Ethics in Islamic Finance: A Methodological Framework

Saturday, June 25, 2016: 9:00 AM-10:30 AM
87 Dwinelle (Dwinelle Hall)
Habib Ahmed, Durham University Business School, Durham, United Kingdom
While the growth of Islamic financial industry during its short history has been impressive, there is a general feeling that Islamic finance has failed to fulfill the social and ethical goals of Shari’ah. In order to comprehend the criticisms labeled against the industry, there is a need to have a clear understanding of the notion of ‘ethics’ in Islamic thought in general and Islamic economics and finance in particular. Most of the literature on Islamic business ethics, however, outlines the ethical values derived from the Islamic texts and literature. For example, Ishak and Osman (2015) review empirical literature and identify the some key Islamic ethical values which included honesty, sincerity, good intention, responsible, justice, brotherhood, optimistic, cooperation, consistence, accountable, etc.. Sidani and Al Ariss (2015) examine the writings of a classical scholar Al-Ghazali and identify four themes related to business ethics.
Another strand of literature asserts that Islamic ethics is integrated with the legal and, as such, Islamic law is closely intertwined with morality. This is because the source of both morals and laws is Shari’ah, which entails all the core teachings of Islam (Carney 1983, Reinhart 1983). As such, Islamic ethics signifies ‘divine command ethics’ and its ‘value is determined solely by reference to commands or statements issued by a superior (here, God) and justified by their point of origination (in God)’ (Kelsay 1994: 117). This approach, however, would fail to assess the ethicality of new issues arising in modern economies and financial sector.
Unlike the conventional literature on theoretical foundations of ethics, to the best of my knowledge no paper has examined Islamic ethics from a methodological perspective. This paper fills this gap by providing a theoretical framework of ethics in Islam in general and its application in Islamic finance in particular. The framework will use principles and concepts from Islamic law and legal theories to make it authentic and acceptable from Shariah perpsective. The suggested framework of understanding Islamic ethics will have the following four elements.
First, the framework will distinguish between the notions of ethics and legality by examining the classification of Islamic jurisprudence of hukm taklifi. Accordingly, any human act will fall under one of the following five types (al-ahkam al-khamsa): obligatory (wajib or fard), recommended (mandub), permissible (mubah), reprehensible (makruh) and forbidden (haram) (Al Zuhayli 2003: 51, Carney 1983: 161, Reinhart 1983: 195). Kamali (2008: 47) contends that while the first and last types of activities (wajib and haram) have legal force, the remaining three activities fall in the domain of morals. It can be concluded that the moral teachings in Islamic will take the form of promoting the recommended (mandub) and avoiding the reprehensible (makruh).
Second, the framework will outline the basics of Islamic legal theory (usul al fiqh), the formal science dealing with the principles of interpretations of the legal texts, methods of reasoning and deduction of rules (Masud 1995: 20). One of the key goals of using usul al fiqh is ensure canonicity that links new rulings to the Shariah texts (the Quran and Sunnah).
Rulings that fail to use link to Islamic values and principles outlined in Shariah texts are deemed to lack legitimacy and authenticity.
Third, the paper will identify the Islamic legal methods that can be used to develop judgments for two types of ethical matters. First, textual ethics are rulings that have references in Shariah texts. While there are some clear indications about morality in the texts, others are implied indirectly. Example of a clear recommendation is found in the Prophetic sayings “Feed the hungry, relieve the distressed and visit the sick” (Khan and Hasan undated: 100). An example of an indirect implied norm can be observed in the saying of the Prophet (PBUH) “Oh God, I seek your refuge in You from niggardliness” (Khan and Hasan undated: 84). The implication of the above hadith is that niggardliness is a morally reprehensible act and as such should be avoided. Similar conclusions can be drawn from the verses of the Quran. As mentioned above, most of the literature take this approach to identify ethics in Islamic texts and literature.
Finally, the paper will outline the methods that can be used to assess ethics that are non-textual. The paper argues that the appropriate way to assess the ethicality of novel and non-textual issues arising in contemporary economies would be to use legal maxims (quwaid al fiqh). Legal maxims evolved over a period of time and entail the essence of Islamic law. Most quwa’id are general principles reflecting the essence of Shari’ah and based on recognized reference in the Quran or Sunnah (Dien 2004: 113). Legal maxims play an important role in the development of Islamic law as they reflect the spirit of Islamic law and can be linked to the overall goals or maqasid (Kamali 2006). Whereas quwa’id are too general to qualify as legal rule or requirement, complying with them can be considered a moral/religious obligation.
The paper will present examples to show the ethical implications of key maxims for Islamic financial transactions. This will be done at two levels. First, general maxims providing the underlying essential features of Shariah will be outlined. These include the fundamental maxim that captures the essence of Islamic law ‘promotion of welfare or benefits and prevention of harm’ (Heinrichs 2002: 372, Dien 2004: 3; Kamali 2008: 32, 35) and also ‘the fundamental requirement in every contract is justice’. Second, specific maxims related to transactions will be presented. For example, the legal maxim ‘in contracts, attention is given to the objects and meaning, and not to the words and form’ provides the guiding principle of devising contracts in financial transactions. Similarly, the ex-ante and ex-post ethics of a transaction can be deduced from other maxims. For example, the maxim “actions are judged by their underlying intentions” provides the basis for judging intention in all activities (Kamali 2006: 80). Thus, an intention of coming up with an illicit act using a valid contract would not only be unethical but can also be considered void.