Stakeholder engagement for value‐based banking: The case of Malaysian Islamic banks

• Published date: 01 November 2023
• Author: Nazrul Hazizi Noordin,Syed Musa Syed Jaafar Alhabshi
• Date: 01 November 2023
• DOI: http://doi.org/10.1002/pa.2876

RESEARCH ARTICLE

Stakeholder engagement for value-based banking: The case of

Malaysian Islamic banks

Nazrul Hazizi Noordin | Syed Musa Syed Jaafar Alhabshi

IIUM Institute of Islamic Banking and Finance,

International Islamic University Malaysia, Kuala

Lumpur, Malaysia

Correspondence

Nazrul Hazizi Noordin, IIUM Institute of

Islamic Banking and Finance, International

Islamic University Malaysia, Kuala Lumpur,

Malaysia.

Email: hazizi@iium.edu.my

Funding information

IIUM Institute of Islamic Banking and Finance

Research Grant Trust Fund, Grant/Award

Number: IIIBF22-002-0002

This study explores the practices of stakeholder engagement (SE) in Malaysian Islamic

banks. In 2017, Bank Negara Malaysia (BNM) introduced the Value-Based Intermedi-

ation (VBI) framework, with the aim of promoting a more sustainable and responsible

banking system in the country. Among others, the VBI framework requires Islamic

banks to adopt a stakeholder-driven approach to their business operations, which

involves understanding and responding to the needs and expectations of their stake-

holders. Within this context, we apply a content analysis of the annual and sustain-

ability reports of all stand-alone Islamic banks in Malaysia to document the changes

in the banks' quality of SE after the introduction of the VBI. The content analysis is

guided by a new index that we construct, termed as the Stakeholder Engagement

Quality Index (SEQI), which covers four dimensions of SE process: the purpose,

stakeholder mapping, scope and approach to the engagement. Our results indicate

that the SE quality significantly increases overall and for the third (i.e., scope of SE)

and fourth (i.e., SE approach) dimensions subsequent to the VBI. Additionally, in

terms of bank types, we find that the SEQI score is higher for commercial Islamic

banks than development Islamic banks in the post-VBI period. Despite such improve-

ments, our study alerts policymakers that there are areas that need further attention.

Among others, these include integrating SE into the banks' internal managerial func-

tions and encouraging active stakeholder participation in the design and implementa-

tion of the engagement itself.

KEYWORDS

Islamic banking, stakeholder engagement, value-based banking

1|INTRODUCTION

Bank corporate governance, which focuses largely on shareholder

profits, hascome under fire in the wake of the 2008–09 global financial

crisis.Shareholder-friendly corporategovernance is criticised for encour-

aging banksto take greater risks than non-financial firmsto grow equity

value sincethey can benefit morefrom financial safety netsprovided by

the state during distress (Anginer et al., 2018). This laxity in lending

would in turn exacerbate bank failure risks and undermine the systemic

fragilityof the banking industry(Dell'Ariccia et al., 2012).

In response to this concern, a reform proposal has been put for-

ward for bank directors to place a greater emphasis on protecting

stakeholder interests to maintain financial stability (Becht et al., 2011;

Laeven, 2013). Stakeholders, who typically receive fixed income but

bear considerable downside risk, would then oppose shareholders'

risk-taking tendency, and care more about the long-term ability of the

bank to remain a going concern. To empower eligible stakeholders,

1

bank managers must extensively engage with them for strategic

decision-making and governance, and not merely for exercising corpo-

rate responsibility (Cosma et al., 2021; Greenwood, 2007; San-Jose

et al., 2011).

1

In this study, we use the Global Reporting Initiative's (GRI, 2021) definition of stakeholders,

that is, individuals or groups that have interests that are affected or could be affected by the

bank's activities.

Received: 2 February 2023 Revised: 17 April 2023 Accepted: 6 June 2023

DOI: 10.1002/pa.2876

J Public Affairs. 2023;23:e2876. wileyonlinelibrary.com/journal/pa © 2023 John Wiley & Sons Ltd. 1of14

https://doi.org/10.1002/pa.2876