020.
During the same period, small and medium-scale enterprises (SMEs) and micro-SMEs were the largest recipients of VBI-related financing.
Their outstanding amount stood at RM51 billion, representing a 25.6 per cent increase, compared to RM40.6 billion outstanding in 2017-2020.