Ethics In Business: Moving Islamic finance from conference rooms to humanity

Syakh Akram Nadwi from Oxford Islamic Centre in Oxford, UK, in his publication titled General Framework for Discussion of Islamic Finance wrote:

“Yet, if using the word ‘Islamic’ before ‘finance’ is to mean anything at all, it should mean the kind of finance that belongs in Islam, the kind that Muslims acting specifically as Muslims engage in when they are producing and exchanging goods and services, and generally building up their individual and collective means of livelihood. Most ordinary Muslims are, I think rightly, suspicious and cautious about accepting the permissibility of many of these instruments. It does not help matters that banks and investment companies run by and for non-Muslims are happy to use these same Islamic financial instruments because it helps them to attract and keep Muslim customers.”

This interview challenges if Islamic finance has truly serviced the needs of humanity. Has it been the face of solving human tragedies of the 21^st century? Has it elevated the standards of living of humanity – Muslims and non-Muslims alike or has it focused too much on forums and conferences, and served the few who seek a better deal in a financial return. Has the industry become out of reach for the general masses in its understanding and ethos with its word games and jargons? Is the industry changing the way economies are run, and if not why not, given its claims that the financial crises 1 and 2 spared Islamic finance industry given its principles of transaction. Why hasn’t the industry been able to convince global powers, businesses and institutions to adopt its principles as a global standard if it indeed delivers a “crises free” market?

Daud Vicary Abdullah, the President and Chief Executive Officer of INCEIF shares his views.

The Islamic finance industry has had impressive growth since its inception in 1983 due to a number of reasons, chief among which is to fill an unmet need of Muslims to live according to the worldview of Islam and conduct their economic activities ethically vis by avoiding the forbidden elements and activities. This was complemented by the political of the government to facilitate its growth through legal initiatives as well as regulatory oversight and guidance. Over time expectations increased among players and consumers for Islamic finance to meet the variety of financial services supported by the market institution within the industry.

Through a ‘planned’ and evolutionary approach, the industry grew while ensuring that its services were designed without compromising the key elements of Shariah (Islamic Law). The intention and the effort were in many ways organised and systematic though not perfect at times. The ‘process’ approach is the linchpin of the Malaysian experience where monitoring, reviews and feedbacks of governance framework as well as product development contributed to an increasing acceptance of these services by the community at large, The designing of products and processes may not be perfect, but the intention and the effort including codes and best practices deserve favourable commendation.

1.    What drives this industry? Ethics, justice or products development for profit making? Has the industry lost sight in the very essence of commerce and trade as stipulated in the Quran and Sunnah to the more pressing issues of bottom line?

The purpose of this business of Islamic finance is to conduct a profitable business in accordance with Shariah as interpreted by those with the authority to provide opinions on such transactions. This is premised within the framework of the political economic system of a market economy with emphasis on shareholders and investors as the key players in national development.

Returns to shareholders or investors will determine the industry, the company and the mode of financing which investors will direct their attention. Expected return to equity and long term shareholder value had been the traditional goals of corporate governance of the Malaysian economy. The responsibility to stakeholders is instrumental rather than inclusive.

The above scenario ought to be considered by commentators when judging on the effectiveness of the outcome of Islamic finance. Perhaps the trend towards an inclusive stakeholder approach to governance á la King 3 may have a significant influence of the future governance framework of Malaysia and similar jurisdictions to accommodate other important stakeholders in their governance structure and processes.

For example, the current efforts at explication, understanding and application of Maqasid Shariah (Goals of Shariah) by scholars including those ISRA and INCEIF is one such attempt to improve on the Shariah approach elevating best practices beyond compliance into social justice and sustainability. This is where a unified understanding and actions among Shariah scholars is required (perhaps through professional associations of Shariah scholars and practitioners) to provide relevant inputs in enhancing governance framework to include a social and ethical approach to business rather than purely using the language of law and economics such as “bottom line through compliance”.

2.    What is our purpose in this life?   

Shouldn’t the very basis of Islamic Finance be a function of enabling Muslims to become better Muslims, better vicegerent of God on this earth? Shouldn’t the industry move beyond labelling and word games towards true engagement of human causes?

The governance framework is dynamic and systematic, and encouraging research and discourse to provide meaningful input into pushing the industry to focus on the next phase of its business where it must be in accordance with the expectations of those whose rights and needs are to be respected.

The use of Zakat for human capital development is in the right direction as it prepares the industry with competent and trained human resource to move it to the next level. Also new insights into social responsibility and sustainability based on Maqasid Shariah ought to develop practices, processes and policies that extend beyond fiqh rulings and into meaningful strategies that is synergistic.

Shariah Committees or Shariah Advisory Council may want to either explore or embark on such initiatives without compromising long term sustainability. Currently, the synthesising of ideas between maqasid and sustainability is fairly limited.  This is one area for Islamic finance to be a role model to other businesses in contributing to shared development. Additionally, it is about time that the responsibility for ethics and developing ethical culture be the responsibility of the board of directors. The board should be accountable to disclose their efforts to the regulators and shareholders. Only through these initiatives and their evaluation can standards be established for improving ethical awareness and sensitivity based on Islamic values.

3.    Prohibition of wealth to be circulated amongst a selected few – This dictates that the poor and needy have a right on the property of those who enjoy a surplus. How does the industry ensure communities, especially the less privileged communities are served? Is the Islamic finance industry serving to eradicate human predicaments of the less or is it here to serve a selected few in a selected circuit of industry?

