The Ethics of Islamic Financial Market(Blueslide)_28072009sdn

8/14/2019 The Ethics of Islamic Financial Market(Blueslide)_28072009sdn

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By: Saebani Hardjono Jakarta 28 th , August 2009


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ObyectiveBringing understanding to the audience what

the ethics is.Giving discription of the ethics in the financialsystem. To share perspective on the ethics of Islamic

financial market.


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Introduction and

BackgroundWhat ethics does mean?

What should we understand of the Islamicethics ?

Why does ethics matter ?

Why does we need to study an ethics of Islamic financial market ?


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Introduction (continue)What ethic does mean ?Ethics is:1. A system of moral principles governing the appropriate

conduct (encarta).2. The system of code of morals of person, religion, group

(yourdictionary.com)

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

4. A set of values that represent the ethical ideals (ethics.org)5. The principles of human conduct, incl: values, rights,

morality (businessdictionary.com)


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Introduction (continue)What should we understand of the Islamic ethics ?Muslim derive their ethical system from the Quran andSunnah and also from concensus of scholars ( Ijmaa ) and

analogy ( Qiyass ). The goals of Islam are not primarily materialist, but humanwell being and good life, socio economic justice, andbalanced both material and spiritual for ummah (Chapra,1992).

The Islamic ethical system contains a concepts of unity

(Tawhidi), justice and trusteeship.


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Introduction (continue)Why does ethics matter ?

Over the centuries, Value-free society developed and

economists focused on the mechanics of economics, andreligion became seperated.A free-market capitalist economy uses market determinedprices as filtering mechanism. However, it has frustrated therealization of socio-economic goals.Empirical studies suggest that global managers shouldunderstanding and committed to pursuing the best inethical and moral decision making and behavior(Al-Khatib et. al; 1995, Amine, 1996).


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Introduction (continue)Why do we need to study an ethics of Islamicfinancial market ?

Islamic wordlview implies that the market system(incl. financial) should be maintained, with thedevice that minimizes unnescessary claims onresources. This device is the moral filter/ethics(Chapra, 1992).

The Islamic ethical system contains specific guidelinesfor achieving the moral filter and for business (incl. infinancial market). It is derived from the interrelatedconcepts of unity, justice and trusteeship.


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Financial Market (Background) The financial products are relating to many players:

commercial banking,investment banking,insurance andthe markets where these are traded.

The Islamic financial products and market have toconform with Shariah and Islamic ethics.

We need to correctly understand the norms of Shariah andIslamic ethics.We notions of financial system ethics as understoodconventionally and of Islamic.


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e principles:

Financial system must be efficient, ethical, and fairto all participants.

Ethics and fairness are an entitlements or rights of

savers and investors.


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Seven classes of fairness :

1. Freedom from coercion,2. Freedom from misrepresentation,3. Right to equal information,4. Right to equal processing power,

5. Freedom from impulse,6. Right to trade at efficient prices,and7. Right to equal bargaining power.


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eedom from Coercion

Investors have the right not to be coerced into a transactiThe free will of all the parties to the contract.

The right not to be prevented from entering into a transac

The right to search for information.Not to be forced into making specific disclosures.


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Freedom from Misrepresentation

All investors have the right to rely on truthful

information.

This does not imply any kind of compulsion toreveal

information.

Deliberate disclosure of inaccurate informationcan be

claimed.


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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.


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Right to Equal Information ProcessingPower

Equal access to a common set of information.

Compulsory disclosure of information in a

processed form.

Prohibition where certain groups may be atdisadvantage .


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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.


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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).


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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


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Norms

Islamic scholars have undertaken a thorough

examination of relevant verses from the holy Quranand the Sunnah and have long established the

basic principles, which govern the rights and

obligations of participants in a financial system.


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eedom to Contract

m provides a basic freedom to enter into transactions, contracts or traran (2:275), says: Allah has made trade lawfu l.

ther, no contract is valid if it involves an element of coercion forher of the parties. Quran (4:29), says: Let there be among you traffic

trade by mutual goodwill.

hange is permitted only when undertaken in permissible commodities

perty ( maal ).

de is not permissible in alcohol and pork. Even trade in stocks ornership interests in companies dealing with or producingse commodities is not permissible.


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Freedom from Al Riba

All forms of contracts and transactions must be

freefrom rib a (excess) payment.

No reward for time preference.

Reward, returns or benefits must alwaysaccompany

liability or risk.


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Freedom from Al Gharar (ExcessiveUncertainty)

Contracts and transactions must be free from

excessive

gharar (or uncertainty).

Contracting under conditions of excessive

uncertainty is

not permissible.


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edom from Al-Qimar (Gambling) and Al-Maysir

Contracting under excessive uncertainty (gharar) is akin

to gambling (al-qima r).Quran and the traditions of the Prophet (pbuh) explicitly prohibit

gains made from games of chance, which involve unearned inco

(al-maysi r).

Speculation always involves an attempt to predict the future

outcome of an event (without analysis and interpretation

of relevant information).


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Freedom from Price Control and ManipulationIslam 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 (ihtika r).


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Transact at Fair Prices

Prices without any intervention or manipulation

are believedto be fair.

Pricing is based on a valuation exercise.

The presence of ghubn makes a transactionunethical.


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Equal, Adequate and AccurateInformation

Great importance to the role of information in themarket.

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


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Freedom from Darar (Detriment/damage)

The possibility of a third party being adverselyaffected

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 beingadversely

affected by any decision of the controlling

shareholders


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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."


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

iffers from the norms of mainstream financial ethicsnificantly in imposing injunctions against al-riba,qima r, and al-maysi r.

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


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Maslahah Mursalah (Unrestricted Public Interest)

The framework of maslahah-mursalah orunrestricted public

interest. which is a valid framework of Islamiclegislation.

Unrestricted public interest on account of its beingundefined

by the established rules of Sharia h. Maslahah consists of considerations, which secure abenefit or

prevent a harm but are, in the mean time,harmonious with the

objectives (maqasi d) of Sharia h.

These objectives consist of protecting five essential

values, namely:reli ion, life, intellect, linea e and ro ert .


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There is possibility of conflict between concernsabout

financial system ethics and efficiency.

In an Islamic financial system, by definition,concerns about

conformity to norms of Islamic ethics dominateall other

concerns.

All transactions in an Islamic system must be

governed bynorms of Islamic ethics as enunciated by the

Shariah .

Islamic systems are, in essence, ethical systems.


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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 theabove norms of

Islamic ethics.

And Islamic scholars have not only establishedthe basic

principles and norms, but also identified thecontractual

mechanisms that conform to these norms anddo not violate

them in any manner.

The Ethics of Islamic Financial Market(Blueslide)_28072009sdn

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