EQUITY AND MORALITY IN ISLAMIC BANKING
MUAZZAM ALI
The idea that moral values should be taken into account in economic and financial matters has, in the last decade, arisen again after some centuries of neglect. In the West, a number of investment managers who refuse to invest in unethical business activities such as tobacco, pornography, armaments and so forth, have appeared on the scene and investors have responded by pouring money into them. These ethical funds, according to surveys, seem to attract and hold money better than average conventional investments and are the fastest growing sector of the stock market.
The Cooperative Bank of Britain is the first bank to screen corporate customers by ethical criteria. Leo Coates, of the Ethical Investors Group, said, “You don’t have to sacrifice performance for principle…Most ethical funds have been out-performing international equities as well as UK growth unit trusts…Ethical investments can make you both morally and financially happy.”
This movement in the West has coincided with the resurgence of Islamic economics and both are clearly motivated by the worldwide disillusionment with conventional economics. Many prominent people have commented on the need for ethics in finance. The Bishop of Oxford, the Right Reverend Richard Harris, has pointed out that for a long-time finance and economics were integral branches of theology and ethics and that there was no reason to assume that the world of finance and economics should be detached from other aspects of life.
The Bishop of Birmingham and the Chairman of the Church of England’s Board of Social Responsibility, Hugh Montefiore, have reminded us that in the ancient world, both Plato and Aristotle objected to the practice of charging interest and Cato even compared it with homicide. Th e Jews equated it with robbing the poor. Jesus told people to “lend, expecting nothing in return.”
While the West has become concerned with ethics in economics. Islamic banking has already put down strong roots, not only in Muslim countries but in many other countries, both East and West. There are more than 100 Islamic financial institutions, managing several billion dollars.
Islamic countries include not only those like Pakistan, Sudan and Iran, where Islamic principles have been applied to the entire banking and financial system, but also those where Islamic banks, investment and insurance institutions exist side by side with conventional western financial institutions.
At the root of Islamic economics are the concepts of equity and morality. These concepts are the universally accepted principles of justice and fairness. They are not always incorporated in written laws but they have a place in human nature which makes them an effective force in the conduct of life. It may be said that equity, law and religion have an organic relationship and often play an effective role as a source of law.
To understand their importance in Islam, we must remember that the Arabian Peninsula in the seventh century A.D. was corrupt with social injustice and violence. The arrival of the Islamic faith, which appealed at first mainly to the poor, brought a recognition of values such as honesty, fairness, equality, modesty, respect for labour and effort and timely payment of wages.
These values are specifically mentioned in the Qur’an and confirmed by the sayings and practice of the Prophet. Later they came to form an integral part of Islamic jurisprudence. As a source of law, they are often used by judges to remedy loopholes in legislative and case law.
Islam does not accept the Western concept that economics is divorced from morality. Islamic models replace greed with accountability to God, and reliance on the market with morality. The self-interest of a Muslim is seen against a longer timeframe than that of a materialist, for it includes his happiness in the hereafter as well as in this life. From the beginning, Islam has given a universal vision of man and society, teaching that life is not divided into autonomous compartments, but that everything works together harmoniously under God’s law. Accountability to God, therefore, leads to greater efficiency and less corruption in the financial system.
Economics today is seen as being the exclusive domain of bankers, businessmen and the like, yet it affects all of us, for how we earn, spend and look after our money determines the social and political goals not only of each individual but also of the nation. Western economics is doomed unless Islamic principles of justice, human rights and equity are incorporated into the system.
The Islamic model is based on profit-and-loss-sharing and insists upon the investor taking a share in the business risk. To be legitimate, all financial transactions must be associated with real, productive activity and not just gaining money from interest, as is done in the West. Moreover, in accordance with Islamic law, financial transactions must not involve any businesses dealing in alcohol, drugs, gambling or pornography.
Most Islamic institutions that exist today are still in a process of transition and not yet based fully on Islamic law. This has been inevitable if they are to compete with conventional institutions in attracting funds from depositors and investors. Their success is dependent on motivating Muslims to participate in an Islamically based system and this requires time and education.
Not only is the Islamic financial system ethical, but it has been shown to be a sound and stable system. It is said to have a greater capacity to absorb market shocks than the capitalist system. For instance, during the Gulf War, Islamic banks suffered far less than conventional banks. In bank syndications, venture capital and trade finance. Islamic financial institutions often lead the way.
Those who say that Islamic banking is based on negative thinking misunderstand it. It prohibits only those activities that are considered to be the root cause of all evil. Some have said that it is only a matter of refusing to charge or take interest, replacing it with fees, etc. But, on the contrary, it aims to make a very positive contribution to the fulfilment of the basic socioeconomic objectives of Islam. According to the Qur’an, wealth should not be either hoarded or squandered, but put to productive use, to provide benefits both for its owner and those less fortunate. This means that it is not permissible to leave money idle, to charge for the use of money without regard to the profit or loss which it generates, or to speculate with it.
