Islamic Approach to Economic Activity Has To Be Firmly Grounded In Ethics and Morality

By Moin Qazi, New Age Islam

14 September 2022

An Array Of Clerics, Bankers, And Legal Experts Has Used Scholarship, Enterprise And Ingenuity To Reconcile The Core Principles Of Islam With Conventional Finance So That Muslims Can Enjoy Access To The Same Services And Products As The Rest Of The World

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Islamic finance has emerged as an effective tool for financing development worldwide, including in non-Muslim countries. Major financial markets are discovering extraordinary evidence of Islamic finance having been already mainstreamed within the global financial system.

Islamic finance caught up fast even in the western world. Even though it is originally an eastern concept. Most of the large Western financial institutions have their own Islamic subsidiaries or, at the very least, Islamic “windows” or products aimed at their Islamic clientele. As proof of how many companies are compatible with Islamic law, there is now even a Dow Jones Islamic market index.

In recent decades an array of clerics, bankers, and legal experts has used scholarship, enterprise and ingenuity to reconcile the core principles of Islam with conventional finance so that Muslims can enjoy access to the same services and products as the rest of the world. The immediate trigger was the resilience of the nascent Islamic finance industry, which successfully weathered the storm that imploded the Western world's financial system. But even though these banks are prospering there are continued tirades of criticism and accusations of violation of the fundamental tenets of Islamic laws. 

Several Muslim scholars question how “Islamic” this approach is and whether it is an appropriate ethical alternative to mainstream investments. Or is it a creative way of transplanting conventional finance by using Islamic names for normal products and services? Or by tweaking the rules and other broad principles so that they don’t appear to hurt the core Islamic tenets. There is increasing evidence that very strict scrutiny of many; Islamic financial products would show stark deficiencies.

Many banks have shown that, with some creative finesse, a surprising number of Western financial products can be executed along the lines of Islamic law. But there is plenty of evidence in the criticism being made against western banks for using means that don’t essentially answer the questions that most clerics raise. The vast majority of clients who are not eligible for services from mainstream financial institutions but enroll with Islamic banks are depriving them of all types of banking services in the market purely because they feel these institutions are not being endorsed by the clerics.

Indeed, one of the most contentious issues that have vexed the minds of Muslims is the concept of interest. It still poses a big dilemma for moderate as well as liberal Muslims who are keen to become part of the modern-day economy but are still not fully convinced of what the divine laws say about the existing choices. Many f these individuals are opening are non -interest accounts with regular banks because the safety of funds is gu; guaranteed here. They don’t mind the loss of interest which is credited to the bank’s profits. Some wiser and good-intentioned Muslims engage with normal banks but they donate the interest earned to charities.

The Islamic clerics (ulema) have exhibited an ambivalent stand and have preferred to intelligently deflect questions relating to it. Not all Muslims are silent about it. Some of them are extremely outrageous in the matter of interest. Others feel that we need not be so rigid about it on account of an emerging economic ecosystem that has been keenly focusing on inclusive development.

Despite growing scholarship in the field of Islamic finance,  this field remains one of the greyest areas in both Islamic scholarship and practice. It has attracted a very small pool of researchers because the contours of Islamic finance are still quite hazy. . There are so many misplaced notions which is the reason why discussions on Islamic finance are fraught with serious moral implications for one's faith. There are also strong apprehensions of one getting trapped in acts of heresy.

The Muslim economic life, along with its political and social norms, is regulated by a code known as sharīʿah, literally, (the path leading to the watering place).  It is a body of Qur’an-based guidance that governs, among other things, a Muslim’s economic and social life, dictating how believers should conduct themselves. Although it is a huge corpus, very little of the wisdom in this religious code has been channeled into evolving laws on Islamic finance.

The principles of Islamic finance are universal: you cannot make money off money. No one can charge or pay interest, or invest in items that Islam forbids such as alcohol and gambling.

As opposed to conventional banking, depositors in Islamic banks eschew interest at all levels of financial transactions and participate in risk-sharing between the lender and borrower. 

Islamic banks are typically funded by current accounts, which do not receive interest, and profit-sharing investment accounts, on which investors receive a return determined by the eventual profitability of the bank or the pool of assets financed by these accounts.  Central to Islamic finance is the fact that money itself has no intrinsic value; it is simply a medium of exchange

Cynics conclude that in many respects Islamic finance looks and acts exactly like its conventional counterpart, but disguises its operation with creative financial engineering to give the products a pious dressing. 

Islamic finance attracts mostly those clients who are driven by spiritual imperative; others who prefer better returns normally compromise on the terms, replacing the fear of God with the fear of exposure and retribution on earth. The returns in Islamic banks are truly low and most of those who are investing in these banks are highly pious people with a very strong conscience and faith. But some have no idea that there are alternatives that can improve the yield of their investment. Most of those investors who are averse to banking with Islamic banks are primarily on account of this reason.

