Ethical Dimensions in Islamic Business: Realities and Challenges 9 th -11 th July 2012 / The Westing Langkawi Resort & Spa, Malaysia
Ethics and Islamic Finance in Malaysia Regulatory Perspective
Muhammad Adli Musa !
Abstract
This paper argues that the Islamic Banking Act 1983, the Shar!ah Advisory Council (SAC) and the Shar!ah Governance Framework for Islamic Financial Institutions issued by Bank Negara Malaysia provide not only legal but also ethical guidelines for players in the Islamic finance industry in Malaysia. The paper first explores the complex relationship between ethics and Islamic law and posits that the shar!ah should not be solely synonymous with Islamic law per se, but should encompass ethics as the shar!ah defines both legal and ethical obligations. The paper then briefly examines the Islamic Banking Act 1983 and the Shar!ah Governance Framework for Islamic Financial Institutions and argues that ethical considerations are in place though obscured by legal technicalities and plagued by challenges of implementing and monitoring ethics. In consideration of the SACs significant role in Islamic finance in Malaysia, the views of three SAC members on issues related to ethics and Islamic finance were sought. It is evident that the SAC is aware and considers ethics as integral to Islamic finance though conceding to the fact that ethics seems to have been sidelined due to various reasons. This paper concludes that Islamic financial institutions are business entities that are expected to manifest Islamic ethics in their operations and unlike other businesses, which do not employ this Islamic label, there would naturally be more focus and scrutiny on institutions labelling their products and services as Islamic.
1.0 Introduction
Islamic financial institutions are business entities, which are expected to manifest Islamic business ethics in their operations. Furthermore, the Islamic label calls for those institutions to behave in conformity with Islamic values. Unlike other businesses, which do not employ this Islamic label, there would naturally be more focus and scrutiny on institutions labelling their products and services as Islamic. In relation to this, Usmani (2002, p.116) says:
for being Islamic it is not sufficient to design the transactions on Islamic principles. It is also necessary that the outlook of the institution and its staff reflects the Islamic identity quite distinguished from the conventional institution. This requires a major change in the general attitude of the institution and its management.
! Ph.D. (Islamic Studies) Candidate, Asia Institute, The Faculty of Arts, The University of Melbourne Academic Fellow, Department of Qur"n & Sunnah Studies, Kulliyyah of Islamic Revealed Knowledge & Human Sciences, International Islamic University Malaysia. 2 Islamic obligations of worship as well as the ethical norms must be prominent in the whole atmosphere of an institution which claims to be Islamic.
Proponents of Islamic finance claim that all Islamic financial transactions are governed by norms of Islamic ethics as enunciated by the shar!ah and that in essence is ethical (Obaidullah, 2005, p.15). Furthermore, Islamic finance also claims to be based on a system of ethics derived from revealed and divine texts, which are then applied through shar!ah law (Walsh, 2007, p.753). It is posited that the stark difference between Islamic and conventional financial systems is that the former has to preserve certain social objectives in line with Islamic ethics, while the latter need not be concerned with the moral implications of their business ventures (Venardos, 2005, p.59). Moreover, it is suggested that Islamic finance emphasises on community values, socio-economic justice and a balance between material and spiritual needs of human beings (Elmelki, 2009, p.126). Therefore, Islamic financial institutions are considered to be ethical since the foundation of their business philosophy is grounded in the shar!ah, often referred to as ethics in action, which is concerned with promoting justice and welfare (al-adl wa al-i!s"n) in society and seeking Gods blessing (al-barakah) (Haniffa, 2007, p.129). Islamic finance is seen as representing an assertion of religious law in the area of commercial life (Ruthven, 2000, p.19), and these legal rules pertaining financial transactions encompass both ethics and law (Ruthven, 2000, p.23), and is driven by the aspiration to apply classical law that still commands overwhelming authority and prestige among Muslims (Ruthven, 2000, p.26).
