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MANY PEOPLE BELIEVE THAT ANYTHING SHARI’A-COMPLIANT IS AUTOMATICALLY ETHICAL AS WELL. THEREFORE, THERE IS NO NEED FOR A SEPARATE EMPHASIS ON ETHICS IN ACTIVITIES AND TRANSACTIONS THAT ARE AIMED TO BE SHARI’A-COMPLIANT. WHAT IS YOUR VIEW AND WHAT ARE ITS IMPLICATIONS FOR THE PRACTICE OF ISLAMIC BANKING AND FINANCE?

The intrinsic quality of being human is our ability and freedom to think and make decisions. In every situation, we are faced with a moral dilemma. The only thing that prevents us from falling is our choice to do otherwise. Ethics explore this concept and demands responsibility.

As much as ethics are needed in one’s personal life, they are needed more in organisations and the corporate world.

“We need timeless principles to steer by in running our organisations and building our personal careers. We need high standards – the ethics of excellence.” Price Pritchett, American Businessman and Author

Shari’a, in the general term is understood as a set of legal rules. In its broader sense, it is permeated with a deeper sense of moral purpose. It governs all aspects of human life and presents unchanging beliefs and principles in accordance with the will of Allah.

“Shari’a in its literal sense means, the path to water. It refers to the religious guidelines, derived from the Qur’an, the words and deeds

of the Prophet Muhammad (PBUH), and scholarly interpretations thereof.

This brings us to an important discussion. Many people believe that anything Shari’a-compliant is automatically ethical as well. Therefore, there is no need for a separate emphasis on ethics in activities and transactions that are aimed to be Shari’a-compliant.

We asked experts their views on this important question and what are its implications for the practice of Islamic banking and finance?

 

MUFTI FARAZ ADAM
CHIEF EXECUTIVE OFFICER AMANAH ADVISORS

A debate regularly emerges on the issue of ethics and Shari’a compliance. Start-ups grapple with the issue and wonder whether to use both or either of them. Some argue that Shari’a compliance does not necessarily mean being ethical. This brief article shall endeavour to explain how Shari’a is inherently value-laden and that Shari’a compliance incorporates ethical considerations. It shall further highlight how Shari’a compliance can relate to different dimensions.

THE MEANING OF SHARI’A

To understand the essence of this debate, it is necessary to understand what Shari’a means. Linguistically, Shari’a means the path to a source of water. Technically, it is the system given by God to mankind, comprising of belief, practice and character. Hence, the word Shari’a encompasses all aspects of Islam: faith, actions and character.

Shari’a is a spectrum of value judgements such as hurma (unlawful), makru (disliked), mubah (permissible) and fard (obligatory). These values stem from the moral framework and worldview of Shari’a. They are assigned to actions depending if they are right, wrong or an imperative in light of the revealed guidance.

DIMENSIONS OF SHARI’A COMPLIANCE

There are two dimensions for ethics when discussing Shari’a compliance. First is the text, and second is a specific circumstance or context.

  1. Text: the transaction flows and contracts

Usually, when Shari’a scholars review transactional structures and contracts, what we can call ‘text’, for Islamic financial institutions it is generally in the absence of a context. The transactions are reviewed in the light of Shari’a principles as they have been presented in writing. If the structure is deemed Shari’a-compliant at this level, it necessarily means that the structure meets the Shari’a criteria for it to be morally right and ethical. Scholars use halal (lawful) and sahi (valid) to state that the transaction incorporates all ethical considerations that Shari’a demands. These terms are value-laden statements. Shari’a would not consider something to be halal if it is intrinsically wrong or morally problematic. Likewise, something cannot be sahi if it violates Shari’a judgements and values. The opposite of sahi is batil (void), which means there is something severely wrong with the core contractual elements making it unethical.

