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IRTI Working Paper Series

WP# 1435-07

Ethics in Relation to Islamic Finance


Activities
Abdul Ghafar Ismail, Nor Azmidah Zali

3 Jumada2 1435H | April 3, 2014

Islam2c Economics and Finance Research Division

IRTI Working Paper 1434-07


Title: Ethics in Relation to Islamic Finance Activities
Author(s): Abdul Ghafar Ismail, Nor Azmidah Zali

Abstract

Ethics has been fundamental in organizations and in specific, Islamic financial


institutions have selected ethics as their core competencies. Islam accepts ethics as a
good value in enhancing company performance since ethics is grounded by Shariah
rules. The ethical issues have been raised steadily in business and they do not seem to
settle as a lot of companies have not been aware of its importance. There are a lot of
theories of ethics that have been introduced but the number of unethical business
activities does not seem to be reduced. This paper seeks to explain the conventional
ethical theory and how Islamic ethical philosophy generates the ethical business
activities. Later on, the study will produce an ethical model which is in accordance to
the Islamic intellectual discourse , that will explain the relationship between ethics and
Islamic finance activities and also discuss the screening criteria of financial activities .
This study has the intention to contribute to the current knowledge of the business
ethics field and to contribute its findings for further research in business ethics. This
study will also bridge the gaps about how ethics can be a corporate identity to the
Islamic financial institutions.
Keywords: Ethics, Philosophy of Ethics, Ethical Theory, Business Ethics, Islamic
Ethics
JEL Classifications: A13, D21, D46, M14, P40

IRTI Working Paper Series has been created to quickly disseminate the findings of the work in progress and
share ideas on the issues related to theoretical and practical development of Islamic economics and finance
so as to encourage exchange of thoughts. The presentations of papers in this series may not be fully polished.
The papers carry the names of the authors and should be accordingly cited. The views expressed in these
papers are those of the authors and do not necessarily reflect the views of the Islamic Research and Training
Institute or the Islamic Development Bank or those of the members of its Board of Executive Directors or
its member countries.

Islamic Research and Training Institute


P.O. Box 9201, Jeddah 21413, Kingdom of Saudi Arabia

Ethics in Relation to Islamic Finance Activities


Abdul Ghafar Ismail1
Islamic Research and Training Institute
Islamic Development Bank
P.O. Box 9201, Jeddah 21413 Kingdom of Saudi Arabia
e-mail:AgIsmail@isdb.org
Nor Azmidah Zali2
Institut Islam Hadhari
Universiti Kebangsaan Malaysia
Bangi, 43600 Selangor Darul Ehsan, Malaysia
Fax: +603-8921 5789
e-mail:norazmidahzali@gmail.com

ABSTRACT
Ethics has been fundamental in organizations and in specific, Islamic financial
institutions have selected ethics as their core competencies. Islam accepts ethics as a
good value in enhancing company performance since ethics is grounded by Shariah
rules. The ethical issues have been raised steadily in business and they do not seem to
settle as a lot of companies have not been aware of its importance. There are a lot of
theories of ethics that have been introduced but the number of unethical business
activities does not seem to be reduced. This paper seeks to explain the conventional
ethical theory and how Islamic ethical philosophy generates the ethical business
activities. Later on, the study will produce an ethical model which is in accordance to
the Islamic intellectual discourse , that will explain the relationship between ethics and
Islamic finance activities and also discuss the screening criteria of financial activities .
This study has the intention to contribute to the current knowledge of the business
ethics field and to contribute its findings for further research in business ethics. This
study will also bridge the gaps about how ethics can be a corporate identity to the
Islamic financial institutions.
Keywords: Ethics, Philosophy of Ethics, Ethical Theory, Business Ethics, Islamic
Ethics
JEL Clasifications: A13, D21, D46, M14, P40

He is head of research division, Islamic Research and Training Institute and Professor of Banking and
Financial Economics. He is currently on leave from School of Economics, Universiti Kebangsaan
Malaysia. An earlier version has been presented at the Presented at Seminar on Ethics and Religions for
a Fair Economy, Singer-Polignac Foundation, Paris 23-24 January 2014
2
Phd Candidate in Islamic economics, Institut Islam Hadhari, Universiti Kebangsaan Malaysia

2
1.