The institutionalisation of Islamic finance should be a means to fulfil the social responsible goals of the Islamic financial system, based on the abolition of rib"; prohibition of dealings in !ar"m; adoption of negative screening criteria in investment selection; elimination of gharar; prohibition of fraudulent and deceptive practices; risk and profit sharing; promotion of moderation, balance and harmony; and assistance of the underprivileged through zak"h and "adaqah (Dusuki, 2011, pp.xii- xiii).
Having said all the above, El-Gamal (2006, p.xi) observes that modern Islamic finance aims to replicate in Islamic forms the substantive functions of contemporary financial instruments, markets and institutions, which has arguably caused its failure in serving the objectives of the shar!ah (maq""id al-shar!ah) and economic purpose. He proposes that attention should instead be given to the substance of Islamic finance rather than form, which would subsequently shift the current paradigm of Islamising every financial practice to emphasising on the social and economic ends of financial transactions (El-Gamal, 2006, p.xii). Similarly, Foster (2009) calls for the reconsideration of aims, institutional frameworks and contractual methodologies of the modern Islamic financial sector in order to provide a genuine alternative to the current operating financial systems. It is quite alarming to observe that recent debates on the practice of Islamic finance highlight the increasing divergence between theory and actual practice, as critics argue that faith-based ethical principles are being overridden by Islamic financial institutions pursuit of profit maximisation and shareholder value (Barom, 2008, pp.498-499). However, it is contended that when the benchmark of corporate performance is money, it is often difficult to place ethics before self-interest, even when an Islamic system is in place (Rosly, 2003, p.1249).
3 2.0 Islamic Law and Ethics
Islamic law, shar!ah and fiqh are often used interchangeably without any distinctions made between them. This has caused a degree of confusion and it is pertinent to distinguish these terms (Abdal-Haqq, 2006, p.3). The word shar!ah is etymologically derived from the root sh-r- meaning road (Nasr, 1966, p.93). Literally, shar!ah means the path to the watering place (Kamali, 2007, p.149). Shar!ah is often associated with revelation (Kamali, 2007, p.149), hence it is considered to be eternal, immutable and unchanging (El Fadl, 2005, p.150). It is also sometimes known as Sacred Law (Schacht, 1964, p.1) or Divine Law, which embodies Divine Will that dictates how man should live both in private and in public (Nasr, 1966, p.93). Nasr (1966, p.94) describes shar!ah as the law according to which God wants a Muslim to live. On the other hand, fiqh means human understanding and knowledge (Kamali, 2007, p.149). It is primarily concerned with the knowledge of the detailed rules in various branches of Islamic law and is also known as the law per se (Kamali, 2003, p.2). Fiqh is in fact the process of deducing and applying shar!ah principles and injunctions (Abdal-Haqq, 2006, p.5). Since it is a human rational endeavour and mostly based on speculative reasoning (Kamali, 2007, p.149), fiqh unlike shar!ah, is not divine and thus not eternal, immutable or unchanging (El Fadl, 2005, p.150). It can be expressed that shar!ah is grounded in revelation (wa!y), while the human effort to deduce and apply the shar!ah, known as fiqh, rests on human reason (aql). Together, shar!ah and fiqh, form the basis of Islamic law.
Some would argue that Islamic law, as evident from the term itself, is very much legalistic in nature. This might be true if one were to concentrate on the fiqh aspect of Islamic law, which is particularly concerned with detailed rulings. For example, in examining the issue of rib", Saeed (1996, pp.37-40) observes that the fuqah", to a certain extent, disregarded the ethical framework within which the Qur!n and Sunnah appear to have dealt with the issue resulting in the lack of moral emphasis in the fiqh interpretation of rib" . It is also claimed that details and specifics take precedence over the ethical and moral objectives of the shar!ah as embodied in the Qur!n due to the lack of efforts at analyzing the ethical principles enunciated in the Qur!n (El Fadl, 2005, p.156). This has resulted in calls to disentangle Islamic ethics from medieval Islamic law, understand the primary sources of Islam; the Qur!n and Sunnah in its historical context, and treat the Qur!n as a complete ethical system as the basis to derive new principles of shar!ah on various issues (Hashmi, 2002, p.148).