Thus, although it is true that there is a ban on the use of interest, it is not, as some suggest, a random or irrational edict, but a principle grounded in the ethics of wealth and therefore affecting the happiness of all people. Having created a clean financial climate, Islam offers various directions in which banks may develop their activities. These sectors include environment, science and technology, medicine and employment.
The preservation of the environment enjoys special attention and all investments directed towards this end will always be well supported. This idea was present even in the early days of Islam, when the first Caliph, Abu Bakr, instructed his general, who was going on a military mission, not to destroy vegetation or animal life in enemy territory.
Another criticism of Islam’s economic views is that it is against science and technology, but nothing could be farther from the truth. The Qur’an teaches that all the resources “of heaven and earth have been created for the benefit of mankind” and the Prophet said “Seek knowledge, even as far as China.” It follows that Muslims must invest in the development of science and technology in order to gain knowledge and use the resources that man has been given. If Muslim countries have lagged behind in industrialisation, it is not because of any religious taboo, as can be seen from the Qur’anic verse, “God has permitted trade and forbidden usury” (2:275), but because of unaccountable governments and dictatorships, of centrally-planned economies, of corruption and nepotism and of self-interest.
Islam also lays great emphasis on the welfare of every member of society. Every Muslim must participate in the economic and productive efforts of society to cater for the needs of his family and to help his neighbours. A truly Islamic society is one in which everybody can find employment in accordance with his or her abilities.
In Pakistan, a Commission for the Islamisation of the Economy has been set up to make proposals to bring existing economic practices into conformity with the moral injuctions of the Sharia. Its functions are:
1. To recommend ways of achieving the social and economic well- being of the people.
2. To examine existing fiscal laws, banking and insurance law and laws on the levy and collection of taxes and fees and recommend ways of bringing them into conformity with the Sharia.
3. To monitor the progress of Islamisation, identifying lapses and bottlenecks and suggesting means of removing these.
4. To oversee the elimination of interest from every sphere of the economy.
With regard to the social and economic well-being of the people, the Commission is to devise a comprehensive strategy to achieve the following:
1. Secure the well-being of the people, regardless of gender, caste, creed or race, by raising their standard of living and preventing the concentration of wealth in a few hands at the cost of the general good and ensure equitable adjustments of rights between employers and employees and landlords and tenants.
2. Provide for all citizens facilities for work and adequate livelihood and for rest and leisure.
3. Provide for all persons’ social security by compulsory social insurance or other means.
4. Provide the basic necessities of life for all citizens, irrespective of gender, caste, creed or race, as are permanently or temporarily unable to earn their livelihood on account of infirmity, sickness or unemployment.
5. Reduce disparity in the income and earnings of individuals.
6. Eliminate all dealing on interest. The creation of this commission is a big step forward in the process of introducing Islamic ethical principles into the economy and may be seen as a model which other Muslim countries might well follow.
In fact, it can be said that there is really no great difference between the highest social ideals of the West and those of Islam. This was shown recently when the Duke of Edinburgh, Crown Prince Hassan of Jordan and Sir Evelyn de Rothschild met at St. James’s Palace in London in 1994 and proposed “A Code of Ethics on International Business for Christians, Muslims and Jews.” This had been drawn up by a group of eminent scholars, businessmen and clerics from the three religions “with regard to ethical issues on the conduct of business” in order to “highlight the importance of the shared moral, ethical and spiritual values inherent in the common Abrahamic tradition.” However, the “People of the Book” have no monopoly on ethical business. There is a small but thriving Japanese Buddhist ethical banking movement in the City of London.
This same issue featured prominently at a conference on Accounting Systems for Islamic Banking when the Chairman, Sir Peter Tapsell, stressed the need for the importance of moral factors to be impressed on the modern commercial and financial mind. He added that Islamic banking would become a major force in the commercial life of the world.
Indeed, already the Islamic ‘windows’ of conventional banks have found big takers of murabaha and leasing finance among western multinational blue-chip corporations.
The three Abrahamic faiths do share a common moral basis derived from the Scriptures. Sharia principles are not very different from what Christian Canon Law and the Laws of Moses say about business morality. In the Middle Ages, Christian courts regularly punished people for the sin of ‘usury’, which is generally agreed to mean charging interest on loans. It was the rise of capitalism, which separated church from state, that led to secular methods of business and modern theories of profits, markets and competition.
But now that Islamic bankers have taken up the challenge of controlling large-scale modern finance while observing ethical principles, it is up to their Christian and Jewish counterparts to follow the same path, not just by refraining from investing in interest-based businesses but by challenging the whole concept of interest. There are now widespread doubts even in the West as to whether the long-held ethos of ‘business is business’ is really consistent with the aim of social justice which has in recent years become accepted. Islamic banking is the response to a global desire for more ethical business practices and is successfully showing the way by its multi-million-dollar achievements in modern business.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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