Introduction

Business entities showed a rapid development in 1960s. It brings the opportunity


for them to participate in the development and make a significant impact on the
economy and to solve the social problems like providing jobs and clean water, and
reducing crime rates. One of the main attentions to this development is business ethics.
Most people learn ethical norms at home, at school, in mosque, or in societal setting,
but researchers as mentioned by De George (1987) learn about the business ethics from
the theory of justice.3 The theory and application on this subject had flourished in 1980s
with the publication of a special journal (i.e., Journal of Business Ethics) dedicated
towards this area.4 Since, then, there are literally hundreds of researches that have been
done on business ethics. The written papers on this subject are also many. Aspects
involved are theological and religious aspects, business environment, business
legislation, and business corporate responsibility. The development of this area has also
been recognised through the publication of a special journal dedicated to this area. 5
.Business ethics has also been classified as an academic field in management,
marketing, governance, economics, finance, human resources, engineering, and other
related study fields and recently, ethics has been institutionalized in an organization to
address the significance of human moral and ethics.
In 2000s, the collapse of many companies (Sims and Brinkmann, 2003), and
business scandals has inspired the academician to re-visit the subject. They discuss
on the wide ranging issues such as theological and religious aspect, business
environment, business legislation, and business corporate responsibility.6 While the
companies are trying to distance themselves from unethical behaviour by disclosing in
their financial statements their ethics codes and their social responsibility. In addition,
the commitment into ethical behaviour is an important way of sustaining an ethical
organizational culture (Weaver et al, 1999), business performance (Oz7, 2001; Haniffa
and Hudaib, 2007 and Kulshreshtha, 2007), company value (Guy, 1990; Saeed et al.
2001 and Vogel, 1991), and strategic leadership (Thomas, et al. 20048; Key and Popkin,
1998 and Minja, 2009). Thus, the sustainability of ethical behaviour in management
showed it is one of the contributors to the stability of financial institutions.
The establishment of Islamic financial institutions and Shariah-compliant
companies also attracts an interest among researchers. For example, Shariah committee
at Securities Commission of Malaysia and Bank Negara Malaysia are given the task to
3

Please read further in Rawls, John, A Theory of Justice (Cambridge, Mass., Belknap Press of Harvard
University Press, 1971).
4
Also the formation of European Business Ethics Network (EBEN)
5
Journal of Business Ethics was published in 1982 whereby the only original articles from a wide variety
of methodological and disciplinary perspectives concerning ethical issues related to business that brings
something new or unique to the discourse in their field.
6
See Vann Center for Ethics (http://www.pinterest.com/vanncenterethic/pins/)- Ethics Forum: Business
Ethics in Todays Global Economy by Richard De George. University Distinguished Professor of
Philosophy, of Russian and East European Studies, and of Business Administration, and Co-Director of
the International Center for Ethics in Business at the University of Kansas. Wednesday, December 5,
2012 at Davidson College.
7
See further in Oz, E. (2001). Organizational Commitment and Ethical Behavior: An Empirical Study
of Information System Professionals. Journal of Business Ethics, 34(2): 137-142.
8
Further reading on Thomas, T., Schermerhorn, J. R. & Dienhart, J. W. (2004). Strategic Leadership Of
Ethical Behavior In Business. Academy of Management Executive, 18(2): 56-66.

screen out the financial activities so that these activities are in line with Shariah. The
unethical activities need to be filtered out to ensure the financial activities are
permissible under Shariah rulings. The screening of financial activities is done under
the qualitative9 and qualitative10 criteria. Qualitative screening will look out into two
perspectives which are the structure of business transaction and the nature of business
itself whereas the quantitative screening consists of three aspects; the indebtedness of
the company; interest income and other incomes of the company; and the extent of cash
and receivables. The purpose of doing this to ensure financial activities and business
operation is operating ethically.
It is not enough to say that the company complies Shariah, but the business
behaviour does not have the ethical values. Furthermore, it is similarly to say that they
are two contrasting views: first, the business behaviour is attacked for disregarding the
freedom of business owner and, second critics are saying that business owner is
supporting the capitalist. It shows that philosophy is part and crucial elements in
understanding the business ethics. However, the current explanation is lacking in terms
of linking the two. Furthermore, in discussing the ethical finance activities, the
understanding of Islamic business philosophy should be extended to a wider scope.
This paper wants to explain the conventional ethical theory and how Islamic
ethical philosophy will come up with ethical axioms and characteristics. Later, it will
be used to produce the ethical business principles that can be utilised to derive the
parameters of business ethics for Islamic finance activities.
The remaining discussion of this paper will be divided into four sections.
Section 2 will highlight the insight into the ethical theory in business ethics. Section 3
will discuss the ethical theory in Islam. The proposed model of ethics for Islamic
finance activities will be explained in section 4. Section 5 will present the conclusion.

2.

An Insight into the Ethical Theory in Business Ethics

There is consensus among researchers (see Derry and Green (1989)) that ethical theory
is important in explaining the field of business ethics. They seem to believe that an
understanding of ethical theories is important for three reasons: explaining the on-going
debate about issues in business ethics; engaging in personal and social analysis of moral
issues; and arriving for business decision making (see Section 2.2). Each one will be
discussed in following discussion. Given this consensus, we will first discuss the ethical
theory in the light of understanding the frontier knowledge of business ethics.
2.1

What does the theory say?

The screening process of qualitative criteria involves two parts; (1) the structure of the transaction in
terms of whether there is any elements that is prohibited in Islam such as interest (riba), uncertainty
(gharar), etc; and (2) the nature of the counter-partys (companys) business.
10
Generally, the quantitative screen involves the three main financial ratios, namely, liquidity ratio,
interest ratio and debt ratio. Some index providers also examine non-permissible income ratio.