Nevertheless, Johansen (1999) argues that fiqh classifies and sanctions human acts and provides ethical and legal guidance to Muslims. Reinhart (1983, p.186) also claims that if Muslims were asked which science determines ethical action, no doubt their answer would be fiqh. Furthermore, Hourani (1985, p.1) suggests that Islamic normative ethics was elucidated in books of fiqh and the purpose of such books was ethical in a modern sense. In contrary to the view that the fuqah" to a large extent disregarded ethics, Sachedina (2009, p.7) suggests that the fuqah" were fully aware of the moral foundations attached to the religious duties incumbent upon Muslims and that their research relied upon substantial consideration of different moral facets. Sachedina (2009, p.7) further claims that the validity of the fuqah"s judicial decision rested on their ability to deduce universal moral principles. Masud (2002, pp.139-140) posits that fiqh generated moral obligation more than legal right, and that it evolved to 4 become synonymous with shar!ah vis--vis Divine Law that defined both moral and legal obligations. The following quotation sums the claimed relationship between fiqh and ethics:
In Islamic jurisprudence ethical values are integral to the prescriptive action guide that the system provides to the community. No legal decisions are made without meticulous analysis of the various factors that determine the rightness or the wrongness of a case under consideration. The universal major premise provided by the scriptural sources the Quran and the Tradition that serves as known is part of the divine commandments regarding the good that must be obeyed and the evil that must be avoided. There is an inherent correlation between Gods command in the revelation and the moral reasoning that undergirds the command that is acknowledged by reason as being good. (Sachedina, 2009, pp.7-8)
In reality, though fiqh is considered a means of realizing ethics, which is in fact acknowledged as the core of the shar!ah by textual sources of Islam (Kamali, 2009, p.35), most fiqh literature are very legalistic in nature and in effect the ethical objectives of the shar!ah seem to have been obscured if not ignored. It appears that while the fuqah" concentrated their efforts to formulate detailed and specific rules in relation to human action, the underlying objectives of such actions, which should in fact be ethical, were not extensively elaborated. Bearing in mind that the shar!ah is considered as the divine guidance pertaining to the dogma of Islam, its moral value and its practical legal rules (Kamali, 2007, p.149), fiqh might have been treated distinctively as practical legal rules and the issue of dogma and ethics were left to the discussion of the scholars of ilm al-kal"m and ilm al-akhl"q respectively. If such is the case, then it is not surprising to observe the lack of moral emphasis in the discussion of various branches of law that fall under the purview of the fuqah".
The realization that classical fiqh literature inadequately analysed ethical principles enunciated in the primary sources of the shar!ah in formulating detailed and specific rulings can be attributed to the current attention being given to maq""id al-shar!ah (objectives of the shar!ah). Instead of concerted efforts to determine the ilal (effective causes) of original rulings found in sources of the shar!ah, it is also pertinent to discern the !ikam (objectives) of such rulings to gain a comprehensive understanding of the goals and purposes of the shar!ah. In addition, the science of u"#l al-fiqh (principles of fiqh) has evolved to become too technical and literal that renders it static to the changing conditions of society (Kamali, 2009, pp.23-24). In comparison, Kamali (2009, pp.23-24) claims that maq""id al-shar!ah provide tools to manifest underlying values of Islamic law and are inherently dynamic to adapt with evolving conditions of society. Auda (2008, p.xxvii) argues that:
Current applications (or rather, mis-applications) of Islamic law are reductionist rather than holistic, literal rather than moral, one-dimensional, binary rather than multi-valued, deconstructionist rather than reconstructionist, and casual rather than teleological. There is a lack of consideration and functionality of the overall purposes and underlying principles of the Islamic law as a whole. Moreover, exaggerated claims of rational certainty (or else, irrationality) and consensus of the infallible (or else, historicity of the scripts) add to lack of spirituality, intolerance, violent ideologies, suppressed freedoms, and authoritarian regimes.
