By: Saebani Hardjono

Jakarta 28th , August 2009

Obyective
Bringing 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.
Introduction and
Background
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 ?
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)
Introduction…(continue)
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.
Introduction…(continue)
Why does ethics matter ?
Over the centuries, “Value-free society” developed and
economists focused on the mechanics of economics, and
religion became seperated.
A free-market capitalist economy uses market determined
prices as filtering mechanism. However, it has frustrated the
realization of socio-economic goals.
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).
Introduction…(continue)
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.
Financial Market (Background)
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.
 he 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 :

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,and
7. Right to equal bargaining power.
reedom from Coercion

Investors have the right not to be coerced into a transactio

The free will of all the parties to the contract.
The right not to be prevented from entering into a transact
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
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.
eedom from Al-Qimar (Gambling) and Al-Maysir

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 incom
(al-maysir).
Speculation always involves an attempt to predict the future
outcome of an event (without analysis and interpretation
of relevant information).
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."
 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.
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.
 There is possibility of conflict between concerns
about
financial system ethics and efficiency.

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.

Islamic systems are, in essence, ethical systems.

 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.

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.