Business Ethics in Islamic Finance

Transcription

1. ArchivesofBusinessResearch –Vol.7,No.2 PublicationDate:Feb.25,2019 DOI:10.14738/abr.72.6179. Mathkur,N.M.M.(2019).BusinessEthicsinIslamicFinance.ArchivesofBusinessResearch,7(2),143-152. BusinessEthicsinIslamicFinance NaifMansourM.Mathkur BusinessCollege,JazanUniversity, Jazan,KingdomofSaudiArabia ABSTRACT The goal of this research undertaking is to provide illuminating insights on the phenomenon of business ethics in Islamic finance. The paper offers insight into the ways that Islamic finance can enhance the upholding of utmost business ethics in diverse settings. For this, the study employees a meticulous literature review that covers an array of credible primary, secondary, and tertiary sources. This research disseminationfindsthatmanyplayersintheIslamicfinancesegmentobservebusiness ethics in general. Scores of Islamic finance practitioners observe the business ethics laid out in the Shari’ah. However, there are quite a few notable cases of wayward participants who have not been true to business ethics. The results of deviation from ethical business practices have been catastrophic. To deepen the observance of businessethics,itisimportantfortheIslamicfinanceindustrytodeploypragmaticand objective models that can be timely applied to warn of possible deviation from the observanceoftheethicalidealslaidoutintheShari’ahandavertthepossibleadverse consequences. The paper is tentative in nature. There is a need for further empirical research. Keywords:Islamicbankingandfinance,ethics,businessethics,non-interestfinancing. INTRODUCTION Islamisawayoflife.EthicslieattheheartofIslam.TheentireIslamiclawplacesapremium on ethical conduct in all the affairs of man in this world. The Shari’ah is inseparable from ethics.EthicsinanIslamicsystemdifferfromthatofaconventionalsystemasethicalideals, theoriesandpracticesintheformerareshapedbyreverencetoAllah(SWT)whileinthelatter ethics are based on transitory customs. Islamic ethics are based on the eternal provisions revealedtomanfromtheHolyQuranandtheSunnahteachingsofProphetMohammed(peace beuponhim).TheconceptofMaṣlaḥah,orsocialwelfareorutility(“commongood”),isatthe heartofthefundamentaldecreesofIslam.TheidealofMaṣlaḥahtouchesonallhumanaffairs– including business – and defines the nature of the proper links and relationships between individuals and the society (Montgomery, 2010). Maṣlaḥah is the building block of all the businessethicsofIslamicfinance. Ethicsinbusinesshaveattractedgrowinginterestduetothegrowingdisillusionmentwiththe raceformaterialismatallgainsthatispopularinmostaspectsoftheconventionalsociety.The nadiroftheobservanceofbusinessethicsintheconventionalfinancialsystemishighlightedin historybytheglobalcreditcrunchof2008.Thecreditcrisiswasprecipitatedbytherampant unethical practices of the various participants in the conventional financial system despite therebeingsupervisoryandregulatoryauthorities. IslamicfinanceisasoldasIslamitself(AlRayanBank,2015).Withhistoricalrootstracingwell into the 7th century, Islamic finance has grown in leaps and bounds to become dominant playerintheglobalfinancialservicessector.Islamicfinanceisthefastestgrowingsegmentof the global financial services market. It has remained true to the guiding principles of the Shari’ah(AlRayanBank,2015).Islamicfinanceinitspureformisdevoidofspeculationand excessive uncertainty. It is built upon the principles of trade, entrepreneurship, and risk