El Fadl (2005, p.158) also posits that the objective of Islamic law is to achieve the ultimate moral and ethical objectives intended by the shar!ah and not the application of technicalities regardless of their consequences. Having said that, El Fadl (2001, 5 p.139) observes that there is a rising trend to negate the role of akhl"q in contemporary Islamic discourses, as the only emphasis is law and nothing beyond the law. El Fadl (2001, p.139) continues to say that akhl"q has been reduced to a term that describes the prescriptions of the law, but it neither informs the law nor carries any weight for Muslims.
It is indeed absurd to divorce ethics from Islamic law, as the shar!ah, which is an integral part of Islamic law, is very ethical in nature due to its affinity with revelation grounded in the Qur!n and Sunnah. In fact, Rahman (1966, p.33) describes shar!ah as moral law, which is immutable and that submission to it is Islam and its implementation is ib"dah (worship). Among the three divisions of the shar!ah; theology (kal"m/aq"id), ethics (akhl"q) and practical rules (fiqh), the nu"#" (textual sources of Islam) regard ethics as the core (Kamali, 2009, p.35). This exhibits that ethics plays a central role and is in fact part and parcel of the shar!ah. Ethics and law are in fact inseparable and both serve to guide man to lead a life according to Divine Will.
3.0 Bank Negara Malaysia
Bank Negara Malaysias (BNM) role is to promote financial sector stability through the progressive development of sustainable, robust and sound financial institutions and financial infrastructure. It is also explicitly mentioned that BNM formulates and implements policies and strategies towards building and positioning Malaysia as a premier integrated Islamic Financial Centre. To enable BNM to meet the objectives of a central bank, it is vested with comprehensive legal powers under various legislations to regulate and supervise the financial system, which include the Islamic financial industry through the Islamic Banking Act 1983 and the Tak!ful Act 1984.
3.1 Islamic Banking Act 1983
The Islamic Banking Act 1983, Section 2 defines an Islamic bank to be any company which carries on Islamic banking business and holds a valid license, while Islamic banking business means banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam. Section 3(5) of the Act further states that BNM shall not recommend and the Minister of Finance shall not grant license for the establishment of an Islamic bank unless they are satisfied:
a) that the aims and operations of the banking business which it is desired to carry on will not involve any element which is not approved by the Religion of Islam; and b) that there is, in the articles of association of the bank concerned, provision for the establishment of a Shar"ah advisory body, as may be approved by the Central Bank, to advise the bank on the operations of its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam.
6 Section 11(1)(a) states that BNM may recommend and the Minister of Finance may revoke the license of an Islamic bank if it is pursuing aims, or carrying on operations, involving any element which is not approved by the Religion of Islam.
3.2 Shar!ah Governance Framework for Islamic Financial Institutions
It is stated in the Shar"ah Governance Framework for Islamic Financial Institutions (BNM, 2010, p.1) that Shar"ah principles are the foundation for the practice of Islamic finance through the observance of the tenets, conditions and principles espoused by Shariah. Furthermore, comprehensive compliance with Shar"ah principles would bring confidence to the general public and the financial markets on the credibility of Islamic finance operations (BNM, 2010, p.1). BNM claims that it places great importance in ensuring that the overall Islamic financial system operates in accordance with Shar"ah principles, (BNM, 2010, p.1), which is to be achieved through a two tier Shar"ah governance infrastructure comprising of the SAC and the Shar"ah Committee of each Islamic financial institution.