Each sub-field of knowledge has its own philosophy, such as philosophy of legal,
religious, culture and personal approaches. The same also goes to business, as
mentioned by Cavanagh et al. (1981) there are also ethical philosophy of business.
Initially, they find out three types of ethical philosophy in business, i.e., utilitarian,
rights, and justice. However, recently, the researchers have expanded the philosophy to
include common good and virtue approach. This ethical philosophy may influence the
individual decision in managing business organizations.
The utilitarian view was introduced by Jeremy Bentham (1748-1832) (1907).
This is one of the ethical philosophies that evolve from teleology or so called
consequentiality ethics. It is called consequentiality because the understanding of the
valuation of a good or bad action depending on the purpose or result of the action. It
shows that the approach only looks at the beginning and the end (i.e., they do not look
at the process). The ethical actions would only provide the greatest balance of good and
evil. This view was further strengthened by Frankena (1963) who stated that utilitarian
is a basic premise in teleological that argues people should choose the alternative that
has the greatest good for the greatest number of people.
Therefore, utilitarian is known as moral principle to business organization that
hold the moral rights in any circumstances that produce the greatest balance of benefit
over harm for everyone. It shows that utilitarian does not care whether the benefits are
produced by (via a process) lies, coercion or manipulation as long as it gives maximum
benefits for everyone. Many of the business organization are take for granted the
wrong action because they believe they have the moral duty to perform the action and
the good will come from the action. For business that wants to maximize their selfinterest, utilitarian is the powerful moral principle to remind them to spread the
"interest" to the good of all. However, Williams (1985) argued that utilitarian is a type
of benevolence aspect and Burton and Don (1996) refuted this statement and explain
utilitarian give the nature of vague for benevolence concept for individual in giving
benefit to the society. This carries the means that, the individual only takes the action
based on obligation purposes. Kant (1724-1804) said if action is only taken based on
obligation, the action consider as an ethical.11
The theory of right was pioneered by Kant (1724-1804). The concept has
evolved from the philosophy deontology. It is called deontology or nonconsequentiality ethics because in every action, it must be based on the assessment of
good or bad of the action. According to Kantian or right view, they assume that in a
universal moral principle, every person has certain basic rights. In doing the business
activities, business organization has a right to not do something if it violates the moral
principles they hold as long as it is not against the public trust. For example, company
has the rights to refuse in engaging the selling the non-halal activities for mere profit.
This has been constituted in Robert Nozicks theory of moral rights that every
individual has the basic of moral right such as the right to life, the right to choose, and
right to information (Shaw, 1999). However, Cavanagh et al (1981) suggested these
rights also include the right to free consent, the right to privacy, the right to freedom of
11

See further in Guyer, P. (1998, 2004).

conscience, the right to free speech, and the right to due process. The theory of rights
provides a guide on how to respect the rights of individuals.
Theory of Justice was pioneered by John Rawls (1971) who argues that justice
must be based on equity, fairness and impartially (Shaw, 1999). Principles of justice
are designed to protect the interest of all participants in a business operation. The justice
approach to ethics has its roots in the teachings of the ancient Greek philosopher
Aristotle, who said that equals should be treated equally and unequals unequally.
The basic moral question in this approach is: How fair is an action? Business
organizations have to think that whether that decision taken is fair to all parties within
and outside of organization. The theory of justice further holds that rules should be
administered fairly and impartially enforced and individuals must not be held
responsible for matters over which they have no control and injured individuals should
be compensated for their injuries by those responsible (Premeaux and Mondy, 1993).
Then, other scholar like Shaw (1996) who has argues that justice must be related to
equality and individual moral equation.
From the discussion of these three ethical theories, this will represent the ethical
normative structures for individual (Boal and Perry, 1985). However, the decision
making of individual is likely related with the virtue of the individual internally. The
virtue approach is different from other views because it seems like a spiritual essence
of the person. It focuses to human as a moral actor and more to an internal value
(Whetstone, 2001). Then, other scholars like Satyanugraha (2003) stated that a virtue
ethics looks into moral characteristic or a person12. Garca-Rosell and Moisander
(2008) mentioned that virtue ethics are referred to the persons act as a decision maker
and promote internal quality for the whole of life. However, he also says that virtue
ethics is related to the personal traits that contributing personal effort to the quality of
business operations. Based on this, in managing business operation, the virtuous act is
purposeful assessment of the factual situation according to the moral duty (Whetstone,
2001). According to Aristotle who is Father of Philosophy, he said that moral virtue is
a practice of allowing people to act in accordance with the specific purpose and use
wisdom of mind in each action. So, for business people, they have to manipulate their
mind to think of good of all because by using their intellectual mind, they can think
rationally and consider all the priorities in the organizations decision making process.
Hence, according to Whetstone (2001), Aristotle's approach is more psychological than
philosophically abstract and analytical, being meant to discover how a good person is
to act.
The discussion about the common good approach have lately appeared in the
discussions of business social responsibility, discussions of environmental pollution
and discussions of the problems of poverty. What is exactly the common good? The
common good is a concept that originated over two thousand years ago in the writings
of Plato, Aristotle and Cicero. More recently, Velasquez et. al (1992) and Argandona
(2009) try to promote the common values and moral or ethical principles found in a
12

For further reading, Satyanugraha, Heru (2003). Etika Bisnis, prinsip dan aplikasi. Jakarta, LPFE
Universitas Trisaksti.

society. For example, the moral principles foind in China will often be different than
those in India. Business owners and managers often implement these principles to
ensure their companys overall vision is in syncronization with society as a whole.

2.2

What are the Issues in Business Ethics?