Countries with large Muslim populations have still not been enthused by Islamic finance because of low returns. The greatest disincentive for big businesses is that in Islamic finance they have to eschew higher returns (foregoing interest on deposits for example) for religious reasons.

In several developing countries, particularly Bangladesh, banking has played a pivotal role in eliminating poverty and uplifting the lives of impoverished populations. However, in several   of these economies, there is still no unanimity on the correct meaning of the term “Riba.” Some prefer to translate it as interest.  Others believe that accepting the term as the modern equivalent of riba, particularly on account of modern finance having been cleansed of the element of usury and its coercive character, would amount to a very superficial interpretation of a term that has multiple layers and colours.

Riba, according to this school, has a sinister connotation and operates with the use of coercive informal practices followed by rapacious moneylenders. Riba is more broadly defined as a prohibition against unjust enrichment or advantage gained by a lender without taking the risk. For example, in conventional financing, a borrower must pay interest to the lender on the loan even if the borrower's business is unsuccessful. This structure does not comply with sharia because the lender did not exert to earn the additional funds and is not sharing risks.

Riba does not prohibit parties from earning a return on their investments but this return must be based on the profitability of the business. Riba also prohibits transactions with guaranteed returns. According to the Qur’an, “The world can survive with justice and unbelief, but not with injustice and belief.” As a result, the Islamic system emphasizes ethical and equitable modes of financing. Wealth creation is encouraged, but ‘super-normal’ profits are not.

In Islamic economic theory, money is merely a medium of exchange, not a commodity to be traded. It has no intrinsic value and should therefore not grow over time. Idle cash cannot be a source of guaranteed income. Money has to be invested entrepreneurially so that both the health of the economy and individual well-being is enhanced.

Islam regards Interest, in whatever form -either disguised as “commission,” a fixed or variable add-on, or a discount‒as usury and speculation as gambling. In addition to the prohibition of riba, several other important provisions govern financial transactions. These include the prohibition of “gharar” (uncertainty or asymmetrical information), “may” (gambling, speculation),  activities and transactions involving alcohol and pork-related products, but also armaments, gambling, pornography, and other activities deemed socially detrimental, like hoarding Justice, partnership, and opposition to excessive risk are the main principles guiding Islamic banks.

The proponents of Bangladesh and India's women's self-help groups that use the same social concept of Islamic financial services are similar to any other type of socially responsible or ethical investing. In this case, they tend to fulfill three criteria: no explicit interest; transactions can't be in areas such as gambling, pork, or pornography; and they can't be deemed to carry high risk. Islam also emphasizes that the business ventures must be carried out in true Islamic ethos of honesty, piety, and trust. The basic instruments of Islamic finance include profit-sharing (mudaraba), cost-plus financing (murabaha), partnership (musharaka) leasing (ijara), and forward sale (bay’salam).  These constitute the basic building blocks for developing a wide array of more complex financial instruments.

Many pragmatic Muslim bankers and financiers have argued that the Islamic injunction is aimed specifically against usury rather than interest. They say Prophet Muhammad was opposed to the loan-sharking techniques employed by money changers in the lawless markets of Mecca before the establishment of Islam. The liberalists say that there is nothing wrong with charging a reasonable price for the use of funds for some time. They argue that the Qur’anic prohibition applies to overcharging and usury, not money-market funds or interbank lending rates. In short, Islam strictly prohibits exploitation in any form including finance under Islamic law.

One unique feature of public banks in India is that they offer appropriate loan products that are affordable to the poor, self-employed, and farmers. Similarly, in the case of defaulters, if a default is not wilful and deliberate and is on account of genuine circumstances, and is eligible for restructuring of the loan terms restructured or waived the loss or partial loss of interest on the defaulted amount is absorbed by the banks. Financial services must be tailored to the needs of such marginalized families.

A serious objection against the prevalent model of Islamic banking is that interest is being charged by several financé providers in the guise of a service fee. In normal cases also loans from Islamic banks are much costlier than those from conventional financial institutions, particularly public banks. 

One issue that needs serious introspection by the entire Muslim comm.;u it is that if we believe the Islamic banks find several impediments in non-Muslim countries,   how can we justify the collapse of so many Islamic financial institutions in India in recent times. We know full well that petty investors have been duped in the past in a big way by hustlers claiming to offer Islamic financial services. The money these people lost was hard-earned precious life savings. The protagonists of Islamic banking must offer a satisfactory explanation. They need to be more robust in monitoring and supervision.

This is possible when we can hope to inject a universal or religious morality into the marketplace. There is an Arabic saying that states that “some people feel no shame, only fear,” a rather more pithy way of echoing Hobbes' assertion that the social contract is forged because of people's fear, and is enforced by fear. In the absence of a religious motivation to act responsibly as a client or a money manager and a sound conscience that is not susceptible to worldly temptations, strong regulation presents itself as the only possible deterrent.