The main objective of the Shar"ah Governance Framework is to enhance the role of the board, the Shar"ah Committee, the management and other key relevant entities in an Islamic financial institution in relation to Shar"ah matters, which is ultimately aimed at attaining a Shar"ah based operating environment (BNM, 2010, p.2). The frameworks lists seven principles to be observed by Islamic financial institutions pertaining to Shar"ah matters (BNM, 2010, pp.5-27):
i. It is the duty and responsibility of an IFI to establish a sound and robust Shar"ah governance framework with emphasis placed on the roles of key functionalities in ensuring effective implementation of the Shar"ah governance framework ii. An IFI shall set out the accountability and responsibility of every key functionary involved in the implementation of Shar"ah governance framework. iii. Independence of the Shar"ah Committee shall be observed at all times in exercising their duties to make objective and informed judgment. iv. Any person bearing responsibilities outlined in the Shar"ah governance framework for an IFI shall possess the necessary competency and continuously enhance their knowledge and understanding on the Shar"ah as well as keep abreast on the latest developments in Islamic finance. v. Internal and privileged information obtained by the Shar"ah Committee members in the course of their duties shall be kept confidential at all times and shall not be misused. vi. Professional ethics, judgment and consistency shall be maintained in ensuring Shar"ah compliance. vii. There shall be a robust Shar"ah compliance function, comprising review and audit functions, supported by risk management control process and internal research capacity.
7 3.3 Shar!ah Advisory Council
The Islamic Banking Act 1983 uses the term element which is not approved by the Religion of Islam. What is actually meant by this? Who decides what elements are disapproved by the Religion of Islam and on what basis such can be established? It seems that the highest Shar"ah authority in Islamic finance in Malaysia is the Shar"ah Advisory Council (SAC) of BNM:
The Shar"ah Advisory Council of Bank Negara Malaysia (SAC) was established in May 1997 as the highest Shar"ah authority in Islamic finance in Malaysia. The SAC has been given the authority for the ascertainment of Islamic law for the purposes of Islamic banking business, tak!ful business, Islamic financial business, Islamic development financial business, or any other business, which is based on Shar"ah principles and is supervised and regulated by Bank Negara Malaysia. As the reference body and advisor to Bank Negara Malaysia on Shar"ah matters, the SAC is also responsible for validating all Islamic banking and tak!ful products to ensure their compatibility with the Shar"ah principles. In addition, it advises Bank Negara Malaysia on any Shar"ah issue relating to Islamic financial business or transactions of Bank Negara Malaysia as well as other related entities.
In the recent Central Bank of Malaysia Act 2009, the role and functions of the SAC was further reinforced whereby the SAC was accorded the status of the sole authoritative body on Shar"ah matters pertaining to Islamic banking, tak!ful and Islamic finance. While the rulings of the SAC shall prevail over any contradictory ruling given by a Shar"ah body or committee constituted in Malaysia, the court and arbitrator are also required to refer to the rulings of the SAC for any proceedings relating to Islamic financial business, and such rulings shall be binding. (http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802)
The above would entail that the SAC has the vested authority to determine elements that are approved or disapproved by the Religion of Islam in the Malaysian Islamic finance industry. The Central Bank of Malaysia Act 2009, Section 59(1) stipulates that the BNM may issue such written circulars, guidelines or notices on any Shar"ah matter relating to the Islamic financial business carried on by any Islamic financial institution in accordance with the advice or ruling of the SAC. In Section 59(2) and (3) of the Act, it is stated that Islamic financial institutions are compelled to abide by the circulars, guidelines or notices issued, and failing to do so is an offence and upon conviction shall be liable to a fine not exceeding RM3 million.
In consideration of the SACs significant role in Islamic finance in Malaysia, three SAC members were interviewed to gain an insight into how do they view Islamic business ethics in relation to Islamic finance. " All of the SAC members interviewed agreed that from an Islamic perspective, ethics is integral to business. In response to the question on the difference between Islamic and mainstream business ethics, SAC-1 and SAC-3 highlighted accountability to God. SAC-3 added the concept of khil"fah (vicegerency) as another distinguishing factor of Islamic business ethics where she describes wealth is something which All!h has entrusted to human beings,
" To maintain the anonymity of the SAC members interviewed, they will be referred to as SAC-1, SAC-2 and SAC-3 throughout this paper. The interviews were conducted separately at the offices of the respective SAC members between June and October 2010 as part of the authors qualitative data collection process for his Ph.D. research on Islamic Business Ethics in Malaysian Islamic Financial Institutions an Exploratory Study of Islamic Banks in Malaysia. 8 the resources are something that All!h has entrusted to us and we have to use it in an accountable manner. SAC-2 on the other hand was of the opinion that the stark difference between Islamic and mainstream or conventional business ethics is that the ultimate aim in business from an Islamic perspective is seeking the pleasure of All!h (mar#"till"h).