The failure of a company might spotlight corporate moral failings. The cases of Enron
(in December 2001) and Lloyds Banking Group (was fined PS28 million by the U.K.
Financial Conduct Authority for serious failings in the bonus and pay structure for its
sales staff in December 2013) are a few example. It is a reminder to companys leader
who sought excess (such as be greedy (looking for more profits) or disobey the rules at
the expenses of their communities and their employees. The end result would be a
died or problem company and bring injuries all of those who has gone along for
many years with the company.
The examples show that company faces a multitude of ethical issues.
Fundamental ethical business issues include integrity and trust, and other complex
issues such as accommodating diversity, decision-making, compliance and governance.
Fundamental Ethical Issues
The most fundamental or essential ethical issues that businesses shall face are integrity
and trust. The basic understanding of integrity includes the idea of conducting business
activities with honesty and a commitment to treating every stakeholder fairly. When
customers observe that a company is revealing a steadfast commitment to ethical
business practices, a high level of trust can develop between the business and the
customer it seeks to serve. A relationship of trust between business and stakeholder
may be a key determinant to companys performance.13
Accommodating diversity
There are several examples of diversity issues at workplace. For example, fairness and
opportunity for every employee is the law and the world is a rich and diverse place full
of interesting cultures (based on religion or races) and people, who should be treated
with respect and from whom there is a great deal to learn. Furthermore, in Al-Quran,
Allah said: Human beings, We created you all from a male and female, and made you
into nations and tribes so that you may know one another. Verily the noblest of you in
the sight of Allah is the most God-fearing of you. Surely Allah is All-Knowing, AllAware.14 .A diverse workplace is made up of employees of different races, genders,
abilities, ages and cultural. An ethical response to diversity begins with recruiting a
diverse workforce, enforces equal opportunity in all training programs. The results
would be that every employee is able to enjoy a respectful workplace environment that
13
14

See among others Kulshreshtha (2007), Guy (1990); Vogel (1991) and Gellerman (1986)
Refer to Chapter Al-Hujuraat (49:13)

value their contributions and could maximize the value of each employees
contribution. Both are key elements in business performance.
Decision-Making Issues
In their review of ethical decision making, Tenbruensel and Smith-Crowe (2008)
present a distinction between moral decision making and amoral decision making.
Within each category of decisions, one can make ethical decision or unethical decisions.
They further argue that we should be in the business of telling people what they should
do, that is define what is ethical and what is not, but they should acknowledge the
necessary to define the criteria by which decisions are placed into their typology for
analytical purposed. Hence, the framework for ethical decision making is needed to be
created as a method for exploring ethical dilemmas and identifying ethical courses of
action: recognizes an ethical issue, gets the information and facts, evaluate alternative
actions, make a decision, and tests it and reflects on the outcome. Therefore, ethical
decision-making process should focus on protecting employee and customer rights,
making sure all business operations are fair and just, protecting the common good and
making sure individual values and beliefs of employees are protected.
Compliance and Governance Issue
A sad story of corporate ethics that happened in the last two decades plus falling
stock markets, corporate failure, dubious accounting practices, abuse of corporate
power and criminal investigations indicate that the economic system upon which
investment returns have depended is growing signs of strain that have undermined
publics confidence. Hence, the public becomes more interested on the subject of
corporate governance and compliant, because both apparently have an important
implication for the economic health of corporations and society in general. It seems that
that the checks and balances should be there to protect the shareholder interest (such as
conflict of interest, scandals and malpractices, see Anderson and Orsagh, 2004) and
public confidence (due to such as inexperienced directors, overly lucrative
compensation or unequal voting rights).
By having the list of issues in business ethics is not enough. It tells us what are
the issues? In addition, to getting the facts, resolving an ethical issue also requires an
appeal to analyze the personal and social of business ethics, particularly the personal
and social values in dealing with ethical issues.
2.3

Personal and Social Analysis of Business Ethics

A company is established by individual via legal form. At the same time, it is also run
by individual. Each has its own behaviour or known as human behaviour. Hence,
personal relationship exists between stakeholders in a company, such as owner and
creditor, owner and employee, employee and customers. The behaviour of the
interacting agents related business transactions show that personal analysis of business
ethics should be there. It shows that the presence of human flourishing should be
recognized in the ethical theories.

The interacting agents are related and governed by contractual theory and
property theory. This theory is called normative theories as they are prescriptive ethical
principle for the contracting party to adhere to what have been agreed under a particular
principle. While the property theory should look into social aspect of property which is
not owned by owner (owner as a trust) then the right of others should not be ignored.

3.

Ethical Theory in Islamic Business Ethics

In a company, it also involves in managing resources, like people and money. While
the ethical perspective for workers has been discussed in Possumah et al (2013), the
discussion on the ethics for financial activities is not many. In this section, we will
discuss the ethical theory in explaining the Islamic financial activities. Therefore, in
this section we will discuss the ethical theory in Islam and followed by ethics in Islamic
financial transactions and ethics in shariah compliant companies.
3.1