2. Mathkur ,N.M.M.(2019).BusinessEthicsinIslamicFinance.ArchivesofBusinessResearch,7(2),143-152. sharing (Al Rayan Bank, 2015). These ideals strengthen the relationship between Islamic financial institutions and their customers while at the same time stimulating increasing the scale of economic activities and opportunities for individuals, organizations, and the greater society(AlRayanBank,2015). TheformationofIslamicfinancebusinessesisethicalsincetheyarebasedontheprinciplesof theShari’ah.TheHolyQuranoffers,““ItisnocrimeinyouifyeseekofthebountyofyourLord (by trading)” (Al- Baqrah (2):198). The Prophet Salla Allahu alai wa sallam was a honest, successful, and ethical businessperson. Dignified business promotes the virtues of selfachievement, success, self-reliance, hard work, decency, and integrity. Islamic finance institutions apply ethical and society-friendly criteria in the management and administration oftheaffairs.(Wilson,1997).AccordingtoIslam,onlythemorallyuprightarecompleteinfaith (Alaro,2009).BusinessactivitiesthatgenerategenuineprofitsarefullypermissibleinIslam. ForeverypermissibleactundertheShari’ah,therearegermanerulestobefollowed.Therules taketheformofmandatoryconditionstobeobserved(Shurūt)orimpediments(Mawāni)that havetobeavoided(Alaro,2009).Theabsenceoftheformerallthepresenceofthelattercould renderanactnullandvoidforbeingunethicalundertheShari’ah(Alaro,2009). Some Islamic finance institutions have gone ahead to bag awards due to their outstanding observance of business ethics when pit against their contemporary Western peers. For instance, the Ethical Consumer Magazine ranked the Al Rayan Bank (formerly known as the IslamicBankofBritain)asbeingamongthetoptencurrentaccountprovidersintheworld(Al RayanBank,2015). THETENETSOFBUSINESSETHICSINISLAMICFINANCE In the context of business ethics in Islamic finance, there are those ethical notions that are characteristicallyunderpinnedinreligionwhileothersgenerallybearsemblancetotheethical ideals and practices espoused by the conventional system. The unique business ethics of IslamicfinancetouchontheabsenceofRibaintransactions;theavoidanceofHaramactivities; non-participationinexcessiverisk-takingandspeculativeactivities;prohibitionindealingwith forbidden items such as alcohol, pork, and pornography. Montgomery (2010) pinpoints that thebusinessethicsinIslamicfinancearehingedonthepromotionoftradeandcooperation; prohibitionofRibāandofprofitingwithoutrisk;theprohibitionofghararandmaysir;andthe requirementofcharityandaltruisticacts. Islamic business ethics hold that enterprises of any nature exist to create value to all the stakeholders.Allah(SWT)isastakeholderinanybusinessendeavorsinceGodcreatedpeople tocarryoutactsandholdideasthatseekGod’spleasure.ProphetMohammed(peacebeupon him)impressedupontheimportanceofethicstohisfollowersinbusinessinseveralSunnahs. The Prophet (peace be upon him) was a businessman before his call to prophethood. Those whoconductbusinessinafairandethicalmannerwillshareinthefeastofthegreatsaintsin theHereafter. ThebusinessethicsofIslamicfinanceinstitutionsarebasedonthecommandments(Ahkam)of the Shari’ah. The Ahkam are derived from the Quran; the prophetic traditions; Ijma, the consensus of Islamic scholars and (iv) Qiyas, that is solving emerging issues by finding their analogies in the first three sources (Ullah, Jamali, & Harwood, 2014). The business ethics drawn from the above sources clearly highlight the obligatory (Fardh and Wajeb); the recommended(Mandoob);thepermitted(Mubah);thedisliked(Makrooh);andtheprohibited (Haram)(Ullah,Jamali,&Harwood,2014).TheFardhandWajebarethedecreessourcedfrom theHolyQuranandtheprophetictraditionsthatpermittheobligativecommissionofspecified URL:http://dx.doi.org/10.14738/abr.72.6179. 144
