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Social Respo lly onsible B Banking?
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By Danie Chandrana el ayagam

As the year turns jus fourteen da old, more and more people and st ays e p business are turnin to centuri old religio tenets fo the ses ng ies ous or Universit Malaysia w reported recently to h ty was have said, regulatio of their fin on nancing. Prof fessor Bala S Shanmugam of Monash o

Islamic finance is also k known as socia ally responsib ble banking  because w we tend to thin nk of what the e consequenc ces are of  this. It’s no ot just lending g money for t the sake of len nding and  making pr rofits off of this. 
Understa andably, with crumbling f h financial mar rkets, an ethical financial framework based on fairness sounds desirable. As such, l A the grow of Islamic Finance in institutional finance mark wth c kets is unsurpri ising. In November 2006, Ethical Corp poration repo orted that hydrocarbons conglo omerate, Saudi Basic Indu ustries Corpo oration, issued a three billion Saudi riyal ( n (USD800 mill) Sukuk, Isla amic

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Finance’s equivalent of a bond. A that time, it was also st At tated that Finance Hous was to issu a USD200 mill Sukuk for a se ue 0 f Kuwait F Chinese company fin nancing expa ansion of a po ower plant.

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More rec cently in Octo ober, Malaysia’s central b bank governo Dr. Zeti or, Akhtar A Aziz, stated, during her k keynote addre at the Sta Street ess ate Islamic F Finance Cong gress 2008 in Boston, tha the outstan n at nding amount of Islamic pr rivate securit ties amounted to USD79 bill. She b increased to a net as sset value of over USD5.2 bill.


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also add that the n ded number of Sh hariah-based unit trust fu d unds had

 

Why?
According to Malaysia’s central bank governor, Dr. Zeti Akhtar Aziz, the strengths in Islamic Finance are derived from Shariah principles. During her keynote address at the State Street Islamic Finance Congress 2008 in Boston, Dr. Zeti stated that these principles, based on Islamic law, “require that the financial transactions be accompanied by an underlying productive activity, thus giving rise to a close link between financial and productive flaws.”

Because gambling and the exacting of interest are prohibited, Islamic financiers are required to innovate in order to come up with comparable instruments to lend, invest and insure. The instruments for these activities are usually based on contracts that require both parties to share profit and loss equitably.

have said that Islamic banks “will follow through exactly what you want to do and be your partner

Dato’ Vaseehar Hassan Abdul Razack, Chairman of Unicorn International Islamic Bank, was reported to

holding your hands from day one, until the project is completed, and then make sure it is properly share an equitable proportion of the profit.”

completed and that the cash flows are generated according to what they are projected, and then they

Money for? by Ferruh

responsibility in the course of their business.

This sounds like a good enough reason to consider Islamic banks as conducting their corporate social

There’s more…
It is said that Islamic laws covers the entire social order. Islam protects the right to private property, but these rights should also take into consideration the rights of others in the community, including the right to proper natural resources. Because these natural resources, like water, forests, air and sunlight, are the property of society (and the world at large), an individual is held accountable for its use or repair if she causes harm to them.

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It has been noted that some Islamic Finance products provides better deals than those of conventional banking. Managing Director of DVA Consulting Sdn Bhd, Daud Vicary Abdullah, was reported to have said, “… an example that I often use is a deposit-based product, where you are penalised if you break a fixed-term deposit in the conventional world and you get less interest. But in the Islamic world, you get the profit that you’re due, up to that point in time when you break the deposit.” Formerly the Chief Operating Officer of Asian Finance Bank, Mr. Daud was also quoted on INSEAD Knowledgeas saying,

There is a significant potential for socially and ethically responsible financing … not  just in terms of ethics, but also the opportunity in terms of the structure in  development of some of the green funds, waste recycling, green forms of energy, and  so on. There is under the tenets of Islam a clear alignment between what Islam  represents and what is ethically and socially responsible. 

Credibility Problems
On the basis of the tenets discussed above, it can be said that Islamic Finance products, through their very nature, are eco-friendly. However, there are some challenges to Islamic Banking. For one thing, it has been suggested by industry practitioners to the CSR Digest that some Islamic Finance Institutions possibly “close one eye” as to whether or not what they are funding will cause detriment to the environment.

global economy” that the “lack of transparency even on contractual compliance matters is

Furthermore, Ethical Corporation comments in its Special Report, “Islamic finance - Ancient values in a

disquieting”. Ethical Corporation pointed out in 2006 that Shariah board members, at least in the UK, are paid by banks to deliver fatwah (Shariah rulings). Although, institutional clients might be advised to accept the fatwahs made by people “chosen and paid for by the other team”. on the reasons behind the rulings, private consumers and affected communities were usually just left

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Money Money Money by Ivy046

 

Dr. Zeti pointed out, “Against a b backdrop of a increasing uncertain global environment, Islamic an gly viable an competitiv nd ve.”

finance, as a form of financial int f termediation in the intern national finan ncial system, has continued to be

Norton R Rose’s Head of Islamic fin nance and an adviser to the British go n overnment wa reported to have as t said onthe Huffingto Post: on

Islamic finance does dem monstrate go ood banking b behavior that has been per rhaps lost  ast 10 years or so… Islamic banking is sa aying we are c close to our cl lients and  over the la we’re only y going to do g genuine trans sactions wher re we can see e the asset, we e  understand the asset, w we can make a an assessmen nt of that asse et: whether it t’s  a ship or an a aircraft they w will go and have a look at t the business. I It’s giving  financing a guidance a as to what ba anking should be.  d
A very ta order, and the world w all d watches.◊

Written by Daniel Edit y January 14 2009 at 11:15 am 4, Posted in CSR Digest Edit torial, Marketplace, Transpare ency Tagged with ethical finan nce, Islamic Finance, Malaysia, reporting , « Stop the CSR Spin e

One Re esponse to 'Socially Re esponsible Banking?'
Subscribe to comments with RSS or T e s TrackBack to 'S Socially Respon nsible Banking?'. 1. As you kn now a rough co ousin to Islamic banking and finance in th west is ethic investing. d he cal I got interested in ethic investing so cal ome forty year ago as I beli rs ieved that whe we invest in a company we share in en n w the respo onsibility for th activities of the company as well as participate in the outcomes of t he the company’s s activities. Therefore any . yone valuing t their personal or spiritual growth has to ta these thing into accoun when ake gs nt investing. I also believe that if eve eryone does in nvest according to their personal values, th g hen, since so m many of core values are v alike — and are suppor rtive of higher ideals — that in the long run, only compa anies employin these higher values ng will truly prosper. For anyon interested I have a site that covers the l ne latest global news and resea arch on ethical investing, as well as l occasiona reports on Is al slamic finance It’s at http:// e. /investingforth hesoul.com/ Best wishes, Ron Robins

Ron Robins
15 Jan 09 at 12:44 am Ed dit

 

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