Ethical Theory in Islam

The summary in section 2 shows that conventional ethical theory can be applied for
specific circumstances due to the specific of decision making and purposes and any
action from ethical theory has to be supported by moral principle because ethics and
morality have mutual connections. These principles are different in Islam. However,
the theoretical foundation of business ethics from religious perspectives is not known
by many. Therefore, to gain a greater understanding towards the ethical theory, Islam
has its own view. Following is the discussion of business ethics from Islamic
perspective which is derived from original sources and Islamic intellectual discourse.15
For example, Al-Qaradawi (2011) refuted the statement of Kantian that is all
actions are considered as ethical but must be based on the intention and haram action
(forbidden). It is still considered as haram even though the action gives benefits to the
society. Islamic law does not allow the principle of the so-called al-ghayah tubarrirul
wasilah (to achieve the purpose, anything is allowed), or a principle that says alwushulu ilal haq bil khaudhi fil katsiri minal bathil (to be able to acquire a good thing,
can be done to wander in falsehood).
Furthermore, Muslims regard Islam as a way of life and not merely a religion.
The term of ethics in business or business ethics is not an issue. Since in Islam, business
ethics cannot be separated from ethics because it deals with all aspects of a Muslims
daily life (Carney, 1983; Hasanuzzaman, 2003; Beekun and Badawi, 2005). It is further
stressed by Muhammad, et al. (2008) that business ethics is referred to moral principles,
15

Islam ecognize ethics as akhlaq (attitude) and the origin sources of ethics in Islam is from the teachings
of the Quran and the Sunnah (i.e. recorded saying and behavior of Prophet Muhammad, peace be upon
him (pbuh)). Ethics is also widely used as a term of morality (Hanafy and Sallam, 2001) and the word
of adab is also represent the words of ethics (Al-Attas, 1979). In his writings, he also reveals that ethic
is not only akhlaq but also adab which the most fundamental concept in Islamic teaching of being good
manners.

standards of code of conduct and the guidance in the business environment. A company,
as suggested by Haniffa and Hudaib (2007), should maintain in good behaviour,
involving in social responsibility with promoting justice and welfare (al-adl wa alisan)16 in society and seeking Gods pleasure and blessing (al-barakah). It also means,
as suggested by Rice (1999), Islam also promotes human harmony in daily life, strong
element of brotherhood and establish justice in the socioeconomic and also try in
balancing the material aspects and spiritual aspects of humankind.
Naqvi (1981) also agreed on what has been proposed by Rice (1999) that a
harmony in human life can be achieved since ethics dominate the business and not vice
versa. Then Al-Qaradawi (1995) stated that to being involved in Islamic business, there
are some business practices like ethical behaviour, the nature of piety, strong
compassionate nature and fair or balanced in any action that should be there. The
tawhidi elements that bring the meaning of oneness, monotheism, unity or singularity
of God, have been claimed as the core or basic of Islamic ethics (Faruqi, 1992; Naqvi,
1981; Rice, 1999; Beekun, 1997; Haneef, 2005) along with the other ethical axioms
like balanced, free will and responsibility (Naqvi, 1981). Therefore, Muslim is
encourage to have ethical manners that is recognized as an ethical code of conduct like
forgiveness, create positive relationship to public, do not suppress, hoarding and have
a sense of responsibility to God to do business as been ordered by God (Abeng, 1997).
Therefore, the Islamic business should be linked with three branches of
philisophy that are meta-physical philosophy, ethical philosophy and logical
philosophy. Firstly, in metaphysics, even though Islam encourages his followers to do
business, but Islam at the same time provide guidance to people so that business is done
in line with the main objective is to attain al-falah.17 To achieve al-falah, the continued
profitability of the business world and the hereafter, company has to follow the rules of
ethical code of business ethics. In Islamic business, the activities must be base on the
rabbani or divine principles.18 It is means that all the activities must be done in
accordance to the Gods command and cannot escape from Gods judgments. The
ethical command in business that has already been stated in Islamic intellectual
discourse is the akhlaq (ethics) element in business transaction. This element is actually
a direct command of God to man. The Gods command also ask us to do justice in
business.
Secondly, ethics is a branch of philosophy that deals with the human behavior
or act in relation to a good or bad. All the ethical action must obey to the Islamic law
or Shariah as a main guidance in all aspect of life (Beekun and Badawi, 2005).
According to Rashid and Ibrahim (2005), Islam considers ethics as an offshoot of iman
(a Muslim belief system), and it emerges from the Islamic worldview of human life.
Ethics are also known as akhlaq. Akhlaq is seen as a set of moral and Islamic value
16

The term of al-adl wa al-ihsan is refer to the Islamic ethical system that offered the balanced, fair, just
and benevolent, and seeks to respect the rights of both primary and derivative stakeholders without
allowing for exploitation, nepotism and other human ills (Muhammad et al 2008).
17
Al-Falah means the success in the world and in hereafter
18
See Yusuf al-Qaradawi (1995), Dawr al-Qiyam wa al-Akhlaq fi al-Iqtisad al-Islami, Kaherah:
Maktabah Wahbah, pp. 29-31