3. ArchivesofBusinessResearch (ABR) Vol.7,Issue2,Feb-2019 acts. The performance of Fardh and Wajeb is rewarded while non-observance is punished (Ullah,Jamali,&Harwood,2014).Forinstance,commitmenttoZakatdeductionsisaFardhfor the inidividuals participating in the Islamic finance transactions, the Muslim owners of the Islamicfinanceinstitutions,andtheaccount-holdersbutnottotheIslamicfinancialinstitutions themselves (Ullah, Jamali, & Harwood, 2014). The Mandoob are directives regarding the performance of recommended actions and behaviors. Acting out on the Mandoob merits rewardswhilethenon-performanceofMandoobisnotpunishable.AnexampleofMandoobin thebusinessethicsofIslamicfinanceiswithregardtothepaymentofhighwagesthatexceed the maket rate; or the provision of good working conditions. While the payment of wages at rates that are higher than the market rate is not compulsory, it’s non-commission is not punishable. The Mubah directives provide guidance on which actions and behaviours that Muslimscanpartakewithoutanyrestrictions.Forinstance,thebeneficialharnessingofnatural resourcesispermittedtoallMuslimsprovidedthattheydonotdegradetheenvironment.Acts ofabuseofnaturalresourceswouldmakesuchactivitiesHaram.TheMakroohdealswiththe actions and behaviors that are strongly disliked, discouraged, and loathesome. For instance, smokingisadestableact,butneverthelessitisnotpunishable.Issuesthatdealwithwhetherit isethicalforIslamicfinanceinstitutionstofundtheoperationsofcompaniesthatmanufacture cigarettes and other tobacco products that are harmful to human health falls under the jurisdiction of Makrooh. Haram denotes those actions, practices, and behaviours that are completely outlawed by the Shari’ah. The consumption of intoxicants, participation in gambling, charging of Riba, divination, and speculation activities is Haram (Ullah, Jamali, & Harwood, 2014). In the matter of Haram, the Holy Quran counsels, “O ye who believe! Intoxicants and gambling, (dedication of) stones, and (divination by) arrows, are an abomination,ofSatan'shandiwork:Eschewsuch(abomination),thatyemayprosper.Satan's plan is (but) to excite enmity and hatred between you, with intoxicants and gambling, and hinder you from the remembrance of Allah, and from prayer: Will ye not then abstain?” (AlMaida(5):93-94).Haramactivitiesandpracticesdegradetheholisticdevelopmentofaperson and the society at large. All Haram actions are unethical and participants in Islamic finance activitiesshouldgivethemawidebearth.AccordingtoIslamicfinance,runningconventional Western bank savings and investment deposits, purchasing interest yielding bonds, and the financingofinstitutionsinvolvedinalcoholproductionorthedistributionofporkproductsis Haram(Wilson,1997). ConsciousnessofGodandObservanceoftheShari’ah AccordingtoIslam,thereisoneness,unity,andsupremacyoftheAlmightyAllah(SWT).Allah (SWT)isthesolecreatorofheavenandtheentireuniverse.Allahcreatedtheworldandplaced peopleinittoashisvicegerents.BusinessesthatupholdthesupremacyofGodandmorelikely to uphold business ethics as compared to those secular businesses do not incorporate reverenceofGodintheiroperations. ItisimpossibletocomplywiththeShari’ahandbeunethicalinanyundertakinginlife.Shari’ah andethicsarestronglyentwined.Itispracticallyimpossibletoseparatethetwo.Therefore,it goes without saying that, all the business ethics in Islamic finance have their roots in the Shari’ah.AllIslamicfinancialinstitutionsaresupposedtocomplywiththeShari’ahfromtheir formation as well as through their entire existence. In as much as there is no one single codifiedsourceofbusinessethics,alltheimpliedethicalprinciples,andguidelinesthatgovern the conduct of Islamic finance can be traced directly to the Holy Quran and the Sunnah teachingsoftheProphet(peacebeuponhim).ThereisnotonebusinessethicstenetofIslamic financethatemanatesfromsecularsources. Copyright©SocietyforScienceandEducation,UnitedKingdom 145
