The Ethics Of Islamic Financial Market_forscribd_11082009sdn

By: Saebani Hardjono Presented as assignment of Dr. Abul Hassan Class of Islamic Capital Market

Jakarta 28th, August 2009

Bringing an understanding to the audience what the ethics is. Giving discription of the ethics in the financial system. To share perspective on the ethics of Islamic financial market.

The research method implemented in this study is a literature’s study, in the area of ethics, both in financial system as a convensional system and in the Islamic financial system.

What ethics does mean? What should we understand of the Islamic ethics ? Why does ethics matter ? Why does we need to study an ethics of Islamic financial market ?

What ethic does mean ? Ethics is: A system of moral principles governing the appropriate conduct (encarta). The system of code of morals of person, religion, group (yourdictionary.com)

The philosophy of the good and right thing to do (socialscience.cypresscolledge.edu)

A set of values that represent the ethical ideals (ethics.org) The principles of human conduct, incl: values, rights, morality (businessdictionary.com)

What should we understand of the Islamic ethics ? Muslim derive their ethical system from the Qur’an and Sunnah and also from concensus of scholars (Ijmaa’) and analogy (Qiyass). The goals of Islam are not primarily materialist, but human well being and good life, socio economic justice, and balanced both material and spiritual for ummah (Chapra,1992). The Islamic ethical system contains a concepts of unity (Tawhidi), justice and trusteeship.

Why does ethics matter ? Over the centuries, “Value-free society” developed and economists focused on the mechanics of economics, and religion became a private matter (Gillian Rice, 1999). A free-market capitalist economy uses market determined prices as filtering mechanism. However, it has frustrated the realization of socio-economic goals (Chapra, 1992). Empirical studies suggest that global managers should understanding and committed to pursuing the best in ethical and moral decision making and behavior (Al-Khatib et. al; 1995, Amine, 1996).

Why do we need to study an ethics of Islamic financial market ? Islamic wordlview implies that the market system (incl. financial) should be maintained, with the device that minimizes unnescessary claims on resources. This device is the ‘moral filter/ethics’ (Chapra, 1992). The Islamic ethical system contains specific guidelines for achieving the moral filter and for business (incl. in financial market). It is derived from the interrelated concepts of unity, justice and trusteeship (Gillian Rice, 1999).

The financial products are relating to many players:    

 

commercial banking,

investment banking, insurance and the markets where these are traded.

The Islamic financial products and market have to conform with Shariah and Islamic ethics. We need to correctly understand the norms of Shariah and Islamic ethics. We notions of financial system ethics as understood conventionally and of Islamic.

The principles:

Financial system must be efficient, ethical, and fair to all participants.

Ethics and fairness are an entitlements or rights of savers and investors.

Seven classes of fairness (Shefrin & Statman, 1992)

• • • • • • •

Freedom from coercion, Freedom from misrepresentation, Right to equal information, Right to equal processing power, Freedom from impulse, Right to trade at efficient prices,and Right to equal bargaining power.

Freedom from Coercion  Investors have the right not to be coerced into a transaction.  The free will of all the parties to the contract.  The right not to be prevented from entering into a transaction.  The right to search for information.  Not to be forced into making specific disclosures.

Freedom from Misrepresentation  All investors have the right to rely on truthful information.  This does not imply any kind of compulsion to reveal information.  Deliberate disclosure of inaccurate information can be claimed.

Right to Equal Information  Equal access to a particular set of information.  Information is forced to disclose it to others.  Privileged access to “inside information” is prevented.

Right to Equal Information Processing Power  Equal access to a common set of information.  Compulsory disclosure of information in a “processed” form.  Prohibition where certain groups may be at disadvantage.

Freedom from Impulse (forced action)  Protection from imperfect self-control.  Prevented from making mistakes, which are harmful to his own interest.  Regulator assumes a paternal role and seeks to protect the investors.

Right to Trade at Efficient Prices  Trade at prices they perceive as efficient or correct.  Let prices adjust by whatever amount necessary to equate demand & supply (market price).

Right to Equal Bargaining Power  Equal power in negotiations leading to a transaction.  Unequal bargaining power can occur when one party:  has deficiencies in information processing or imperfect self-control.  low-networth investors competing for allotment in an IPO with high-networth investors.

Norms Islamic scholars have undertaken a thorough examination of relevant verses from the holy Quran and the Sunnah and have long established the basic principles, which govern the rights and obligations of participants in a financial system.

reedom to Contract

am provides a basic freedom to enter into transactions, contracts or trad uran (2:275), says: Allah has made trade lawful.

rther, no contract is valid if it involves an element of coercion for her of the parties. Quran (4:29), says: Let there be among you traffic d trade by mutual goodwill.

change is permitted only when undertaken in permissible commodities o operty (maal).

ade is not permissible in alcohol and pork. Even trade in stocks or wnership interests in companies dealing with or producing ese commodities is not permissible.

Freedom from Al Riba  All forms of contracts and transactions must be free from riba (‘excess’) payment.  No reward for time preference.  Reward, returns or benefits must always accompany liability or risk.

Freedom from Al Gharar (Excessive Uncertainty)  Contracts and transactions must be free from excessive gharar (or uncertainty).  Contracting under conditions of excessive uncertainty is not permissible.

