Islamic finance as ethical finance

This is based on the talk held in Hong Kong on 22 June 2019 entitled ‘What is Islamic Finance?’

Islamic finance is regarded as an ethical finance because, if properly implemented, it can mitigate two major world issues.

The first major issue is the failure of conventional financial system to avoid recurring financial crisis due to speculative activities in financial markets. For example, speculative behaviours in stock markets had crashed the markets in 1987. Speculative behaviours in currency markets had devalued affected currencies in 1997. Speculative behaviours in debt markets had caused the subprime credit crisis that erupted in 2007.

It is difficult to regard speculative behaviours in financial markets as ethical if they caused recurring crisis that consequently erupted society wellbeing in destructive manner (e.g., financial and jobs losses). If `ethics' is circumscribed as all human actions aimed at securing a good life (as prescribed by the Journal of Business Ethics), then actions that destruct society wellbeing as described above is hardly ethical.

Why Islamic finance is a remedy to this problem? A properly implemented Islamic finance will eliminate such destructive speculative activities because ‘gharar’ (excessive uncertainty) is prohibited from Islamic law perspective. This is because Islamic finance is about real investment activities (i.e., the production and buying/selling of real permissible good and services), not speculative financial trades (i.e. buying/selling financial assets for instant profits). The former involves real effort and time while the latter involves pure speculation (akin to gambling) that had historically fuelled financial crisis. The latter is prohibited simply because of its destructive consequences. If purely speculative activities in financial markets are banned, then there will be no financial crisis.

The second major issue is the widening gap between rich and poor. It was reported that 82% of all wealth created in 2017 went to the top 1%, while the bottom 50% saw no increase in wealth at all (Oxfam, 2018). Whereas, “26 richest billionaires own as many assets as the 3.8 billion people who make up the poorest half of the planet’s population” (The Guardian, 21 Jan 2019).

Truly Islamic finance can mitigate the rich-poor gap issue because it prohibits riba (i.e., an excess that contains unfairness and exploitation elements). Purposeful rent-seeking or earning without regard to real performance (or effort) is not acceptable. Likewise, lending at interest (i.e. selling money for money) is prohibited. This prohibition is due to, at least, three reasons, 1) money is a medium of exchange, hence should not be traded, 2) there is no rationale why money should inflate in value with time, and 3) interest income is fixed without regard to the underlying performance or effort.

Furthermore, in conventional lending the poor (e.g., subprime borrowers) is charged with higher interest rates due to poor credit rating. It is unfortunate that less fortunate people get punished rather than help. It is difficult to view this normal practice as ethical.

Interest on lending can also be seen as a tool that helps the rich becomes richer without having to work hard or undertake real effort. One can get richer by simply sitting on a large amount of financial capital and enjoying a flow of income that is fixed to the capital amount. Therefore, if interest on lending is banned, then the gap between rich and poor can be narrowed.

In brief, if we are 'sick' of financial crisis and widening gap between rich and poor, then a properly implemented Islamic finance is an ethical remedy to be considered.