From an Islamic law perspective, Shari’a considers this structure to be fair in relation to the two transacting parties and their immediate rights and obligations. Hence, when an unfair term is in the contract, it results in the contract being corrupt (fasid), in other words, unethical. When Shari’a-compliant is used in the Islamic finance industry, it generally addresses the transaction and the contract, in this meaning. Contractual agreements practiced in the pre-Islamic times such as mulamasa1 (sale by mutual touch) and munabadha2 (sale by throws) are examples of unethical and impermissible contractual forms. These were prohibited by the Prophet Muhammad (peace be upon him). Such contracts failed to meet the Shari’a criteria of how a contract ought to be conducted and how transactions should morally be performed, and therefore were considered unethical from a contractual dimension.

  • The context

Another dimension, which Shari’a also considers, is the context. Sometimes the unethical nature of a context necessitates a ruling or fatwa to understand the issue’s permissibility, resulting in contextual and conditional fatwas. For example, a product structure might meet all ethical considerations of Islamic law making it sahi. However, the extrinsic nature of the product structure violates macro and extrinsic ethical considerations making it haram (unlawful), makru (highly reprehensible) and khilaful ‘awla (not preferred). Such a violation would not mean that the structure is intrinsically invalid or problematic, rather in the given circumstances and in light of wider considerations, an overall negative value shall be assigned to it, anchored in the Islamic legal maxim, “preventing harm is given priority to gaining benefits3.” Similarly, there may be a context in which a structure is assigned a positive value such as mustahab (preferred), sunnah and wajib (necessary).

CASE STUDIES

The above principles can be understood by the following case studies:

  1. Transacting at the time of Jumu’a (Friday Prayer)

It is not permitted for a person upon whom Jumu’a prayer is obligatory to engage in trading at the expense of missing Jumu’a4. This is impermissible even if the transaction intrinsically meets all Shari’a principles and was ethical at a

micro, contractual level. Since this transaction is preventing a person from fulfilling his duty to God – which is unethical and morally wrong in Islam – a negative value is assigned to this context. Hence, even though the contract was executed correctly, the wider unethical implication overpowers.

  • Talaqqi al-Jalab (Intercepting Delivery of Goods to the Market)

It is prohibited to intercept delivery of goods designated for the market5. Before the advent of Islam, it was a common practice in early Arabia, to stop a merchandise caravan before it reached the market and buy the entire stock and later sell it at a higher price in the city. This practice would only be disliked (makru) and discouraged if it is economically harmful. In contrast, if it is beneficial, then such a practice is not disliked6. Shari’a has a contextual ruling and deems it unethical and morally wrong when harm is perceived.

  • Making an Offer after Two Parties have Agreed in Principle

The Prophet (peace be upon him) has prohibited making a purchase offer on a deal agreed upon between the two parties in principle7. Making an offer is independently lawful and ethical when made according to the Shari’a principles, however, it becomes unethical in this context due to the wider consideration of harming the other party.

CONCLUSION

Shari’a compliance is always inclusive of ethical considerations but understanding the dimensions and context is essential to arrive at the right decision. The Islamic finance industry generally uses the term ‘Shari’a compliant’ to express the ethical nature of the contract and product structure. It is the responsibility of the Islamic financial institutions to put the matter before the Shari’a Supervisory Board to assess the proximity or remoteness of the transaction to the perceived ethical/unethical context, and thereafter issue the corresponding Fatwa.

IT IS NOT PERMITTED FOR A PERSON TO ENGAGE IN TRADING AT THE EXPENSE OF MISSING JUMU’A. THIS IS IMPERMISSIBLE EVEN IF THE TRANSACTION INTRINSICALLY MEETS ALL SHARI’A PRINCIPLES. HENCE, EVEN THOUGH THE CONTRACT WAS EXECUTED CORRECTLY, THE WIDER UNETHICAL IMPLICATION OVERPOWERS.