Freedom from Al-Qimar (Gambling) and AlMaysir  Contracting under excessive uncertainty (gharar) is akin to gambling (al-qimar).  Quran and the traditions of the Prophet (pbuh) explicitly prohibit gains made from games of chance, which involve unearned income (al-maysir).  Speculation always involves an attempt to predict the future outcome of an event (without analysis and

Freedom from Price Control and Manipulation  Islam foresees a free market: prices are determined by D & S.  No interference in the price formation process even by the regulators.  Price control and fixation is generally considered as unIslamic.  Some scholars admit of its permissibility:  that price fixation is intended to combat cases of market anomalies caused by impairing the conditions of free competition.  Islam therefore, condemns any attempts to influence prices:  

through creating artificial shortage of supply (ihtikar).

Transact at Fair Prices  Prices without any intervention or manipulation are believed to be fair.  Pricing is based on a valuation exercise.  The presence of ghubn makes a transaction unethical.

Equal, Adequate and Accurate Information  Great importance to the role of information in the market.  Release of inaccurate information is forbidden.  To hide of vital information (ghish) also violates the norms of Islamic ethics.  Transaction must be free from jahalah or misrepresentation.  Transparent market is, thus, quite important.  Transactions should be based on relevant information.  Information should be equally accessible to all

Freedom from Darar (Detriment/damage)  The possibility of a third party being adversely affected by a contract between two parties.  A case in point is the pre-emptive right (alshufa) of a partner in joint ownership.  Where existing minority shareholders are being adversely affected by any decision of the controlling shareholders

Mutual Cooperation and Solidarity  This norm is central to Islamic ethics. Q: Surah Al Maida (5:2), says: "Assist one another in the doing of good and righteousness.  Assist not one another in sin and transgression, but keep your duty to Allah" The following ahadith by the Prophet (pbuh) reinforce this principle of cooperation and mutual assistance. “Believers are to other believers like parts of a structure that tighten andreinforce each other."

Maslahah Mursalah (Unrestricted Public Interest)  The framework of maslahah-mursalah or “unrestricted” public interest. which is a valid framework of Islamic legislation.  “Unrestricted” public interest on account of its being undefined by the established rules of Shariah. Maslahah consists of “considerations, which secure a benefit or prevent a harm but are, in the mean time, harmonious with the objectives (maqasid) of Shariah.  These objectives consist of protecting five essential values, namely: religion, life, intellect, lineage and property.

e list of norms of Islamic ethics stated above is by no means haustive.

differs from the norms of mainstream financial ethics gnificantly in imposing injunctions against al-riba, -qimar, and al-maysir.

so far as the rights relating to information are concerned, ere is a lot in common between Islamic and mainstream nancial ethics.

What the ethics is? Ethics is: A system, code of morals, philosophy, values, or principles, which is governing the appropriate conduct or bahaviour of a person.

Ethics in the financial system consists of:       

Freedom from coercion, Freedom from misrepresentation, Right to equal information, Right to equal processing power, Freedom from impulse, Right to trade at efficient prices,and Right to equal bargaining power.

Ethics of Islamic financial market consists of:        

Freedom to contracts. Freedom from al-riba, al-gharar, al-qimar, and al-maysir. Freedom from price control and manipulation. Transact at fair price. The right to get equal, adequate & accurate information. Freedom from darar/detriment. Mutual coopertion and solidarity. Maslaha mursalah and maqasid of Shariah

• There is not much different between financial system ethics and Islamic financial ethics instead of the thing that related to Shariah . • In an Islamic financial system, by definition, concerns about conformity to norms of Islamic ethics dominate all other concerns. • All transactions in an Islamic system must be governed by norms of Islamic ethics as enunciated by the Shariah.

An Islamic financial system, by definition, provides a linkage between SSUs and SDUs through an array of financial products and services that do not violate the above norms of Islamic ethics as long as comform with Syariah. • And Islamic scholars have not only established the basic principles and norms, but also identified the contractual mechanisms that conform to these norms and do not violate them in any manner.

• • • • • • •

Ali, Abbas J., & Manton Gibbs, Foundation of business ethics in contemporary religious thought, International Journal of Socio Economics. Bradford: 1998. Vol. 25. pg. 1552. Esq, Umar F. Mogul, (2006), Introduction to Islamic Finance, Communities & Banking, Federal Reseve Bank of Boston, USA. Mews, Constant J., & Ibrahim Abraham, Usury and Just Compensation: Religious and Financial Ethics in Historical Perspective. Obaidullah, Mohammed, (2005), Islamic Financial Service, Islamic Economics Research Center, King Abdulaziz University, Jedah, Saudi Arabia. Pomeranz, Felix, Ethics: toward globalization, Managerial Auditing Journal, 2004; 19; ABI/INFORM Global, Emerald Group Publishing Limited. Rafik I. Beekun & Jamal A. Badawi, Balancing Ethical Responsibility among Multiple Organizational Stakeholders: The Islam Perspective, Journal of Business Ethics (2005) 60; 131-145. Rice, Gilian, Islamic Ethics and the Implications for Business, Journal of Business Ethics, Feb 1999; 18; 4; ABI/INFORM/Global, Kluwer Academic Publisher, Nederlands.