An exploratory study on shari`ah-compliant Social Impact Bonds in Malaysia

Abstract

Social Impact Bond (SIB) is a financial instrument used by socially motivated investors to fund programmes that aim to improve social outcomes, the returns of which are dependent on the impact achieved. The SIB model is seen as a suitable means (wasa’il) to address the issue of maqasid al-Shari`ah discourse Islamic finance, as well as the issues of social service inefficiency and financial constraints. The potential of SIB has created a global interest, but its development in Malaysia is still nascent. This study explores the potential development of Shari’ah-compliant Social Impact Bonds (SC SIBs) in Malaysia from the perspectives of stakeholders. It focuses on four research objectives: Firstly, it investigates stakeholders’ perception of SIBs, conventional bonds (CBs), and SRI sukuk; secondly it investigates the factors influencing stakeholders’ intention to invest in SC SIBs; Thirdly, it identifies the critical success factors (CSFs) and their order of importance; and finally, it identifies the priority social areas for SC SIB implementation in Malaysia. Through a survey, the views of 260 (44% response rate) Malaysian stakeholders (i.e. investors and financial developers) were gathered. The data was analysed using descriptive statistics, non-parametric tests, multiple regression analysis (MRA) and ranking techniques. The key findings indicate that stakeholders’ general understanding of the salient features of SIBs is very low, as compared to CBs and SRI sukuk. SIBs are also perceived to be significantly different from CBs and SRI sukuk. A hypothesised MRA model based on the Extended Theory of Planned Behaviour, extracted “attitude” as the most influential factor of stakeholders` intention to invest, followed by “subjective norm” and “moral norm”, with a 67.1% of the variance explained. However, “perceived behavioural control” was found to be statistically insignificant. Results of the tests suggest that these factors exercised a bigger influence on developers than investors. In terms of the critical success factors, the top five are “good governance framework”, “fulfilment of ethical standards”, “transparent procurement process”, “well-defined scope”, and “viable feasibility study”, while the bottom three CSFs are the “existing social programmes adopted”, “SIB guarantors”, and political will. These important factors must be considered in SC SIB development. Results of the tests showed that investors and developers differ in the CSF ranking. The areas of “Education”, “healthcare”, and “children” were ranked as the top three priority areas, while the least prioritised areas were “socioeconomic disparity” and “repeat offending”. This research finding is important as it indicates the social areas that should be prioritised to ensure the viability and sustainability of SC SIBs in Malaysia, while stakeholders` low understanding of SIBs implies that the stakeholder engagement must be increased. As investors and developers differed in opinion, different strategies must be utilised when engaging with different stakeholder groups. Additionally, what stakeholders perceived to be the differences between SIBs and CBs and SRI sukuk brings into question whether the existing frameworks of CB and SRI sukuk are suitable for SC SIB implementation. Overall, the research discovered that stakeholder interest in developing and investing in SC SIBs in Malaysia is encouraging but many the challenges must be overcome for its realisation.