4. Mathkur ,N.M.M.(2019).BusinessEthicsinIslamicFinance.ArchivesofBusinessResearch,7(2),143-152. Al-Ghazali in Ihya-ulum-al-Dīn links economic performance within business arrangements to thepromotionofthewelfareofthesocietythroughthepursuitofthefive-foldgoalsofShari’ah (Maqasidal-Shari’ah)i.e.religion(dīn),life(nafs),progeny(nasl),property(māl),andreason (‘aql) (Montgomery, 2010). All business ethics in Islamic finance should be geared towards safeguardingtheabovemainstays. AvoidanceofRiba OneoftheremarkabledistinguishingfeaturesofIslamicfinanceistheprohibitionofRiba.The HolyQuranprovidesthat,“Thosewhodevourusurywillnotstandexceptasstandonewhom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah [to judge];butthosewhorepeat[Theoffence]arecompanionsoftheFire:Theywillabidetherein [forever]”(Al-Baqrah(2):275). AccordingtoIslam,moneyhasnointrinsicvalue.Itissimplyameasureofwealth,amediumof exchange,andastoreofvalue.Therefore,moneyisnotacommodityandthemakingofprofit through the charging of Riba is forbidden. Due to the prohibition of usury, deposit taking Islamic financial institutions and individuals are expected to invest the money in prudent as wellaslegitimatewealthgenerationandaccumulationventures.Themoneycollectedthrough savings accounts or similar deposit taking facilities offered by Islamic finance institutions do notearninterestbut‘expectedprofit’.The‘expectedprofit’actsasaperformancetargetsetby the Islamic finance institution. The Shari’ah scholars appointed by the shareholders oversee thatIslamicfinanceinstitutionsdonotsetalowlackadaisicaltargetedrateof‘expectedprofit’. The rates quoted to the depositors of funds by the Islamic finance institutions represent the expected rate of return on the investment of the funds in Shari’ah-compliant legitimate economicundertakings.Duetotheelementofrisk,theactualprofitpaidouttothedepositorof thefundbythedeposit-takingIslamicfinanceinstitutionsmayturnouttobehigherorlower than the quoted ‘expected profit’. Where possible, Islamic finance institutions should try to maximizethereturnsthattheyoffertotheirclients–thedepositors.Itisnotuncommonto find Islamic banks that often exceed the expectations of their clients and offer actual profits that exceed the expert-valued ‘expected profits’ due to sound investment decisions, policies, andactivities(AlRayanBank,2015). According to Islam, the element of usury promotes financial inequity and social injustice in financialdealings(AlRayanBank,2015).Islamoutlawsprofitsthataremadewithouteffortor risktothelenderassuchreturnsconnotemoneybeingmadefrommoneyandthisisunethical giventhecorrectpurposeofmoney(Montgomery,2010). Integrity AccordingtotheunderpinningShari’ahguidelinesthatgovernorShari’ahcompliantbusiness andIslamicfinanceactivities,allthepartiestoeconomicandfinancialdealingsaresupposedto observeintegritybyupholdingtruthfulness,honesty,virtue,anddecencyintheirconduct.The HolyQuranassertsthat,““Oyewhobelieve!Fulfill(all)obligations.”(Al-Māidah(4):1)”.All thepartiestoIslamicfinancetransactionsanddealingsshouldkeeptheirendofthebargain. Onthismatter,theHolyQurancounsels,“Andfulfill(every)covenant,for(every)covenantwill beenquiredinto[ontheDayofReckoning]”Al-Isrā'(17):34.TheHolyQuranaddsthat“Those who faithfully observe their trusts and their covenants … these will be the heirs, who will inheritParadise:theywilldwelltherein[forever]”(Al-Mu'minūn(23):8,10-11). URL:http://dx.doi.org/10.14738/abr.72.6179. 146
