Abstract
Islamic system of finance has the capacity to serve the purpose of financial intermediation as a means to create sustainable value in the real economy at national and global levels. However, the most of Islamic Banks and Financial Institutions (IBFIs) are lacking in application of the Divine principles in letter and spirit. They have not learned the lesson of avoiding finance products that led to instability, injustice and crises in the global finance. They might be lagging behind the conventional institutions in adoption of value based finance that emerged in global finance in the wake of GFC, 2008 (World Bank and Islamic Development Bank Group, 2016; p. 6) to focus on Value Based Intermediation (VBI), Environment, Social and Governance (ESG) aspects and the stakeholders approach. This article focuses on the area of project financing by the IBFIs for different sectors including communication means, energy, residential and commercial buildings, infrastructure and socio-economic projects, and the role that Islamic banks can play in financing the projects leading to development and shared prosperity. Its finding is that while the conventional institutions are turning to the ethics and values based financial intermediation and business, it’s more a duty of the IBFIs to move to VBI by focusing on project financing.
Highlights
Islamic economics and finance has capacity to play crucial role in alleviating extreme poverty, an evil in any society, be it in advanced, underdeveloped or developing economy
Islamic finance is a part of Islamic economy to finance economic activities for promoting well-being of all creatures, including human well-being through social justice (Asutay, 2007, p. 172)
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Summary
Islamic economics and finance has capacity to play crucial role in alleviating extreme poverty, an evil in any society, be it in advanced, underdeveloped or developing economy. It could result in application of the VBI and ESG related factors in line with the global move aiming at shared growth and realizing the SDGs. Islamic finance has developed exponentially in all areas of financial institutions, instruments, markets and the assets with presence in 131 countries. The result of emphasizing the form and neglecting the substance is that the Islamic banking industry is increasingly regressing in terms of responsible product development, values based investments and realization of objectives of socio-economic justice. A global approach with a different mindset is required for resolving the Sharı‘ah governance issues by adopting the AAOIFI and Islamic Financial Services Board (IFSB) standards (World Bank and Islamic Development Bank Group, 2016). IBFIs Lagging Behind the Global Finance with Regard to CSR and VBI based Practices The conventional finance institutions are moving to the ethical, responsible, social and VBI. According to the VBIAF, the adoption of VBI strategy is on a voluntary basis (Bank Negara Malaysia, 2019)
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