Islamic banking

Despite growing acceptance of Islamic banking, there is still scepticism on the purity of the products offered and also the sincerity of those managing the institutions. Others mention that one of the basic problems with Islamic banking is that ”Homo Islamicus [Islamic man] keeps acting a lot like Homo economicus [economic man] (Useem 2005).

On the one hand, Islamic banks are perceived as being too complacent, believing they have a captive market in the Muslim asses who will come to them on religious grounds alone, and in the process lose non-Muslim potential customers interested in investing in organisations whose activities are regarded as ethical. On the other hand, they have been criticised as being so anxious to tap funds from the Muslim masses that they opt for pragmatism over purity in the products offered, and in the process destroy the confidence of their Muslim customers.In short, Islamic banks as value-oriented organisations need to assess their corporate ethical identity and corporate branding process, as their current state seems to be controversial. Since we are not aware of any studies that specifically attempt to assess the strength of Islamic banks’ communicated ethical identity against a benchmark of ideal ethical identity, a discussion of what constitutes the ideal ethical identity based on the Islamic precepts follows.The ideal ethical identity benchmark Islamic banking refers to a system of banking which is consistent with the principles of Islamic law (Shari’ah Islami’iah). The Shari’ah governs every aspect of a Muslim’s life, viz.

spiritual, economic, political and social, and faithful execution of duties and obligations based on the Shari’ah is recognised as a form of worship. The Shari’ah is concerned with promoting justice and welfare in society (al-adl and al-ihsan) and seeking God’s blessings (barakah), with the ultimate aim of achieving success in this world and hereafter (al-falah).Hence, Islamic banks, as economic and social institutions, must portray aspects of those five traits, drawn from both Shari’ah and business ethics, in their activities. These features form the ideal ethical identity benchmark used in this report, which is further described in the following paragraphs. The underlying philosophy and values as mobilises of savings on a large scale and caterers to fund-seekers in all sectors of the economy, IBs play an important role in economic regeneration and social justice (Siddiqi 1995).

They have been entrusted with the safekeeping of depositor’s savings and shareholders’ capital and putting these funds to good use. Hence, they are not only financially accountable but also morally accountable for their business behaviour. Current and prospective shareholders and fund depositors would ideally like to assess and judge the credentials of those who have been entrusted with their funds and who have full authority in making economic decisions on their behalf in enforcing the rules of God.

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In other words, those who manage and govern IBs are expected to be believers imbued with piety and righteousness, and to have knowledge and competence in relevant fields associated with banking as well as knowledge of Shari’ah, especially those areas related to business transactions (Fiqh al-mu’amalat). Unlike the foundation of conventional banking, which is interest based (riba), IBs must avoid any form of such dealings, as Islam strongly prohibits interest, as found in four different revelations in the Qur’an.Consequently, the various financial instruments developed by IBs have been based on two principles: the profit-and-loss sharing principle and the mark-up principle (Aggarwal and Yousef 2000).

Financing instruments based on the former principle include mudharabah (venture capital) and musharakah (partnership arrangement), while instruments based on the latter include murabahah (resale with stated profit), bay’al-salam (forward sale contract), ijarah and ijarah waiqtina (operating and financial lease).To remain competitive, IBs have been innovative in their offering of products that do not violate Shari’ah but to a certain extent; they are still perceived as Islamising products and instruments of the capitalistic system rather than applying their own minds in developing products based on Islamic concepts. Islamic banking is much more than offering interest free products. IBs should only finance projects or support practices and products that are permissible (halal) and avoid financing or investing in activities considered abhorrent in Islam, such as gambling, alcohol, drugs, etc., or in short, those that bring harm to society and the environment.

IBs must also avoid speculative transactions or excessive risks (gharar), such as investments in futures markets, since the consequence is not known. In Islam, parties to the contract should have perfect knowledge of the counter values intended to be exchanged and cannot predetermine a guaranteed profit. The rationale behind the prohibition is the wish to protect the weak from exploitation and as such goes beyond financial accountability to include accountability to society.

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