10

system which is essentially contained and rooted in the Holy Quran and all acts of the
ethical behavior was implemented by Prophet Muhammad (p.b.u.h) during his life.
Principally, akhlaq is classified in two types; good or so called mahmudah and bad or
mazmumah. Islam emphasizes the important of practicing good akhlaq (mahmudah) in
all aspect of human life and recognizes it as one of the purpose of sending His
messengers. Muslim is also encouraged to have good akhlak (mahmudah) in all aspects
which will bring the business operates ethically. Sholars like Miskawayh or known as
father of ethics tells that it is important to have a good values to create civil society and
holistic.19 In other words, the values cannot be selfish because simply we want our own
safety regardless of hereafter society. Classical scholars such as Al-Ghazali (2005) in
his encyclopedia Iya Ulum al-Din (Revival of Islamic Sciences) for instance,
dedicated a chapter on the ethics of earning and living (Kitab al-Adab al-Kasb wa alMaash), which precedes the chapter on lawful and unlawful matters (Kitb al-all
wa al-aram), indicating the importance of ethical behavior in earning a livelihood in
promoting human well being. Scrutinizing this chapter of Iya, al- Ghazali observes
and recognizes that there are three main ethical values that must be internalized; justice
, truth and charity in engaging in the Islamic business transactions. This point of view
showed general explanation of business ethics and ethics of relation.
The last part is logical philosophy. It tries to investigate human thought and a
fundamental to the thinking straight, accurate and healthy. Learning about the rules of
logic is expected to lay the foundation so that it can make accurate conclusions. Any
ethical action must have reasons and be able to defend our actions if it is called upon to
do so (Minja, 2009). In Islam, logic in business activities can be determined by ijtihad
that must obey to the Shariah rules. In the logic behind it, the Muslim will be classified
as a man who disobeys Allah. In this perspective, we can refer to Al-Ghazalis major
works like (Mizaan al-'Amal (The Criterion or Logic of Action), one of the early works
on ethics.20 Al-Qaradawi (1995) also noted that the study of Islamic business was
emphasized by Islamic scholars and researchers in recent years. He described Islam as
God's business, ethical, humanitarian and concerned with the socio-cultural and
economic equilibrium, and is of the opinion that it is the responsibility of the state to
ensure that the theories of Islamic economics are implemented through the legislation
of laws to uphold righteousness and ethics.
Therefore, the discussion of the philosophy of business ethics in Islamic
perspective is try to create an ethical business organization. Muslims are not only need
to have a good behavior internally but also externally and the external behavior is
translated into the compliance of ethical principle of Islamic business.
From the above discussion, the theory is constructed based on the axioms. These
axioms need to be implemented internally, as a guidance that is intrinsically to ensure
Islamic business rules exist in the management of business activities and to comply
with shariah requirements. The ethical axioms are unity, equilibrium, free will and

19

See Umaruddin (2003). Umaruddin, M. (2003). The Ethical Philosophy of Al-Ghazali. Kuala Lumpur:
A.S Nordeen.
20
See Ghazanfar and Islahi (1997) in Islamic Economics Research Series, King Abdulaziz University.

11

responsibility that bringing company in promoting business behavior from Islamic


point of view and enhancing company performance.
Unity or in Islamic term called Tawheed is the vertical dimension of Islam. The
vertical carries the means of all the human aspects like political, social and religious
must be vertical according to the command of Allah. In the perspective of business, the
command of Allah includes the behavior in doing finance activities must be parallel
what in Islam needs and give usufruct (manfaah) to the people without scarifying the
rights of others (Badroen et al 2006). The concept of unity will create the balancing of
human life.
Equilibrium or wasatiyah is basic needs in balancing between this world and
here after. Muslim is encouraged to not create harm (mudarat) and damage
(mafasadhatan) that can cause imbalance in human life.21 The equilibrium of
consolidation of various element (Hussain and Ahmad, 2006) such financial activity
will give human life satisfaction and lastly will create the positive connections between
human.
Free will is a freedom in choosing their own way of life either to follow
Muhammad (pbuh) teaching or set their own way of life. However, the best way is to
combine all the Islamic setting in any action and have freely to think whether to follow
or not (Hussain and Ahmad, 2006). According to this, Naqvi (1981) has express His
theomorphic character, combined with Free Will, sanctifies in the clearest possible term
the principle of human freedom, which is innate in human nature. Towards to the
business perspective, people have free will in any actions either no involves in
permitted trading or making haram activities.
The last axiom of ethical principle is responsibility that closely to the free will.
Free will that is tied to the rules and ethical norms will teach people to responsible in
any action have done (Hussain and Ahmad, 2006). Within the Islamic context, Saeed
et al. (2001) said that there are four type of responsibility that can be apply in business
perspective. There are responsible towards God, responsible towards society,
responsible towards himself and responsible towards environment (Muhammad 2009).
From these point of view, the ethical axioms are able to create the happiness of
financial activities regarding the responsibilities that Muslims should do. The
discussion of these responsibility include towards God, human and environment. We
suggest that, the creation of happiness can be achieved for organization who want to
get Allah's blessings by applying all these responsibility. We agree that the achievement
of happiness will create the characteristics of ethical financial activities that will be
discussed in section 3.2.
3.2

Ethics in Islamic Financial Transactions

Islam is a dynamic religion that encompasses the aspects of faith (belief), shariah and
akhlaq (ethics). In the practice of a company, compliance with these three aspects
should be adhered because it is the cornerstone of the elements of Islam. According to
21

Further reading on Badroden et. al (2006), Alhabshi and Ghazali (1994) and Chapra (1992).

