Ethics and Islamic finance: a study of Islamic financial ethics and Islamic banks in Malaysia

© 2015 Dr. Muhammad Adli MusaAlthough theology and religion have in the past been important in promoting ethics in business, their contributions may be ignored in the current discourse and literature on business ethics. Currently, business ethics is treated narrowly as an applied philosophy and social science, even though, on a practical level, religious teachings inform and shape the morality of a substantial portion of the business population. While business ethics is considered to be integrated within the wider framework of established Islamic ethical norms, a large part of Islamic literature on the subject is either theologically oriented or superficial and inadequate in its assessment of Islamic business principles. The literature is fragmented and spread over a variety of sources, and does not sufficiently provide a systematic framework of business ethics despite the existence of many rich discussions about this concept in Islamic sources. The institutionalisation of Islamic finance aimed at promoting certain ethical values, such as the prohibition of unjust practices, encouraging moderation, balance and harmony in life, and assisting the underprivileged. However, current practices of Islamic financial institutions have been criticised for failing to promote such values, as they often adopt a ‘form over substance’ approach in Islamising conventional finance. My aim in this thesis is to analyse the discourse on ethics in Islamic finance to identify: (i) the similarities and differences between mainstream and Islamic business and financial ethics; (ii) the relationship between ethics and Islamic finance; and (iii) the ways in which ethics has been infused in the formulation of legislation, guidelines and standards for the Islamic finance industry in Malaysia. I also aim to develop an Islamic financial ethics framework that can then be used to assess the extent to which practices of Islamic banks in Malaysia are consistent with the expectations derived from such a framework. In doing the above, I depended on the available relevant literature, interviews with Islamic finance experts and practitioners, a survey of the perception Islamic bank executives, and secondary data in the form of annual reports and annual financial statements of four selected Islamic banks in Malaysia. My findings suggest that notions related to the concept of tawḥīd, such as accountability to God, revelation as a source of ethical guidance, and belief in life in the Hereafter appear to be the unique features of Islamic business and financial ethics. Nonetheless, mainstream and Islamic business and financial ethical norms are more or less similar. In the same way that law seems to be insufficient in warranting ethical behaviour, compliance with sharīʿah rules also does not guarantee ethicality, especially when focus is on the letter of the law as opposed to the spirit underlying it. I identified that the ethicality of Islamic finance is often established on the basis of the following premises: (i) its Islamicity renders it inherently ethical; (ii) prohibitions of ribā, gharar, maysir and involvement in ḥarām activities serve ethical purposes; and (iii) the macro maqāṣid of the Islamic financial system is to establish socio-economic justice. However, there is a general sentiment that the establishment of Islamic financial institutions have yet to infuse ethics into the current financial system as they concentrate on Islamising conventional financial products and services because of: (i) the desire to expand and prove their financial viability; (ii) competition with their conventional counterparts; and (iii) the conventional background of most Islamic finance practitioners. On the basis of three guiding principles, tawḥīd, ʿadālah and iḥsān, I developed an Islamic financial ethics framework. From each principle, I derived practical expectations. Islamic financial institutions are expected to: (i) ensure operations are based on sharīʿah principles; (ii) fulfil social responsibilities; (iii) emphasise profit/loss-and-risk-sharing financial intermediation; (iv) fully disclose material information; (v) fulfil their contractual obligations; (vi) avoid exploitation; (vii) promote financial inclusion through microfinance; (viii) provide qarḍ ḥasan and be lenient in recovering debts; and (ix) deliver quality services. My assessment of the practices of the selected Malaysian Islamic banks reveals that they are committed to operating on the basis of sharīʿah principles and aim to fulfil their social obligations through corporate social responsibility initiatives. Bank Negara Malaysia has made it compulsory for Malaysian banks to be transparent and disclose pertinent information, and that corporate and sharīʿah governance structures are in place to promote integrity in fulfilling their duties. However, in general, the banks depend heavily on sale and lease based contracts in providing financing. Profit/loss-and-risk-sharing contracts are almost absent. The banks have also yet to actively introduce microfinancing schemes, and there seems to be a decline in the percentage of financing provided to small and medium enterprises. Only two out of the four banks recorded providing qarḍ ḥasan, and only one bank disclosed the manner in which it dealt with clients facing difficulties in fulfilling their financial obligations. Generally, the banks endeavour to provide quality services, but the observations and experiences of some of my interviewees indicate that they fell short of meeting their expectations. It can be argued that the agreement between the banks’ practices and the framework developed through this research was mainly driven by legal requirements. Meanwhile, the inconsistencies were mainly caused by a failure to appreciate the higher objectives of the sharīʿah in relation to Islamic finance