ETHICAL BANKING – A GROWING INDUSTRY
MUAZZAM ALI
By a strange coincidence, Islamic banking and ethical investments in the West appeared on the world scene almost simultaneously nearly a decade ago. There are remarkable similarities between the two value-oriented financial movements.
However, the surfacing of the two movements at the same time was not an accident but the result of disillusionment with the prevailing economic systems: the communist and the capitalist. The communist economic system, adopted by many countries with high hopes, proved to be a dismal failure. It not only failed to solve people’s problems but aggravated them – bringing hardship and misery to millions of people during the 70 years of its existence.
Capitalism, the other dominant economic system, encourages concentration of wealth in a few hands by its excessive emphasis on materialism. It tends to make the rich richer and the poor poorer. Th e system is characterised by relentless and unfettered pursuit of profit.
Even in industrialised societies, the “unacceptable faces” of the capitalist system have begun to cause concern. An instance of how exploitative and cruel the unfettered capitalist economic system can be was highlighted by the British media by citing the case of one David Taylor, a client of a major Western bank.
David Taylor was a leukaemia patient. He had a bank overdraft that was growing at a frightening rate due to the bank’s hefty interest rate. Worried that the longer he lived the more of his life assurance money would be taken away by his bank, leaving little or nothing for his family, David did not want to prolong his life. He realised that every additional day that he lived would mean less money for his wife and children.
It is not only private individuals, like David Taylor, whose cases are highlighted by the media, who suffer. The harsh treatment of small businesses by the banks also keeps coming under attack by the media, the Church and political leaders.
But that is not all. Poor countries, groaning under the burden of high interest loans, are vehement in denouncing the capitalist system. In May 1992 the then President Corey Aquino of the Philippines publicly condemned the system as a form of slavery.
Criticising the highly oppressive nature of the modern unfettered capitalist system, she said that the poor nations are unable even to service the loans advanced to them by the mighty international banks and financial institutions, supposedly to help their economic development. Th e countries keep sinking deeper and deeper into poverty as all the foreign exchange earned by them is taken away, she added.
Concerned about this situation, the Pope also criticised “unbridled capitalism”. In a Papal document, His Holiness said: “Free economy should not lead to an idolatry of the market, or a culture in which having is more important than being.”
Addressing a seminar organised by the Christian Ethical Group, the Bishop of Oxford, the Right Reverend Richard Harris, pointed out that for a considerable period of time finance and economics remained integral branches of theology and ethics.
He lamented the failure of the Christian Church to tackle the problem of usury in the capitalist economies. He said that the Church had lost touch with the day-to-day moral issues of finance and economics.
This, he said, had led to a detachment of ethics from financial and economic considerations. But there was no reason to assume that the world of finance and economics were autonomous from other aspects of life, so ethics must have something to say in these fields as in others.
The bishop further said that even those who are not Christians would accept that we all have a moral sense or conscience, an idea of right and wrong. It is not sensible to suggest that this moral sense should be applied to some aspects of life and not to others. It, he stressed, should affect the market place as much as the home.
Others, such as the Bishop of Birmingham and Chairman of the Church of England’s Board of Social Responsibility, Hugh Montefiore, have dealt at length with the question of interest. Posing the question, “Is it ethical to charge interest on a loan?” he said: “In the ancient world interest was generally permitted, although Plato and Aristotle objected. Cato even compared it with homicide. Among the Jews, interest was equated with robbing the poor. The moral teaching of Jesus was absolute: ‘Love your enemies, and do good; lend, expecting nothing in return.’ Canon Law of the Middle Ages absolutely prohibited all lending on interest.”
Should ethics and morality play a role in economics? This issue is also being seriously debated in Western financial circles.
The realisation that morality must be inducted in financial dealings has resulted in the increase in the number of ethical investment organisations in the West. The Co-operative Bank of Britain has become the first British bank to screen ethical criteria. It surveyed 30,000 of its 1.5 million customers to ascertain their views. About 30 per cent of these responded and over 80 per cent of them said that it was a good idea for the bank to have an ethical policy.
