Islamic Ethics in Finance

Islamic Ethics in Finance

Copyright: © 2021 |Pages: 28
DOI: 10.4018/978-1-7998-5295-7.ch008


Islamic banking and finance have been very attractive features for Muslim as well as non-Muslim customers. Where a Muslim customer would investigate Shariah compliance when choosing an Islamic financial institution for its services, a non-Muslim customer prefers ethical banking as a main feature of any financial institution. This awareness of ethical banking has been a decisive factor for many customers when choosing a financial institution. Before delving into Islamic ethics in finance, the authors explore factors of production in Islamic ethics and how they differ from conventional concepts. Secondly, most important in Islamic financial ethics is that the al-Qur'an strictly forbids charging interest or riba to businesses or individual customers. This chapter focuses on reviewing the development of Islamic banking vs. conventional banking.
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This chapter will discuss the Islamic ethics in finance as a moral principle which control or influence an individual’s personal and professional behaviour. It is system of moral principles or rules of behaviour. It relates to beliefs and principles about what is right and wrong. Islamic finance over the last few decades is one of the fastest growing area in the world. Leading Muslim countries started to adopt the Islamic finance as a key and important financial transaction tool for trading.

In order to understand the Islamic point of view, it would be better to have a look at the systems of the distribution of wealth in capitalist and socialist economies. Capitalistic theory can be briefly stated as:

Wealth should be distributed only over those who have taken a part in producing it, and who are described in the terminology of economics as the factors of production.

According to the conventional concept, these are following four factors:

  • 1.

    Capital: which has been defined as “the produced means of production” – a commodity which has already undergone one process of human production and is again being used as a means of another process of production.

  • 2.

    Labour: any exertion on the part of man.

  • 3.

    Land: has been defined as ''natural resources'' (those things which are being used as means of production without having previously undergone any process of human production).

  • 4.

    Entrepreneur or Organisation: The fourth factor that brings together the other three factors utilise them and bear the risk of profit and loss in production.

Under the capitalist economy, the wealth produced by the cooperation of these four factors is distributed over these very four factors as follows:

  • a)

    One share is given to capital in the shape of interest

  • b)

    The second share to labour in terms of wages

  • c)

    The third share to land as rent

  • d)

    The fourth share is reserved for the entrepreneur as profit

On the other hand, in a socialist economy, capital and land instead of being private property are national or collective property. The question of interest or rent does not arise at all under this philosophy. In the socialist system, the entrepreneur too is not an individual but the state itself. So profit as well is out of the question here - at least in theory. Now there remains only one factor, namely labour. And labour alone is considered to have a right to wealth under the socialist system, which it gets in the shape of wages (Usmani, 2015).

Islamic vs. Conventional Factors of Production

Islamic System of Distribution of Wealth

The Islamic system of the distribution of wealth is different from both the Capitalist and Socialist economic system. From the Islamic point of view, there are two kinds of people who have a right to the wealth:

1. Primary Right to Wealth

The primary right denotes the right to wealth which is directly in consequence of participation in the process of production. In other words, primary right is for those factors of production that have contributed in the process of producing wealth.

2. Secondary Right to Wealth

The secondary right holders are those who have not directly contributed in the process of production, but it has been made obligation upon the producers to make them partners in their wealth e.g. beneficiaries of zakah, sadaqah al-fitr, etc.

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