ETHICS AND CORPORATE GOVERNANCE IN ISLAMIC FINANCE
Contrary to the ideal assumption that Islamic finance is about belief, Shari’ah and ethics, it is observed nevertheless that in actual practice, Islamic finance is more anxious on the legal and mechanistic aspect of Shari’ah compliant. At this point, Killian Balz views that Islamic finance is now experiencing a “formalist deadlock” where the industry is more concerned with formal adherence to Islamic law instead of promoting Islamic ethical values. This is affirmed by Mahmud El Gamal when he severely criticized the practice of Islamic finance particularly by highlighting the issue of Shari’ah arbitrage. Significant criticisms by numerous scholars about the current practice of Islamic finance have led to series of questions as to the distinctiveness of Islamic finance with its conventional counterparts. Umer Chapra and Nejatullah Siddiqi for instance view that the practice of Islamic finance seems unable to attain its authenticity and share many common similarities with conventional finance. As a result, Islamic finance industry is also experiencing the impact of financial crisis such as in the case of closure of Ihlas Finance House in Turkey, the Islamic Bank of South Africa and the Islamic Investment Companies of Egypt. These corporate failures raise an issue on the importance of ethics as the core element of Islamic finance.
Islamic model of corporate governance advocates comprehensive approach by emphasizing the elements of ethics as propounded in al Quran and al Sunnah. Unlike ethics from western theory perspective, the Islamic ethical principles are divine and religious construct. Rodney Wilson states that the Islamic ethics as being enduring and based on holy revelation while the ethics in western theory derived from social values are more transitory in nature. Al Quran and al Sunnah provide guidelines and principles of ethics that can be universally applied including in the matter of corporate governance.
In deconstructing the Islamic ethical principles within the realm of economic, Syed Naqvi advocates four important axioms that specifically reflect its relevancy in determining the rules of economic behavior in a society. The axioms of unity, equilibrium, free will and responsibility are the basis for deriving a set of ethical system and principles that would be appropriate to nurture and guide the economic behavior from Islamic point of view. The concept of unity refers to vertical dimension of Islam whereby man’s life on earth in its entirety relates eternally to God. While unity depicts the vertical dimension, equilibrium denotes the horizontal dimension of Islam by which it is a binding moral commitment of every individual, institution, corporation or any kind of entities to uphold a delicate balance in all aspects of lives . The axiom of free will then propagates the concept of natural freedom within certain limitation whereby it emphasizes on the element of balancing between the ‘individual freedom’ and ‘collective freedom’. Finally, the concept of ‘amanah’ or responsibility complements the Islamic ethical axioms in which the natural freedom that derived from the free will axiom must be exercised with full responsibility as a vicegerent and trustee of God. These divine formulated axioms provide very useful guidelines in identifying and recognizing legitimate ethical principles in economic.
Another construct of ethics to legitimize the ideal Islamic economic behavior refers to the principle of adl (justice), amanah (trust) and ihsan (benevolence). Based on the ethical axioms of unity, equilibrium, free will and responsibility, Islamic ethics must at least have three important characteristics namely the criterion of adl (justice), amanah (trust) and ihsan (benevolence). The first feature of ethics in Islam requires all individual to behave justly to all. Allah says in al Quran “Allah commands justice, the doing of good and liberality to kith and kin, and He forbids all shameful deeds and injustice and rebellion: He instructs you, that ye may receive admonition” (Al Quran, 16: 90). The managers for instance shall treat equally the employees without discrimination. The concept of amanah then further characterizes Islamic ethics by considering individual as a vicegerent of God and he is accountable to Him in which requires him to be responsible in whatever he does. In al Quran, (8: 27) Allah says “Ye that believe! Betray not that trust of Allah and the Messenger, nor misappropriate knowingly things entrusted to you”. Finally, the concept of Ihsan represents the core and most important element of Islamic ethics. Al Qurtubi views that, unlike justice which is mandatory, Ihsan denotes what is above and beyond mandatory. In this regard, Ihsan requires extra caution, effort and good intention where the individual performs good deeds with the realization that Allah is watching him at all times. The criterion of ihsan then expects all stakeholders in IFIs regardless of shareholders, managers, board of directors (BOD) and employees to observe the set of Islamic ethical principles which is divinely revealed and clearly stipulated in al Quran and al Sunnah.
The foregoing discussion on the ethical dimension in Islam validates the need for integrating ethics as part of corporate governance framework in IFIs. Islam highly insists stakeholders of IFIs particularly shareholders, BOD, managers, employees and Shari’ah board to preserve standard of conducts, to observe good ethics, conscience and piousness. Indeed it is the prerogative of the stakeholders to take into consideration the element of ethics i.e. adl, amanah and ihsan in every aspect of IFIs’ activities and operations, particularly in the decision making process.