Recent surveys conducted in Britain, USA and Europe revealed that investors are increasingly opting for ethical funds and are even switching their existing conventional investments to ethical investments. According to these surveys, the ethical funds seemed to attract and hold money better than average conventional investments.
According to an article in London’s Evening Standard (6 May, 1992): “Ethical funds – those that stay clear of companies profiting from ‘immoral’ business activities, like tobacco, armaments, pornography and so on, are the fastest growing sector of the stock market and are likely to receive a boost.”
Commenting on investment in ethical funds, Leo Coates of Ethical Investors Group, independent financial advisers specialising in ethical funds, wrote: “It is not a fringe investment for loonies and Quakers. Ethical investments can make you both morally and financially happy. You don’t have to sacrifice performance for principle. The returns are average or above average. People now have a simple choice: make money from a “clean” company or a “dirty” one. Most ethical funds have been out-performing international equities as well as UK Growth Unit Trusts.”
While ethical investments are capturing the West’s imagination. Islamic banking has already taken firm roots not only in the Muslim world but in other countries as well. Today, there are more than a hundred Islamic financial institutions, managing funds to the tune of several billion dollars and employing thousands of personnel. The countries in which Islamic financial institutions are already functioning include: Argentina, Bahrain, the Bahamas, Bangladesh, China, Cyprus, Denmark, Egypt, Germany, Guinea, India, Indonesia, Iran, Jordan, Kuwait, Luxembourg, Malaysia, Mauritania, Morocco, Nigeria, Pakistan, the Philippines, Qatar, Russia, Saudi Arabia, Senegal, South Africa, Sri Lanka, Sudan, Switzerland, Tunisia, Turkey, the UAE and the UK.
The Islamic banking system is firmly rooted in the ethical values of Islam and prohibits investments in businesses declared unlawful, such as dealing in interest, alcohol, drugs, gambling, pornography, etc.
It has been acclaimed not only for its ethical values but also as a sound and stable system. Some financial experts maintain that in times of recession an Islamic economic and banking system may well have a greater capacity to absorb shocks than its capitalist counterpart.
It may be mentioned that, during the Gulf crisis, the Islamic banks suffered far less than the conventional banks. Indeed, whether it is in bank syndications, venture capital or trade finance, it is often the Islamic financial institutions that are showing the way and are destined to take off in a big way.
Some Western critics of Islamic banking have alleged that the system only highlights its negative aspects – that is, don’t do this and don’t do that. This is a fallacy. Islamic prohibitions are against those things which are considered the root causes of all evil.
Islamic banking is much more than refraining from charging interest. It is a system that aims at making a positive contribution to the fulfilment of the socioeconomic objectives of Islamic society. Having created a clean financial climate, Islam points to various directions in which banks may develop their activities. A few such sectors are environment, science and technology, medicare and employment.
The issue of the preservation of the environment enjoyed such great importance in Islam that its first Caliph, Abu Bakr, instructed his general, going on a military mission, not to destroy vegetation or animal life even in the enemy territory. Needless to say, investments which help the preservation of the environment merit special attention.
Islam exhorts its followers to gain mastery over nature, as all resources “in heaven and on earth have been created for the benefit of mankind”. To gain mastery over nature it is necessary to attain maximum proficiency in the fields of science and technology.
It is, therefore, incumbent on Muslims to invest in the development of science and technology. The impression in certain circles that Islam is against progress and promotion of science and technology is based on ignorance. Islam lays great emphasis on the welfare of society.
Economic development is an essential requirement of Islam and participation in economic activities is obligatory on every Muslim. Islam urges Muslims to cater to the needs of their families and to be kind to their neighbours. The goal of a Muslim society should be to create an economic environment in which people find employment in accordance with their abilities. Projects that create employment are commendable.
Edited By Asma Siddiqi
Institute Of Islamic Banking And Insurance London
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