5. ArchivesofBusinessResearch (ABR) Vol.7,Issue2,Feb-2019 A Muslim is at liberty as to whether to enter into a contract or not, but once (s)he has expressedhis/herwordsofcommitmenttoacontractualarrangement,itbecomesbindingand mustbefulfilled.TheProphet(SallaAllahualaiwasallam)said,"Muslimsareboundbytheir stipulations(Alaro,2009)".ConcerningthesuccessfulMu'minūn,Allahsays,“(Theyare)those whofaithfullyobservetheirtrustsandtheircovenants"(Al-Mu'minūn(23):8). Nonmaleficence AllbusinesssurroundingIslamicfinanceaffairsshouldbeconductedinamannerthatdoesnot cause harm to other people. In the context of Islamic finance, the funding of those activities thatcanjeopardizethewell-beingofausterityallthewidersocietyshouldnotbecarriedout. Avoidance of uncertainty (Gharar) and gambling (Maysir) is aimed at protecting the other parties with stakes in Islamic finance transactions. Excessive speculation, uncertainty, and gamblingisinjurioustothebestinterestsoftheinvestorswhoputtheirhard-earnedmoneyin funding Islamic finance institutions. Additionally, partaking of activities with uncertainty and gambling can bring harm to the individual perpetrating such acts through addiction to unwholesomehabitsandeventualfinancialruin. AlllegalandethicalIslamicfinanceactivitiesaresupposedtobeasset-basedandasset-backed to safeguard the interests of all the parties. Conventional Western financial instruments like futures,derivatives,andoptionsthatarenotbackedbyrealassetsareprohibited.Thebarring ofsuchinstrumentsfromthesceneofIslamicfinanceisnecessarysincetheydonotpromote the holistic growth and development of the parties involved and the society at large. Additionally, due to the absence of backing by real assets, financial instruments contain elementsofgreatspeculationandexcessiveriskthatarenotpermittedbythebasicprinciples ofIslam. Beneficence According to this ethical tenet, all economic activities should be conducted in a fashion that benefitsallthepartiestothetransaction,aswellasthewidersocietyingeneral.Thiscanbe achievedbyensuringthatalldealingsarecarriedoutinawaythatensurestherealizationof the Maqasid al-Shari'ah (Montgomery, 2010). Beneficence can be maximized by always choosingthebestoptionthatavailsmaximumreturntoalltheinterestedstakeholderswhile notviolatingtheprinciplesofShari’ah. ObservanceoftheNationalRegulationsandLocalOperatingLaws SomeIslamicfinanceinstitutionsoperateinroutinesthathavedualbankingnationalfinancial systems. A number of Islamic finance institutions operate in environments where by the conventionalWesternbankingandfinanceisthedominantsegmentofthefinancialsystem.In theseenvironments,itisnotuncommontofindinterestratesbeingmorepronouncedbythe players in the financial system as well as by regulatory authorities. In such cases, Islamic institutions may be required to express in percentage points the rates of their charges. Such quotations facilitate customers to make informed comparisons between the charges of Western conventional banking and finance institutions and those charged by the Islamic finance institutions. While such kind of rules may appear to bend towards the conventional Western finance system, Islamic banks ought to comply with certain legal and regulatory provisions.Islamisareligionofpeace.Islamfinanceinstitutionsneedtoexistharmoniously withtheirconventionalWesternpeersandstrivetoupholdtranquilitybycomplyingwithlaws that do not fundamentally threaten compliance with the Shari’ah. In such regimes, Islamic financeinstitutionsneedtoobservethenationallawsandregulatoryregulations.Theyneedto be transparent and impress upon the local Muslim population and the members of the investingpublicthatexpressingtherentalratesasapercentageofthechargedoesnotmean Copyright©SocietyforScienceandEducation,UnitedKingdom 147
