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How Can Islamic Banks Lead in Building a Sustainable Financial System? IslamicMarkets LIVE Briefing Note

IM Insights
By IM Insights
3 years ago
How Can Islamic Banks Lead in Building a Sustainable Financial System? IslamicMarkets LIVE Briefing Note

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  1. Leadership Series Monday - 24 August 2020 How Can Islamic Banks Lead in Building a Sustainable Financial System ? Interviewed by: Daud Vicary, Chairman of Advisory Board, IslamicMarkets.com ARSALAAN AHMED (OZ) Chief Executive Officer HSBC Amanahnah To shift the concept of sustainability beyond mere compliance into an integrated strategy or a purpose-driven organisation requires a change in culture. Value-Based Intermediation (VBI) initiative has empowered Islamic banks to embrace sustainability in dealing with both social and environmental challenges. There is a need to accelerate practitioners’ adoption of sustainability, ESG practices, and innovation especially in these desperate times where equity-based contracts and Islamic social capital can help innovate solutions. S DGs and Islamic finance converge: Starting off the live session, Arsalaan Ahmed noted that Islamic finance already has the environment ready to link sustainable practices into its strategies. Using the United Nations Sustainable Development Goals (UN SDG) as an example, Arsalaan Ahmed highlighted that there is a significant inherent overlap between Shariah guidelines and sustainability practices, which creates a suitable platform for the Islamic finance industry to build upon. The next step is to recognise the existential threats in the external environment and identify the willingness and ability of Islamic banking institutions to make the relevant changes. Arsalaan Ahmed discussed the concept of ‘hearts uniting’ to do good and do well simultaneously. According to Arsalaan Ahmed, the Friedman doctrine of “doing well is the best way to do good” is coming into question as it is intrinsically linked to corporations focusing on ‘me and now’ instead of ‘us and later’. He stressed on the concept of the triple bottom line (People, Planet, Prosperity), stating that Islamic banks should consider long-term profits in the context of people and the planet. He then discussed the ability of Islamic finance practitioners to execute sustainable practices and incorporate them into the industry, stating that whilst Islamic banks should inherently want to be more sustainable, the level to which this change could occur was largely dependent on the ability and willingness of the industry’s heads to lead this change. When asked about how Value-Based Intermediation (VBI) initiative has empowered Islamic banks to embrace sustainability in dealing with both social and environmental challenges, Arsalaan Ahmed noted that VBI previously focused on innovation to grow the Islamic banking and finance industry by creating sustainable and affordable products and services. The focus of VBI today, however, is on collaboration and working together to deliver “shared value” to all stakeholders. In this regard, Arsalaan Ahmed, noted that the work is still at nascent stages. Sustainability Wave: From Compliance to Innovation Learning Stage 3 : Beyond Compliance Stage 4 : Integrated Strategy Stage 5 : Purpose/ Mission Role of Leadership: A Stage 2 : - Align - Business crucial turning point in Stage 1 : Compliance with - Eco-efficiency oppotunities Nonthis regard was the - Regulatory core - Regulatory Compliance - Risk leadership and mentoring enforcement values threat management roles of the Board of - Public - PR crisis Directors. Arsalaan pressure Ahmed noted that it was Time Source: Willard (2005), Senge et al. (2008) of the utmost importance to have individuals who experience to show other aspiring industry players had bought into the concept of sustainability at the helm for how to achieve sustainable banking practices. that mindset change and flow on from the C-suite throughout the bank. This meant that all aspects of the Board of Directors’ The priorities: Arsalaan Ahmed summarized his activities, from strategic discussions, appointments, to risk views by prioritizing the two main steps Islamic management, as well as incentives and remuneration, needed to banks could take to lead in building a sustainable be aligned with the overall sustainability goals and purpose of financial system. First, he stressed that the Islamic the respective banking institution. This would inevitably finance sector should accelerate through the ‘known’ increase the level and pace of change towards more sustainable by being progressive and practical. He added that practices. Speaking of measures that could be implemented to the importance of sustainable ESG practices should drive this change at Board level, Arsalaan Ahmed suggested a resonate with Islamic finance practitioners and guide separate budget allocation purely for sustainability–related them towards implementing best practices training programs for Board members, as well as the throughout the industry. The second phase was to appointment of a sustainability champion amongst the Board of navigate through the ‘unknown’ in terms of driving Directors, who would be able to plug gaps in the Board’s innovation through products and financial contracts sustainability knowledge. Speaking of HSBC Amanah’s Project that already exist within the Islamic banking sector Cocoon, an initiative to become the HSBC Group’s first (citing the use of equity-based contracts as an sustainable banking entity and to create a “mainstream example), as well as the concept of Islamic social commercial bank as a sustainable bank”, Arsalaan Ahmed capital. Arsalaan Ahmed concluded that these two pointed out that the idea is to construct a benchmark in the areas were the future of innovation for the Islamic industry and put forward credentials, sharing knowledge and banking industry. KEY ROLE OF BOD CHAIRMAN To be more demanding on the CEO's sustainability strategy. RISK MANAGEMENT COMMITTEE Need to understand the short and long term sustainability impact on the institution. BOARD AUDIT COMMITTEE Manage the sustainability information provided, non-financial disclosures, and the governance around it. NOMINATION AND REMUNERATION COMMITTEE Incentives and remuneration are aligned with the overall sustainability goals + appointment of key roles with strong sustainability credentials. Watch again on IslamicMarkets.com