Sadly, there is a huge disconnect between the ethics and principles of Islamic finance and the actual practices of Islamic finance institutions. The loss of credibility that Islamic finance suffered in recent times in parts of  Asia points to a glaring ethics deficit in such bankers. In many cases, there was a total breakdown of the system with weak adherence to fundamental ethical principles by promoters who picked up lavish bonuses and financed their political buddies.

Islamic banks have traditionally established sharia boards, employing scholars to rule on whether their products and processes do not infringe Islamic principles. The scholar needs to have expertise both in religion and finance –a strange combination. There is a severe dearth of this expertise. In India, most Islamic banks collapsed because managements hired dubious and pliant scholars to endorse equally dubious products. This left unchecked space for them to dabble both with financial and religious wizardry. Unlike secular countries like India, Muslim countries have a national body such as a central bank or capital market regulator that appoints and oversees a sharia board that is independent of financial institutions.

The situation in India is much different. We do not live in an Islamic state. The spate of failures of Islamic banks in India has caused untold suffering to small depositors. There is no alternative except to transact with conventional banks. There are few reliable and authentic Islamic financial institutions but they have very limited outreach. Moreover, the common Muslims themselves are increasingly wary of Islamic banking for all kinds of reasons.

Modern-day banking has emerged out of the wisdom gleaned over the ages and is a direct weapon for eradicating usurious and unscrupulous moneylenders who have turned borrowers into slaves and stripped them of all their self-dignity. It will be grossly unfair to equate modern banking with money lending. Moneylenders are treated as outcasts in the formal financial system. They have no presence in the universe of civilized finance.  Islamic economic theory may have some answers to the thorny dilemma of balancing the free market with the protection of the vulnerable.

Development banking is very professionally operated, and in developing economies, interest rates are subsidized to enable individuals and institutions to set up their livelihood businesses. The giant leaps in all spheres of life have been powered by financial institutions that have promoted healthcare, education, entrepreneurship, self-employment, and a host of services that have profoundly influenced human life.

If puritans feel conventional banks can’t fulfill the religious requirements, a choice has to be offered to common Muslims. This will require deep introspection among all stakeholders and ways of ensuring that we learn from the failures of the past. It will also need a conscientious understanding that finance is only one aspect of Islamic banking but the other more important aspect is ethics. All the stakeholders: the flag bearers of sharia, proponents of Islamic finance, academics, jurists, and the global banking community will have to acknowledge that mere debates, slogans and pledges won't work. What Islamic finance strongly needs is not money but morality among both the staff and clients. It is an issue that concerns the financial well-being of a large population.

 Islamic finance is not necessarily an end in itself, but it does serve to remind me of the need for humane banking, the elimination of moral hazard, and the reassessment of assumptions that speculators and derivatives add more value than they destroy.  

But are the ideals of Islamic finance reflected in the industry? The ground reality of Islamic finance remains disturbing. Most big defaulters are well-connected tycoons and have the money to employ legal eagles who can play the judicial system—it is here the law flounders. India has some of the most draconian laws in books; they are ineffective against powerful dodgers. Why should ordinary people bear the burden of fat cats? These freeloaders are remorselessly winnowing scarce bank capital. The government has to dress up the balance sheets of the banks to make them appear healthy so that they can lend again. Ironically, instead of being chastised, the wayward borrowers are lauded as captains of the industry. It makes no sense for us to discuss financial discipline when we are far away from times when the world was ruled by these sharks.

Yet not everything is bleak for Muslims. Several noble and good-intentioned Muslim leaders are opening small ff cooperatives which are run broadly on Islamic line and are trying to infuse moral ethics rather than financial knowledge emphasising that the money they take from the bank is somebody else's deposit and once it comes back it has to be recycled to another need Muslim for small business.it is a combination of financial and moral literacy.

But since these o-operatives are mostly governed by a government that normally has little idea of financial governance. We will have to devise ways of insulating these small institutions from political influences. The stark reality is that most such c-operates are promoted by politicians. Islamic economics and concomitantly all concepts and businesses ideas growing out of its seeds and roots have not been able to still come close to even guesswork of a system that has the potential for success. The ideas being cycled into Islamic financial activities do not stand up to serious scrutiny. The Islamic approach to economic activity has to be firmly grounded in ethics and morality. Surely the time has come to emphasise broader ethical principles over adherence to arcane contractual mechanisms.

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Moin Qazi is the author of the bestselling book, Village Diary of a Heretic Banker. He has worked in the development finance sector for almost four decades.

 

URL:    https://newageislam.com/islamic-culture/islamic-economic-ethics-morality/d/129314

 

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