The globalisation of social responsibility is part of maqasid (goal). It can be conceptually developed and practiced through existing international institutions such as IDB and its affiliates, Fiqh Academies and the Association of Islamic economic scholars and practitioners.  It is necessary to have relevant networks that can cooperate effectively in promoting the vision of IDB in achieving its human development goals through training and empowering such initiatives in the poorest regions of the Muslim world.

4.    The essence of commerce and trade in Islam – Professor Akram Nadwi writes” Instead of being oriented outwards to the difficulties of Muslims in their everyday lives, they became oriented inwards towards the difficulties within their own work. … So, eventually, it became possible to speak of a Hanafi or a Shafi‘i or a Maliki or a Hanbali position on this or that matter. Mercifully, now and again, there arose within the community, clear-sighted and clear-hearted individuals who knew, and who said publicly, that it should be the other way round. An example is Shaykh al-Islam Ibn Taymiyya, who refused to be identified as a Hanbali, and insisted on his identity as a Muslim.” 

What is the role of institutions such as INCEIF in reverting the industry back to the essence of commerce in Islam? How could you influence the industry? In this too, what is the role of Malaysia who aspires to be a one of the leading hubs of Islamic finance in making this change?

INCEIF and ISRA among others do recognise the need to conduct and publish research on contemporary issues and possibilities in charging future directions of the Islamic finance industry.

It is also responsible for developing talents through its professional programs that enables students from the various Muslim countries to share experiences and perspective in managing financial institutions while at the same time being aware of the challenges and constraints of improving governance processes and structures.

Malaysia with its valuable experience in developing the Islamic finance industry can provide training of future professionals and also initiate the development of Associations of Islamic professionals as well as the Associations of Shariah scholars that can serve members within and outside the country.

5.    Perfecting commerce by faith – Imam Ghazali in his writings on trade and commerce calls on turning economic activities into a form of “ihsan”(perfect by the faith –  Moving away from the mechanical “ticking the boxes” Industry to one where the Industry serves the people by uplifting their status. There are movements now called “The Fair Trade Commerce” and “The Better World” shopping guides that are already doing this. How is the Industry spearheading this? How can this be better implemented and instituted in the Industry?

Ihsan like integrity, excellence passion, professionalism and other core values of Islamic organisations, must be part and parcel, and, better yet, internalised within the culture of organisations and their stakeholders.

Codes of ethics must be aligned to core values and ought to be properly communicated, explained and evaluated based on best practices and standards. The same applies to ihsan. It must be explicated as part of the character of the institution and it must be ‘alive’ and pervasively present in the systems of reward, strategies and staffing of those institutions. A governance approach that requires accountability of the board for disclosure of culture development efforts is one such initiative that ought to be in place if the culture of doing business in Islamic finance is to be noted for its ethicalness.

6.    Greed in finance – Prophet Muhammad (peace be on him) said “An honest and trustworthy merchant will be with the martyrs on the Day of Resurrection.”How has  the Islamic finance industry led in developing ethical merchants, bankers and greed free system?

Developing a dynamic and evolving culture based on the anchor or core values and supported by ethical leadership of the board and well received codes of ethics can go a long way in promoting ethical behaviour in such institutions. It is timely for board take such responsibilities rather than leaving them to the Shariah advisory committees. The language of profits bottom line, survival and legal compliance ought to be tampered with the language of vicegerent (khalifah), stewardship, social responsibility, spiritual strength and sustainability. Without rules requiring disclosure, the inertia at institutional level is a serious obstacle to such initiatives for a number of reasons. People come and go, the initiative takes time, it involves additional cost in the short run, ethics tend to be understood as compliance more so on the box ticking type.

7.    Challenging global economic principles – Has the Islamic finance industry actively challenged the fundamental global economic principles in the face of the catastrophic collapse of many leading global economies and institutions? Has the industry been at the forefront in arguing the very essence of commerce in Islam which presides on equity, justice, fairness, mercy and well being of all and not a selected few?

The move towards Islamic derivatives is not without dangers and limitations that can cause serious harm and injustices to society at large. It is therefore imperative that the products are properly designed to include the needs and potential harm to stakeholders. Within an inclusive stakeholder approach, initiatives and product of financial industry must be fit for purpose from the perspective of stakeholders, not just management and shareholders.

8.    Business ethics in Islamic finance – Is the whole debate of business ethics and its true essence being actively deliberated by the industry? Or is the greater focus on products that sell?

There is very limited discussion on business ethics for a number of reasons.  Firstly, boards are not required to disclose its ethics initiatives to any party. Even if there is, there is no requirement for the practice to be audited. Secondly, there is a wide gap between talking ethics and practising ethics. This is partly due to the scarcity of cases and literature on Islamic business ethics. Thirdly, compliance is the floor of ethics and is possibly complied for instrumental reasons rather than as part of the belief system. It is likely that ethical responsibility is ‘abdicated’ by the board because the Shariah committee is considered more qualified to handle such issues. Shariah governance framework ought to review to incorporate this responsibility as part of the responsibilities of the board.  Ethical parlance of the fish rotting from the head is most applicable in Islamic finance. The perception that ethics beyond compliance will be costly is reflective of a mindset that sees ethics as an aberration.  This cannot be the mindset of directors, officers and managers of Islamic financial institutions.