ISLAMIC FINANCE INSTRUMENTS AND MARKETS – Book Sample
Viewpoint: Shariah Law—Bringing a New Ethical Dimension to Banking
Amjid Ali, senior manager, HSBC Amanah Global, believes that shariah finance is broadening its appeal and reach—both among Muslims and non-Muslims—as a result of the banking and financial crisis. Recognized as one of the most influential Muslims in the United Kingdom by the
Muslim Power 100 Awards, Ali has 22 years of branch banking experience with Midland Bank and HSBC in the United Kingdom. In September 2003 he joined HSBC Amanah UK as senior business development manager, with responsibility for raising the profile of Amanah Home Finance in the United Kingdom. He took over as UK head in January 2005, with responsibility for strategy, distribution, and sales, and was appointed senior manager, HSBC Amanah Global, in August 2008.
In this role Ali is working as part of the HSBC Amanah central team headquartered in Dubai.
What are the underlying principles of shariah
law from a financial perspective? In other words, what defines the kind of model to which a financial institution that seeks to offer shariah-compliant services to its Muslim customers will have to adhere?
Shariah is the body of Islamic faith and has two main sources. The first is the Qur’an, the sacred book that records the word of God as revealed to the Prophet Mohammed. To quote directly from the Qur’an: “God has permitted trade and for- bidden interest,” Qur’an, Chapter 2, Verse 275. The fundamental underlying principle is that interest is prohibited.
The second source is the Hadith, the body of documents that records the Sunnah (the practice, or “life example”) of the Prophet Mohammed.
From these two sources there are five main prohibitions that must be observed in the crea- tion of a shariah-compliant financial services model. They overlap somewhat and are mutually supportive.
- Riba: the prohibition of interest.
- Gharar (translated as “uncertainty” or opacity): there must be a full and fair disclosure (for example, certainty as to the price of a contract before it is concluded).
- Maysir: the prohibition of speculation or gambling (“obtaining something easily or becoming rich without effort”).
- Profit: the Islamic financier should only generate benefit from the project in which they invest and must take some risk, since risk equates to effort and potential loss.
- Unethical investment: Islam prohibits investing or dealing in certain products such as alcohol, armaments, and pork, and in activities such as gambling, entertainment, and hotels. (Exactly how this last prohibition is interpreted varies widely depending on where one is in the Muslim world.)
Is this list sufficient to define shariah-compliant financial services?
No, there are other factors to keep in mind when constructing product offerings. Very importantly, one has to keep in mind the Islamic view of money. In Islam money is not a commodity; it has no intrinsic use and it can only be exchanged for the same par value. Also, Islam allows the use of securities to support a transaction, which guards against the wilful wrongdoing or care- lessness of partners.
HSBC, Lloyds, and other banks now offer shariah-compliant mortgages for house purchase. How can this be reconciled with the principles you have outlined?
If we are supporting a customer in the buying of a property, it is done under a contract known as diminishing musharakah. This translates as co- ownership. In this transaction, the bank and the customer buy the home jointly, in joint names.
As time progresses the customer buys more and more of the property from the bank and the bank’s share in the home diminishes, until the bank no longer has any stake in the home. It is proper for the bank to take a reward for bearing the initial risk, but this reward is not interest on a loan but a rental charge for the portion of the asset owned by the bank. This method follows the underlying principle that “you cannot make money on money,” but it is permissible to “make money on the use or the exchange of an asset.”
Business Ethics in Islamic Finance
The overarching principles of Islam set the operating framework for every aspect of how business is conducted in the Muslim world. While the shifting boundaries of acceptable behavior in conventional Western business are set by laws, regulations, and corporate governance guidelines, Islamic business is governed by divine principles covering values such as fairness, equality, and morality dating back more than a thousand years.
More specifically, Islamic finance adopts a long-term partner-ship approach between businesses, often based on investors essentially taking an equity stake in businesses. Shariah law outlaws the charg-ing of interest of any kind, while in the wider context the use of money to generate interest is not permitted. Speculation of any kind is also forbidden, while investments are required to deliver social benefits to the community. Islam also forbids activities in prohibited areas such as gambling or alcohol, instead specifying that shariah-compliant businesses should focus on legitimate trade-based activities.
The ethical standards to which Islamic busi-nesses operate reflect the same standards and principles of the Qu’ran, which every Muslim is expected to follow in every aspect of their lives. Therefore, Islamic businesses must operate on a basis of fairness and integrity, while treating everyone equally.
The need for honesty, truthful-ness, and fair dealing is inherent in Islamic business, requirements which have wide-ranging implications across the full spectrum of business activities, from advertising to after-sales customer service. Islamic companies must also respect the principle of trusting others to be as good as their word.
However, this puts the responsibility on businesses to cover their liabilities promptly, honoring their word with timely payment, given the exclusion of credit facilities. The emphasis on the partnership approach to business is fur-ther underlined by the need for companies to look after their investors’ interests, thus protect-ing them whenever possible from dharar (any kind of harm). The “stakeholder” element of Islamic financing is reflected in the onus on working in tandem with other businesses when-ever possible, while markets should generally be free and prices competitive. For example, attempting to squeeze suppliers on price would be unacceptable behavior, as would any attempt
to capitalize on others’ misfortune by raising selling price excessively should, for example, the supply of goods be temporarily interrupted.
- Business ethics in Islamic finance reflect the moral principles and standards which every Muslim must follow in every aspect of their lives.
- Islamic business encourages a long-term partnership approach, based on mutual interest and a spirit of cooperation.
- Honestly, integrity, and a sense of genuine fair play are ingrained in the operating principles of Islamic business.
- Muslim businesses may be less able to capitalize on short-term market opportunities given that speculative activities are not permitted by Islamic ethical standards.
- Islamic business managers do not enjoy the same financial incentives which drive managers of many mainstream Western businesses, though they are motivated by moral objectives and standards.
- Given the moral and ethical goals of Islamic businesses—rather than the pursuit of
pure profit—less efficient businesses (in purely financial terms) could hamper the development of newer, more entrepreneurial, customer-focused start-ups.
Business Ethics in Islamic Finance
In view of the increasing global influence of Islamic finance, companies aiming
to do business with shariah-compliant organizations should gain some understanding of their guiding principles and ethics.
Understand the importance for Islamic business of building long-term partnerships, rather than the pure pursuit of short-term profit.
Compliance with Islamic principles may create complications for non-Muslims in the short term. However, it is important to understand that Islamic business aims to
bring collective benefit to wider society.
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