A.K.M. MIZANUR RAHMAN, CIPA, CSAA
SENIOR VICE PRESIDENT & HEAD OF ISLAMIC BANKING BANK ASIA LIMITED, BANGLADESH

WHILE ENSURING SHARI’A COMPLIANCE, THE FINANCIAL TRANSACTIONS HAVE TO BE RIBA-FREE, HOWEVER, TO BE ETHICAL AN ISLAMIC BANK CANNOT LOSE SIGHT OF THE IMPACT ITS FINANCIAL LENDING WILL HAVE, LET’S SAY ON THE ENVIRONMENT IN THE FORM OF CARBON EMISSION THAT MAY ADVERSELY IMPACT THE ECOSYSTEM.

Ethics and Shari’a sometimes go hand in hand and complement one another, however not everything ethical is Shari’a- compliant. For work to be acceptable to a Muslim, it should be ethical and Shari’a-compliant. Many people wrongly believe that anything that complies with Shari’a is automatically ethical; therefore, no particular emphasis is given on ethics in Shari’a-compliant activities and transactions. Before commenting on this theory, let us go through the definitions of some key ideas.

According to the Cambridge English Dictionary, Shari’a means: “the holy laws of Islam that cover all parts of a Muslim’s life.”

Compliance means: “the act of obeying an order, rule, or request.” Ethics means: “the study of what is morally right and wrong or a set of beliefs about what is morally right and wrong.”

In general terms, ethics guide people on what should be followed for the betterment of society. Culture and environment also influence a man’s actions, and he tries not to perform any activity that goes against the interest of his surroundings. As an individual, a person follows many things for the good of people and himself, but as a Muslim, he is also careful to follow the rules and regulations that make his actions Shari’a-compliant.

An act of ethics in Islam goes beyond the textbook definition. For instance, as per the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) maintaining justice (Adl), exhibiting a fear of Allah in private and public (Ihsan), relying only on Allah almighty (Tawakkul), practicing consistency and truthfulness (Sidq), and exercising quality of trustworthiness (Amanah), falls under the purview of ethics. The organisation also adheres to truth and transparency in statements and information provided to customers and the general public. In the Islamic parlance, anything done for the good of society and the state intrinsically falls under the prospect of ethics.

Returning to the original question: whether Shari’a and ethics go together, the answer is yes. Let us understand it with an example from Islamic banks. While ensuring Shari’a compliance, the financial transactions have to be Riba- free, however, to be ethical an Islamic bank cannot lose sight of the impact its financial lending will have, let’s say on the environment in the form of carbon emission that may adversely impact the ecosystem. The bank will also be careful that the transaction does not fall in the hands of terrorists that may jeopardize society. Going further, it will also be cautious about the asset’s value, lest the purchase gets out of the reach of a common man.

Let us understand it with a real-life example. A land developer purchases a low-cost land for one of his building projects. He acquires a loan from the bank for construction and other purposes that elevates his property’s price and that of the adjacent lands. Now a common man with meagre resources can no longer afford the property in that area, one because, the mark-up on loan forced the developer to charge a premium on the actual cost. Two, development as a catalyst of change altered the perceptual and subsequently, the real value of the surrounding properties. Alternatively, however, had the banker considered the issue ethically he/she would have arrived at a different decision. Shari’a-driven ethics tell us that no action of a Muslim should reflect exploitation and oppression (zulm) so as to deprive others of their due rights. In this case, charging an exorbitant mark-up is unethical and shall be considered as zulm. However, when determining the mark-up or profit, if Shari’a guidelines are followed, the transaction becomes Shari’a-compliant but does it also make it ethical?

 

ULANDDY UYOB – HEAD, SHARIAH DEPARTMENT AMMETLIFE TAKAFUL BERHAD

During my daily commute, to and from work, standing at the front of the train, I observed the track lines every day of the week. The lines, right and left, seemed to run parallel to each other, with no chance of overlapping. Each of them like us, having different perspectives, attitudes and responsibilities.