6. Mathkur ,N.M.M.(2019).BusinessEthicsinIslamicFinance.ArchivesofBusinessResearch,7(2),143-152. thatitisconvertedintointerest.Rather,thequotedpercentagerateindicateshowmuchrental expenses the Islamic finance institution charges the clients as a proportion of the property purchase price (Al Rayan Bank, 2015). While the interest-free loans of Islamic finance institutions are Shari’ah compliant and the conventional mortgages and loans are not, the percentage rate offers the measuring and comparison tool. Discrepancies between the ideal Islamicpracticesandtheregulatoryrequirementsshouldbesolvedinanamicable,peaceable, andcordialmanner. BUSINESSETHICSMATTERSCONCERNINGTHEVARIOUSPARTICIPANTSANDPEOPLE RELATIONSHIPSINISLAMICFINANCE TheEmployeesandEmployers The Hadith narrated by Imam Bukhari provides excellent guidelines on the defining characteristics and nature of the relationship between an employer and the employees. The Hadithgoesasfollows,"Al-Ma'rūrnarratedsaying,ImetAbūDharr"whowaswearingacloak, andhisslavetoowearingasimilarone.Iaskedhimaboutthereasonforthat,andhereplied,I insulted someone by calling his mother with bad names. The Prophet (Salla Allah alayhi wa sallam)saidtome,OAbūDharr!Didyouinsulthimbycallinghismotherbadnames?Youhave inyousomecharacteristicsofignorance.YourservantsareyourbrotherswhomAllahhasput underyourcommand.Sowhoeverhashisbrother(asservant,slave,employeeetc)underhis command,heshouldfeedhimofwhathehimselfeats,andclothhimofwhathehimselfwears. Donotorderthem(yourservants,slaves,employeesetc.)todowhatisbeyondtheircapacity, andifyoumustdo,thenassistthem”(Alaro,2009).Employeesshouldbetreatedwithdecency anddignitybytheiremployersandsuperiors. ManyIslamicbanksputthebestinterestoftheiremployeesattheforefrontoftheiroperations. When it comes to remuneration, Islamic financial institutions go beyond paying the compulsory minimum wage and the market wage levels. They choose to voluntarily pay a ‘Living Wage’ that is substantially higher than the compulsory minimum wage and average marketwage(AlRayanBank,2015). AnumberofIslamicbankingandfinanceinstitutionsare‘InvestorsinPeople’(AlRayanBank, 2015).Asexemplaryemployers,theysupporttheempowermentofemployeesinallpossible waysastheydischargetheirmandate. TheHolyQuranguidesthat,"Allahcommandsyoutorenderbackthetruststothosetowhom theyaredue"(Al-Nisā'(4):58).Employeesshouldavoiddefraudingtheiremployersbyrobbing offthevaluabletimeoftherespectivecorporationsthattheyworkfor.Employeesshouldavoid tardiness and laziness at work at all time. Employees who do not work diligently get paid unearnedincome.ThereceiptofunearnedworkisforbiddenintheHolyQuran.Theunearned incomeistantamounttotheearningofRiba.Employeesshouldtaketheinitiativetoimprove their capacity for service delivery by sharpening their skills through commitment to lifelong learningoftheircraft.Furthermore,employeesshouldavoidtakingintoxicantsormakingpoor lifestylechoicesthatdiminishtheirproductivity,effectiveness,andefficiencyatwork. TheManagementandInvestors Themanagementoweacriticaldutyofcaretotheinvestors.Theinvestorsappointtheboard ofdirectorsandmanagementasthestewardsoftheircapital.Themanagementshouldnever engageinGhararandMaysir.Whilespeculationandexcessiverisk-takingpracticesmaypayoff in the short-term, they are detrimental to the long-term interests of the investors since they posegoingconcernthreatstothebusinessoftheinvestors. URL:http://dx.doi.org/10.14738/abr.72.6179. 148