Specifically on ethics and Islamic finance, SAC-2 contended that in most cases ethics is universal. However, SAC-2 cautioned that not everything which falls under ethical finance can be considered Islamic:
I would say that not everything that falls within the boundary of ethical financing as it is termed by the West, lets say, is Islamic, no. You see, take for example interest, okay, rib", probably if your talk in ethical financing they say if the margin that you take is small, you see, to cover the cost and to make a little bit of profit, thats fine. That is not against the ethics. But from the Islamic point of view, no You see, whether (it) is small, big whatever, it is !ar"m, it is !ar"m. You see, its unethical its unethical. So not everything which is, which fall within that so-called ethical financing is Islamic. You see, but of course, ethics is part and parcel of Islamic finance, and I would very much like to see that people start talking about this aspect. I would say that this is one the aspects that we are lacking in Islamic finance.
When asked about the relationship between ethics and Islamic finance, SAC-1 made a remark that the word Islamic is a liability for the Islamic finance industry, as it demands that Islamic financial institutions be very distinguished in their conduct and that they should manifest that they are of higher ethical standards than their conventional counterparts. SAC-2 argued that Shar"ah compliancy entails adherence to Islamic ethics.
In describing the current practices of Islamic financial institutions in relation to Islamic business ethics, all of the SAC members interviewed concurred that the focus of Islamic financial institutions all these whiles has been on the Shar"ah compliancy of products and services offered, while less emphasis is beng given to the ethical aspect of Islamic finance. SAC-1 attributed this to the preoccupation of Islamic financial institutions to survive during the developmental stages of Islamic finance:
I think somehow Islamic finance has not been focussing on Islamic ethics in their business because they were, perhaps during the early stages of Islamic finance, they were focussed very much on the survival of the institution. So they paid less attention to the development of the Islamic ethics environment either at the board level or the shareholders, management, bank and customer relationship so I would say (that) in the past this has not be emphasised not because they are not important but because due to some other factors that pull them from focussing on this issue. But moving forward, Islamic finance should be characterised by Islamic ethics because Islamic ethics can compliment (the) Shar"ah compliant aspect of the bank
SAC-2 and SAC-3 were of the view that at the moment there seems to be no difference between Islamic and conventional finance except for Shar"ah compliancy. SAC-3 posited that though the products and services offered by Islamic financial institutions are Shar"ah compliant, the spirit behind Islamic finance seems to be lost. She points out to another problem where Islamic financial products and services are packaged in a similar way to those offered by conventional banks to the extent that customers are unaware of the underlying differences between Islamic and conventional products and services. This SAC-3 attributed to the human factor, where 9 a large number of those involved in the Islamic finance industry was conventionally trained. SAC-2 also mentioned this point and added that those in the Islamic finance industry tend to have the same way of thinking with those involved in conventional finance, where their ultimate goal is to pursue profits. SAC-2 said that this is evident in the imbalance between microfinance and corporate finance products and services offered by Islamic financial institutions.
When queried on the proposition that an emphasis on ethics might pave the way for improved long-term value of Islamic financial institutions, SAC-1 opined that research has to be done to prove the co-relation between the observance of good ethics and the performance or sustainability of Islamic financial institutions before this whole idea can be promoted. SAC-2 and SAC-3 on the other hand unequivocally agreed that good ethics would pave the way for improved long-term value of Islamic financial institutions. SAC-2 posited that ethical failure was the cause of the recent financial crisis and that people are looking for alternatives in the financial sector and there seems to be increasing demand for Islamic finance, which is considered ethical in a way or another. SAC-3 on the hand opined that good ethics instills a sense of trust and this would encourage people to patronise Islamic financial institutions.