Let us consider another situation where farmers produce onions and the market for it has a demand-supply gap. After production, the farmers realise that if they export the onions to a neighbouring country, instead of selling it in the local market, a huge profit could be earned. Though this thinking is not against Shari’a, it is still unethical because the artificially created shortage will result in high price of the onions, affecting the purchasing power, and thus goes against the interest of the local people.

The above explanation tells us that compliance with Shari’a is not enough to be completely just in any situation. The guidelines of both the Shari’a and worldly ethics need to be followed for the betterment of society. In nutshell Shari’a compliance and ethics are not competitors; instead, they complement one another to arrive at a decision that improves society’s well-being.

In a different thought, Denmark has been named by the Environmental Performance Index as the cleanest country in the world for 2021. Interestingly, majority of the population in that country are non-Muslims, yet they still preached Islamic teaching on cleanliness, knowingly or unknowingly. Let’s extent the list, Luxembourg, Switzerland, United Kingdom, France, Austria, Finland and the list goes on. Sadly, there is no Muslim country listed in the top ten positions. That’s the left line of the train track.

Now coming to the right line of the same train track. If the statistics are accurate, most, if not all of the first ten positions in the list of the dirtiest countries in the world are occupied by Muslim-majority countries. These left and right lines, are similar, if not rhetorically, as metaphors for ethics and Shari’a- compliance.

Attitude is perhaps the best word to blend ethics and Shari’a- compliance. A person with a good attitude is believed to be ethical and can perhaps be considered Shari’a-compliant even if he is a non-Muslim. On the other hand, a Muslim with a bad attitude may be Shari’a-compliant but not necessarily ethical.

The idea that any form of Shari’a compliance is automatically ethical as well is a misconception. Attitudes or the set of beliefs and ideas would definitely be the deciding factor for an individual in every situation, as our attitudes influence our

actions. As such, it will be of significant value to an institution that intends to nurture an ethical working culture and be Shari’a-compliant to identify a person with a good attitude.

In the banking and finance industry, where dollars and cents are the basic subject matter, only reputable or trustworthy institutions are approached by the community. It is the customers’ trust that create a connection with these institutions. Along with all the legal documentations duly executed for the facilities offered by these financial institutions, trust is the only reason for millions of dollars being invested and countless transactions being conducted. It is because of this that while all the banking and financial institutions are contractually accountable to act prudently in their day-to-day business transactions, they must ensure that fiduciary duties entrusted by their customers are continuously been upheld.

These accountabilities, whether expressed or implied, shall include the process of hiring personnel with good attitudes, as they are expected to have a good working ethic, which will be translated in the working culture of the organisation. The personnel shall need to be trained and assessed constantly for their self-development process to ensure steadfast ethics. This quality shall be even more demanding when it involves Shari’a elements, as adherence to Shari’a is another set of evaluation while hiring. However, the question remains, is a Shari’a-compliant person expected to be a person with good ethics?

In our organisation, as an Islamic financial institution, we emphasis on our products and services to be Shari’a-compliant and similar training is provided to our team to adhere the Shari’a principles in day-to-day business transactions. Our customers entrust us to provide Shari’a-compliant products and services and it will be a breach of trust if we fail to do so.

This duty and responsibility is correlated with the people working in our institution, coming from various backgrounds, thus, consistent professional and personal development programmes are required with the long-term objective to craft good attitudes. As working in an Islamic financial institution does not require one to be a Muslim, however, being ethical is a must since the same shall reflect in the attitudes. As individuals first, and later as Muslims, it is our duty to propagate Shari’a principles and good attitudes. The Islamic financial fraternity is working towards building trust in the system through ethical aa well as Shari’a-compliant products and services, and at the same time training and nurturing the masses to adhere to Shari’a principles, incorporating ethics in their day-to-day affairs.

Life is about learning and learning is a process that takes time. Remember, Rome was not built in one day!

LIFE IS ABOUT LEARNING AND LEARNING IS A PROCESS THAT TAKES TIME. REMEMBER, ROME WAS NOT BUILT IN ONE DAY!

 

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