12

Beekun and Badawi (2005), Islamic business is not only seen as a system based on mere
belief system, but covers legal and Shariah compliance and has it own ethics. Based on
the ethical axioms that have been discussed in section 3.1, to legitimize the ideal Islamic
business behavior, the criterion of adl (justice), amanah (trust) and ihsan (benevolene)
should be included in the characteristic of Islamic ethics.
In Islam, man is as a trustee of the earth and the Gods as the trust owner that
obligate man to care all that is on this earth. Based on the Quran in chapter Al-Mulk
verse 2, [He] who created death and life to test you [as to] which of you is best in
deed - and He is the Exalted in Might, the Forgiving, the God has expressed the human
act as a khalifah (trustee) of God on earth and this world as a test for mankind. As a
trustee of the owner in this world, man must act in accordance with what in obligations
of that trust and have to responsible on it. For example, under the mudarabah financial
trasaction, the shareholder is obliged to contribute capital in a company and the
entrepreneur should share the profit with the shareholder. In another chapter of AlQuran, Al-Muddhathir in verse 38, Every soul will be (held) in pledge for its deeds.
This verse shows, all in this world is own by God and man just owe just for a while.
and the finance activities is also including in this means. By implication, behaving
ethically is one of the mans trusteeships and man has to responsible to fulfill the
requirement stated. It shows that the contracting party in financial trasaction acts as
trustee for the business organization in ensuring any financial activities meet the
responsibilities entrusted.
Ihsan or virtue (benevolent) is do the right things that beneficial to others
without any obligation to do those things (Beekun, 1997) or the simple meaning is do
ibadah as if you see God or feel God sees us. In the Quran chapter of Al-Qasas in verse
77, But seek, through that which Allah has given you, the home of the Hereafter; and
[yet], do not forget your share of the world. And do good as Allah has done good to
you. The concept of Ihsan is very good grace to be applied in the work culture and
must adhere in involving in any financial activities. For example financial activities like
hoarding, and corruption. The concept of ihsan will produce the concept of trust when
performing the business dealings that tied with a spiritual relationship with God.
In al-Quran chapter Al-Maidah in verse 8 tells that O you who have believed,
be persistently standing firm for Allah , witnesses in justice, and do not let the hatred
of a people prevent you from being just. Be just; that is nearer to righteousness. And
fear Allah; indeed, Allah is acquainted with what you do. This verse mentioned
Muslim is encouraged to behave justly towards all. Allah has force people to respect
each other and not hatred another party. When making any finance activities, the
concept of adl is implemented to achieve al-falah. The concept of al-falah is very
subjective in Al-Quran that covers all aspects including spirituals, and intrinsic
motivations to get happiness world and blessings in the Hereafter. Thus, Islam
encourage a person to have all these aspects. We found that these aspects are closely
linked with ethical behavior. Therefore, the ethical behavior of individual should be
controlled by a modified code of ethics. This will be discussed in in section 4.

13
4.

A Modified Model of Ethics for Islamic Finance Activities

Conventionally, the code of ethics is created as a tool to communicate the companys


philosophy to stakeholder including employee, customers and the public. However, a
modified model of ethics that is suggested in this paper will try to link not only to
philosophy, but also the ethical theories, principles and ethical elements. The purposes
of this model are: to promote the code of ethics in promoting ethical behavior in Islamic
finance activities and to ensure higher standards behavior.
The model can be explained in Figure 1. It can be represented by five boxes.
Box A shows the philosophy of business ethics. From this box, the root of Islamic
business ethics is grounded by Islamic philosophy. In Islamic philosophy, the metaphysical philosophy and ethical philosophy are actually grounded from Al-Quran and
Hadith which guide the all aspects in life. The logical philosophy comes from
experiences and empirical studies. These philosophies are expected to encourage the
business owner that is not only look at the monetary and non-monetary rewards in this
world but also non-monetary reward in the hereafter. The results would be shown in
Box B, that are: (i) the creation of unity among the business owners because they follow
the Gods command; (ii) the balancing of human life; and (iii) they are free to choose
the rules but at the same time, they are also needed to be responsible towards society,
themeselves and environment.
In creating the moral awareness in business, the discussion of ethical axioms is
able to create intrinsic or internal guidance for an individual who covers the concept of
unity (tawheed), equilibrium (wasatiyah), free will and responsibility. In conjunction
with this ethical axiom, the characteristic of individuals ethics i.e. adl (justice), amanah
(trust) and ihsan (benevolence) can be disclosed in legitimize the behavior of an ideal
Islamic business. The combination of ethical axioms and individual characteristics are
able to create ethical manners in organization. These ethical manners is has been
recognized as Islamic codes of ethics that able to transform the ethical behaviour in the
organization. Islamic code of ethics is one of the management tools of control to guide
people in organization to behave ethically.
From (i), it means that all the activities must be done in accordance to the Gods
command and cannot escape from Gods judgments. These will result in the three
important ethical characteristics, i.e., trust (amanah), justice (adl) and benevolence
(ihsan), as shown in Box C.
The combination of ethical axioms and individual characteristics are able to
create ethical principles for a business organization (see Box D). These ethical business
principles are expected to transform the ethical behaviour in the business organization.
These principles are one of the management tools of control to guide people in
organization to behave ethically.
These principles will be translated into ethical elements for Islamic finance
activities as presented in Box E, that covers all the good behaviour i.e. do not involve