7. ArchivesofBusinessResearch (ABR) Vol.7,Issue2,Feb-2019 TheLendersandBorrowers TheHolyQuranprovidesthat“Ifthedebtorisinadifficulty,granthimtimetillitiseasyfor him to repay. But if ye remit it by way of charity, that is best for you if ye only knew.”(AlBaqarah (2): 280). The lenders should accommodate the exigencies of the borrowers in a compassionate manner. When the borrowers face genuine difficulties in repaying the loaned amounts,thelendersshouldrescheduletheloanrepaymentswithoutcharginginterest. “TotheMadyanPeople[Wesent]Shu'aib,oneoftheirownbrethren:hesaid:"Omypeople! worshipAllah:YehavenoothergodbutHim.Andgivenotshortmeasureorweight:Iseeyou inprosperity,butIfearforyouthepenaltyofadaythatwillcompass[you]allround.AndOmy people!givejustmeasureandweight,norwithholdfromthepeoplethethingsthataretheir due:commitnotevilinthelandwithintenttodomischief.ThatwhichisleftyoubyAllahis bestforyou,ifye[but]believed!ButIamnotsetoveryoutokeepwatch!…Whenourdecree issued,wesavedShu'aibandthosewhobelievedwithhim,by[special]mercyfromourselves: Butthe[mighty]blastdidseizethewrongdoers,andtheylayprostrateintheirhomesbythe morning,-Asiftheyhadneverdweltandflourishedthere!Ah!Behold!HowtheMadyanwere removed [from sight] as were removed the Thamud!” (Hūd (11): 84-86, 94-95). The above extractfromtheHolyQuranteachesthatthelendershavetoavailtothelenderstheservices thattheypromisetodeliver.Islamicfinanceinstitutionsshouldofferproductsandservicesin themanner,termsandconditionsposedinadvertisingandotherproductpromotionactivities. Islamicfinanceinstitutionshaveanobligationtoliveuptotheirpromisesandsatisfytheneeds of their clients in the pledged manner. The Islamic finance institutions should not underdeliverservicesastheHolyQuranassertsthat,“"Woetothosewhodealinfraud.Thosewho, whentheyhavetoreceivebymeasurefrommen,demandfullmeasure.Butwhentheyhaveto givebymeasureorweighttomen,givelessthanwhatisdue"(Al-Mutaffifiin(83):1-3).These stipulationsprohibittheperpetrationofpyramidschemesinIslamicfinance. Theborrowershaveanobligationtocommittotherepaymentoftheloanedamount.Reckless spendingoftheloanextendedtothemjeopardizesthebestinterestsofthelender.Borrowers shouldnottakeuploansthattheyknowthattheycannotaffordtorepaysincethisposesmoral hazardproblemstothelendingIslamicfinanceinstitution.Borrowingaloanthatonecannot payinfullaccordingtothestipulatedtermsandconditionsisunethical.Itisrankedwiththe outlawedactofstealing. CASESOFNON-OBSERVANCEOFBUSINESSETHICS TherehavebeenafewerrantIslamicfinancecorporationsthathavefailedtoupholdIslamic ethical ideals in their operations. The adverse consequences of non-compliance with the business ethics by the delinquent Islamic banking and finance institutions shows that it is importanttosupervise,monitor,andfollow-upIslamicfinancialinstitutionswithregardtothe strictadherencetothebusinessethicslaidoutintheShari’ah.Abriefdiscussionofsomeofthe Islamicbankingandfinanceinstitutionsthatwentunderduetoengaginginwaywardunethical practicesfollows. The Islamic Bank of South Africa collapsed in 1997 (Nathie, 2009). Unethical business ethics wereattheheartofthedownfalloftheIslamicBankofSouthAfrica.Investigationsconducted ontheoperationsofthecollapsedIslamicBankofSouthAfricarevealedthatthemanagement of the bank accumulated Riba-based property debt in contravention to the blueprint for the ethical charter of Islamic banking and finance institutions laid out in the Shari’ah (Nathie, 2009). To cover up its malpractices, the bank resulted to using misleading, unethical, and unjustcreativeaccounting(Nathie,2009). Copyright©SocietyforScienceandEducation,UnitedKingdom 149
