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Home > Business Ethics Checklists > Business Ethics in Islamic Finance

Business Ethics Checklists

Business Ethics in Islamic Finance


Checklist Description

This checklist summarizes how Islamic business operates within the strict moral values and principles enshrined in shariah law.

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Definition

The overarching principles of Islam set the operating framework for every aspect of how business is conducted in the Muslim world. While the shifting boundaries of acceptable behavior in conventional Western business are set by laws, regulations, and corporate governance guidelines, Islamic business is governed by divine principles covering values such as fairness, equality, and morality dating back more than a thousand years. More specifically, Islamic finance adopts a long-term partnership approach between businesses, often based on investors essentially taking an equity stake in businesses. Shariah law outlaws the charging of interest of any kind, while in the wider context the use of money to generate interest is not permitted. Speculation of any kind is also forbidden, while investments are required to deliver social benefits to the community. Islam also forbids activities in prohibited areas such as gambling or alcohol, instead specifying that shariah-compliant businesses should focus on legitimate trade-based activities.

The ethical standards to which Islamic businesses operate reflect the same standards and principles of the Qu’ran, which every Muslim is expected to follow in every aspect of their lives. Therefore, Islamic businesses must operate on a basis of fairness and integrity, while treating everyone equally. The need for honesty, truthfulness, and fair dealing is inherent in Islamic business, requirements which have wide-ranging implications across the full spectrum of business activities, from advertising to after-sales customer service. Islamic companies must also respect the principle of trusting others to be as good as their word. However, this puts the responsibility on businesses to cover their liabilities promptly, honoring their word with timely payment, given the exclusion of credit facilities. The emphasis on the partnership approach to business is further underlined by the need for companies to look after their investors’ interests, thus protecting them whenever possible from dharar (any kind of harm). The “stakeholder” element of Islamic financing is reflected in the onus on working in tandem with other businesses whenever possible, while markets should generally be free and prices competitive. For example, attempting to squeeze suppliers on price would be unacceptable behavior, as would any attempt to capitalize on others’ misfortune by raising selling price excessively should, for example, the supply of goods be temporarily interrupted.

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Advantages

  • Business ethics in Islamic finance reflect the moral principles and standards which every Muslim must follow in every aspect of their lives.

  • Islamic business encourages a long-term partnership approach, based on mutual interest and a spirit of cooperation.

  • Honestly, integrity, and a sense of genuine fair play are ingrained in the operating principles of Islamic business.

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Disadvantages

  • Muslim businesses may be less able to capitalize on short-term market opportunities given that speculative activities are not permitted by Islamic ethical standards.

  • Islamic business managers do not enjoy the same financial incentives which drive managers of many mainstream Western businesses, though they are motivated by moral objectives and standards.

  • Given the moral and ethical goals of Islamic businesses—rather than the pursuit of pure profit—less efficient businesses (in purely financial terms) could hamper the development of newer, more entrepreneurial, customer-focused start-ups.

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Action Checklist

  • In view of the increasing global influence of Islamic finance, companies aiming to do business with shariah-compliant organizations should gain some understanding of their guiding principles and ethics.

  • Understand the importance for Islamic business of building long-term partnerships, rather than the pure pursuit of short-term profit.

  • Compliance with Islamic principles may create complications for non-Muslims in the short term. However, it is important to understand that Islamic business aims to bring collective benefit to wider society.

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Dos and Don’ts

Do

  • Recognize the importance that Islamic business ethics place on high moral values, while bringing collective benefit to the wider community, rather than the objective of making short-term profits.

  • Appreciate that while high ethical standards are enshrined in the principles of Islamic businesses, the interpretation of the conformity of some financial products to shariah law may vary slightly between institutions.

Don’t

  • Don’t make the mistake of thinking that conventional Western business ethics are fully compatible with the ways of Islam: managers shouldn’t enter into partnerships with Islamic businesses without first understanding and appreciating how attitudes to the pursuit of profit differ.

  • Don’t adopt a “pick-and-mix” approach to business ethics: the way Muslim businesses operate reflects their owners’ deep-rooted attitudes, beliefs, and commitment to the principles of Islam.

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Further reading

Books:

  • Ayub, Muhammad. Understanding Islamic Finance. Chichester, UK: Wiley, 2007.
  • Iqbal, Zamir, and Abbas Mirakhor. An Introduction to Islamic Finance: Theory and Practice. Singapore: Wiley, 2007.

Articles:

  • Parvez, Zahid. “Lack of business responsibility: An Islamic perspective.” International Journal of Business Governance and Ethics 3:1 (January 2007): 42–45. Online at: dx.doi.org/10.1504/IJBGE.2007.011933
  • Rice, Gillian. “Islamic ethics and the implications for business.” Journal of Business Ethics 18:4 (February 1999): 345–358. Online at: dx.doi.org/10.1023/A:1005711414306

Website:

  • International Institute of Islamic Business and Finance (IIIBF): www.iiibf.org

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