14

in haram activities like riba (interest),22 maysir (gambling)23, gharar (uncertainty)24,


have good character and behavior25 like forgiveness, good relation among people and
care for the environment, and generosity in doing business26 (i.e. do not supress, and
hoarding the goods and hide the information). The end result would be to achieve the
Maqasid Shariah.
The above discussion would lead us to: first, broaden the scope of research on
the ethical business; second, suggest new parameters for business ethics that would
influence the ethical behaviour in organization and both employees and employers
aware about the unethical or illegal activity in organizations that adopted formal codes
of ethics. This will lead us to produce the highest level of compliance to established
ethical standards as proposed by several studies such as Stead et al (1990), Jamal and
Bowie (1995), Somers (2001), Tsalikis and Fritzche (1989); Murphy et al., (1992).

22

O you who have attained faith! Remain conscious of God, and give up all outstanding gains from
Usury, if you are (truly) believers (Al Quran, 2: 278, 2: 275, 3: 140, 4: 161 and 30: 39).
23
O you who believe! Intoxicants and gambling, (dedication of) stones and (divination by) arrows, are
an abomination of Satans handwork: Abstain from such (abomination), that you may prosper. Satans
plan is (but) to excite enmity and hatred between you with intoxicants and gambling, and hinder you
from the remembrance of Allah, and from prayer: Will you not then abstain? (Al Quran, 5: 90-91).
24
Hadith narrated by Muslim, Ahmad, 'Abu Dawud, Al Tirmidhi, Al Nasa'i, Al Darami and Ibn Majah
on the authority of Abu Hurayra where the Prophet prohibited the pebble sale and the gharar sale.
25
Islam insists on obligation to observe good character and behavior as the Prophet himself is sent to us
for purpose of perfecting the best of character. Abd Allah ibn 'Amr said, the Prophet used to say: "The
best of you are those who have the most excellent morals (Bukhari, 61: 23). Hadith narrated by Abu
Hurairah, the Messenger of Allah said: "The most perfect of the believers in faith is the best of them in
moral excellence, and the best of you are the kindest of you to their wives" (Al Tirmidzi, 10: 11). Muadh
Ibn Jabal reported that the Prophet said: Fear Allah wheresoever you may be, follow up an evil deed by
a good one which will wipe (the former) out and behave good-naturedly to people (Al Nawawi, 2001:
35).
26
Generosity in doing business refers to willingness and kindness in giving away either rights or property
or times for the benefit of others. Uthman bin Affan reported that the Prophet said: Allah will admit to
the Paradise a man who is lenient as a seller and a buyer. (Ibn Majah, 3: 2202) Jabir bin Abdullah
reported that Allahs Messenger said: May Allah have mercy on the bondsman who is kind when he
sells, kind when he buys and lenient when he demands (his debt) (Ibn Majah, 3: 2202)

15

Figure 1: Islamic model of ethical financial activities

Box A
Philosophy of
business
ethics
Al falah
Obey to
Shariah
reasoning

Box B
Ethical axioms
Unity
Equilibrium
Free will
responsibility

Box C
Ethical
characteristics
Justice
Trust
benevolence

Box D
Ethical
Business
principles
Balancing
life
Less harm
Human
freedom
responsible

Box E
Islamic ethical
in finance
activities
Permitted/har
am activities
Usufruct
Responsible
to
stakeholders
Good
behaviour

The reason of companies to being ethical in managing activities is good for


business. Due to this, ethics has strong relationship with finance activities that brings
the stand of the company. It means the good ethics is the good business. The good
business carries the means that all the financial activities were undertaken in accordance
with business ethics rules. For the company that applies all the business ethics
accordance in Islam, the business will brings the good image to the company. From this
point of view, we suggest that, the ethical of finance activies of the firm will bring the
good image to the company since the company has applying of all good manners in
business practicess. This has been proven by Balmer (2002) and he support that image
is the expression of the company identity. We found that, the organization identity is
rooted form ethics best practicess or organizational behavior and Ashfort and Mael
(1996) agree that the these ethics is derived form social identity, social constructed
through the thoughts, feelings and behaviors of individual and group members
embedded within the organizational context.

5.

Conclusion

From time to time, the theory of ethics was introduced in parallel with changes in ethical
behavior in certain circumstances. Ethical theory is to use to determine the action to be
done practically. However, over time, many of ethical theories were born but still could
not solve the ethical issues experienced. This is because the conventional ethical theory
is rooted based on the thought and assumption. In Islamic perspective, ethical
philosophy is based on two main intellectual discourses that are Qur'an and Hadith.
Ethical Islamic framework has showed the linkages between ethics and Islamic finance
activities. Islam offers an ethical system which is unique. In Islam, ethics and religion

16

are rooted to primordial human nature which is innocent and good unless is corrupted.
Similarly, ethics, religion and law (fiqh) are complementary and do not contradict to
each other. In this case, what is morally wrong is also illegal, and the law permits only
what is moral. Similarly, in Islam both morality and law are derived from religious
sources and religious teachings are practiced through morality and law. Second, Islamic
ethical system is unique, because its value-judgements transcend all worldly gains and
relativism interpretations. Transcendentalism, universalism and normative character
are among building blocks of Islamic ethics.

17

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