8. Mathkur ,N.M.M.(2019).BusinessEthicsinIslamicFinance.ArchivesofBusinessResearch,7(2),143-152. The Islamic International Bank of Denmark faced severe operating bottlenecks that nearly brought it to its knees. Between 1985 and 1986, excessive risk-taking practices shaved off morethan30%oftheequityoftheIslamicBankofDenmark(Grais,2004). TheIhlasFinanceHouseinTurkeycollapsedin2002.ThecollapseoftheIhlasFinanceHouseis deemedbysomeIslamicscholarsandobserverstobethebiggestfailureofanIslamicbanking and finance institution. Risky lending and unethical practices precipitated the collapse of the IhlasFinanceHouse(Ali,2007). RECOMMENDATIONS WhilemostIslamicfinanceinstitutionsareontherightpedestalwhenitcomestoupholding businessethics,therearesomeIslamicfinanceentitiesthatbeatthecornersintheobservance ofbusinessethicsandfullcompliancewiththeShari’ah.Tothoughtoftheriskofpossiblenonobservanceofbusinessethics,theIslamicfinanceindustryshouldembracepredictionmodels thatdonotfloutthefundamentalprovisionsoftheShari’ah.Failurepredictionmodelsarevery commonintheconventionalWesternbankingandfinancesystem.However,thereisanotable absenceofmodelsthatcanpredictthepossiblefailureofIslamicfinanceinstitutionsbasedon such criteria as observance of business ethics and compliance with the Shari’ah. Such predictive models that have reverence for the Shari’ah would be instrumental in pinpointing andavertingcasesofnon-observanceofbusinessethicsinIslamicfinanceinstitutions. Additionally,itisimportanttoextinguishtheconfusionthatsurroundscertainIslamicfinance situations.ItisimperativeforIslamicfinancetoissueclearauthoritativepronouncementson whether the funding of food retailers, airlines, hotel enterprises, and accommodation institutions that there are a proportion of their revenue from alcohol sales is legal from a Shari’ah compliant point of view, or whether such businesses should be classified with breweries can excluded from any funding by Islamic finance institutions. Unambiguous guidelines should be codified and provide clarification whether it is ethical to fund lucrative business undertakings that derive insubstantial earnings from such items forbidden by the Shari’ah.Strongbusinessethicscodeswithregardtofundingwillaugmenttransparencyinthe operationsofIslamicfinanceinstitutions. CONCLUSION Islamicfinancehasbeenpivotalinfacilitatinginstitutionsandindividualsworldovertoengage with the financial system in ways that are consistent with the ethical Shari’ah principles (Al RayanBank,2015).Allthestakeholdersinthesocietystandtobenefitfromtheobservanceof ethicsbyoneoftheparticipants.Theupholdingofproperethicshasapositivemultipliereffect on the affairs and the interest of other people as well as legally proper businesses. Strong adherence to business ethics by Islamic financial services providers primarily benefits these institutionsoverthelongterm.Whilecuttingcornersintheobservanceofbusinessethicsmay net short-term gains, unethical business practices are self-defeatist and bound to bring the errantinstitutiononitskneeseventually.TheobservanceofbusinessethicsinIslamicfinance leadstotheattainmentofMaqasidal-Shari’ahthatpreserveandenhancetheintellect,justice, andwelfareofall.Non-observanceofbusinessethicsnotonlycreatescognitivedissonancein theculpritIslamicfinanceinstitutionsbutalsodamagesthepublicimageoftheindustry.Since ethicsinlifeareall-pervading,commitmenttobusinessethicsbyplayersinIslamicfinancesets an example for people in the wider society to uphold ethical virtues that leads to the advancement of the society for the good of all. The utmost upholding of business ethics in Islamic finance creates and augments harmonious relationships between depositors, owners, andprofessionalsinthesectorwhileatsametimepromotingtheholisticgrowthofthewider society.BusinessethicsinIslamicfinanceseektopromotethesuccessofanindividualaswell URL:http://dx.doi.org/10.14738/abr.72.6179. 150
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