Do customers of Islamic financial institutions have an expectation with regard to business ethics being part and parcel of Islamic financial institutions business practices? According to SAC-2 most customers are particularly interested in returns or the economic value of the products and services offered. Meanwhile, SAC-3 was affirmative and claimed that customers expect Islamic financial institutions to be ethical and that its employees behave in line with the teachings of Islam. SAC-1 on the other hand said that though customers might have such an expectation, when they deal with Islamic financial institutions they might regard its conventional counterparts as equals and in such a case the former does not have any competitive edge.
With reference to the Islamic financial industry, BNMs Financial Sector Masterplan (2001, p.80) states that Code of ethics will be one of the core determinants in disciplining the industry with less emphasis on central banks intervention. In relation to this, the SAC members were asked whether self-regulation is sufficient to ensure that the practices of Islamic financial institutions are Islamically ethical? Unequivocally, all of the SAC members said that there should be a balance between self-regulation and intervention of the authority. Both SAC-2 and SAC-3 provided an analogy of the parent and their children when describing the relationship between regulators and Islamic financial institutions. SAC-3 suggests:
For me we have to strike a balance between the need for intervention by the regulators and giving the trust to the industry to self regulate. So, okay if the regulator were to look at each and every aspect of the banks operations it will be not practical as well and very costly also. So I think its more like, what you call it, the wisdom to see when you have to intervene and when you need not. Its just like parents looking after their children; when they are young perhaps you want to impose a lot of rules to make sure that they are protected against their own selves because they actually can do things which can danger themselves. But when they are more matured they get to know what is good and what is bad then you may have more autonomy given to your children for example. You have put in the basic principles so they now know what they can do and what they cannot do. So same with Islamic banks, initially you may have to tell them because its something they are trained to be conventional bankers and now you want to move into Islamic 10 banking, you have to tell them what the basic principles (are). So the moment they understand that and perhaps to some extent you can allow for some autonomy for them to self regulate, you know, to do internal audit within themselves. At the same time you have to also check, (and) monitor
SAC-3 posited that BNM could play a role in developing a framework of ethics for Islamic financial institutions but at the moment it is more preoccupied with hard- rules and other bodies such as the IFSB has already embarked on such efforts.
4.0 Conclusion
There seems to be an agreement that currently Islamic financial institutions are focusing on the Shar"ah compliancy of its products and services. Shar"ah compliancy connotes the conformity to the legal or fiqh! aspect of the Shar"ah, though the Shar"ah should encompass ethics as well. Some would argue that ethics has already been infused in fiqh and that there is no need to distinguish between that which is acceptable legally or ethically for both are intertwined. Though Islamic financial institutions might be aware of the necessity of incorporating Islamic business ethics in their practices to be truly Islamic, the current environment where Islamic and conventional financial institutions work in parallel has forced the former to focus on the development of Shar"ah compliant products and services to remain relevant and competitive. In the pursuit to prove that Islamic financial institutions can sustain and perform well, less focus has been given to the ethical aspect of Islamic finance. Having said that, the recent financial crisis has put ethics back into the limelight and Islamic financial institutions should exploit this opportunity to promote the ethical aspect of Islamic finance and move beyond Shar"ah compliancy.
Customers of Islamic financial institutions could play an effective role in demanding that Islamic business ethics be part and parcel of the institutions practices. However, evidences suggest that customers are more interested in returns rather than the ethicality of financial transactions. The creation of public awareness through publicising Islamic business ethical norms for Islamic financial institutions would assist in educating the stakeholders of the Islamic finance industry about the ethical aspect of Islamic finance. The SAC along with the industry players and educational and research institutions in Islamic finance should effectively play their role to promote Islamic business ethics, apart from Shar"ah compliancy, as a distinct feature of Islamic finance.
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