Week 2: Norms of Ethics in an Islamic Financial System
“Introduction and Freedom to Contract … The Concept of Al-Ribâ … The Concept of Al-Gharar … Concepts of Al-Qimār, Al-Maisir and Ghubn … Norms Relating to Profit … Norms Relating to Mutual Cooperation”
- WeeK 2: Norms of Ethics in an Islamic Financial System > Introduction and Freedom to Contract > Unit
- WeeK 2: Norms of Ethics in an Islamic Financial System > The Concept of Al-Ribâ > Unit
- WeeK 2: Norms of Ethics in an Islamic Financial System > Concepts of Al-Qimār, Al-Maisir and Ghubn > Unit
- WeeK 2: Norms of Ethics in an Islamic Financial System > Norms Relating to Profit > Unit
- WeeK 2: Norms of Ethics in an Islamic Financial System > Norms Relating to Mutual Cooperation > Unit
WeeK 2: Norms of Ethics in an Islamic Financial System > Introduction and Freedom to Contract > Unit
- It provides the freedom to enter into transactions while maintaining that these norms and ethics of Islam do not imply unbridled freedom to contract.
- The basic norms of Islamic financial system include: one, freedom to contract; second, freedom from Al-Riba; third, freedom from Al-Gharar; fourth, norms of Al Qimar and Al-Maisir; and fifth, norms of Al-Ghubn.
- The norms concerning mutual cooperation, solidarity, and brotherhood are in the nature of advice and instances that extol and encourage good behavior.
- On completing this chapter, you will be able to first explain the view that Islamic juries take on the freedom to contract; secondly, explain the prohibition of Al-Riba in loan contracts and in exchange contracts; third, describe the norms that prohibits Al-Gharar; and finally explains norms prohibiting Al Qimar, Al-Maisir, and Al-Ghubn, describes the norms relating to profits in financial transactions, describe the norms related to mutual cooperation or Ta’wun in financial activities.
- A contract involved the assistance of two capable and sane parties together called “Aqidain;” the issuance of an outward act depicting internal willingness, an offer or a job or acceptance of Qabul together called Sighah; a legal union between two declarations concerning the subject matter or Ma’qud Alayhi and the contractual obligations; and freedom from all prohibitions.
- The first, third, and the fourth elements mentioned earlier on are essential to a contract.
- According to San Houri, an expert in Islamic finance, there are seven components in a contract: The agreement of offer and acceptance; the agreement of the Majilis, which is a section or meeting, of a contract; plurality of the contracting parties; maturity of the contracting parties; subject matter susceptible to delivery; the object, or Mahall, defined; and the beneficial nature of the object, as permitted by Shari’ah rules.
WeeK 2: Norms of Ethics in an Islamic Financial System > The Concept of Al-Ribâ > Unit
- In Surah Al-Baqarah, verses 278 and 279 says, “O you who believe! Fear Allah and give up what is still due to you from riba or usury from now onward if you are true believers.
- ” The Holy Quran also recommends the prohibition of two things, one, riba in loans or debts, and secondly, riba in sales or exchange transactions.
- Riba in loans or debts refers to any loan, or Qard, as any commodity or sum of money that is given by one party to another for a certain estimate time.
- The Holy Quran states that in both loans and debts, the creditor has right only over the principal amount, or Ra’asul-mal, and not on any excess amount or interest on it.
- The Holy Quran explains that all incomes and earnings, salaries and wages, remuneration and profits, usury and interest, rent and hire, and so on can be categorized either as permitted or prohibited profit.
- Permissible and prohibited transactions are distinguished based on the nature, a sale or purchase, loan, and lease.
- The act of changing a commodity or asset for another commodity or asset is known as exchange.
- The exchange rules are different for different types of assets and contracts.
- According to the rules of exchange of monetary units, an equal and on-the-spot exchange is mandatory for the exchange of any asset with the same kind of asset.
- One, when the two goods being exchanged are different, excess and delay or both are permitted, for example, exchanging gold for wheat or dollars for car.
- Secondly is when the two goods being exchanged are similar, excess and delay both are prohibited, for example, exchanging gold for gold or wheat for wheat, dollars for dollars, etc.
- Third is when the two goods being exchanged are different but the effective cost is the same, then excess or deficiency is permitted, but delay in exchange is prohibited, for example, exchanging gold for silver or US dollars for Japanese yen or wheat for rice.
WeeK 2: Norms of Ethics in an Islamic Financial System > Concepts of Al-Qimār, Al-Maisir and Ghubn > Unit
- Al-Qimar and Al-Maisir are terms associated with unethical and prohibited financial transactions.
- Mobilization of funds by the government through a lottery is considered as gambling, and therefore is prohibited.
- Islamic banks prohibit conventional transactions and bank products that involve such gains.
- It also means wishing for something valuable without working for it.
- In Islamic banks, the conventional transactions and bank products that involve Maisir are prohibited.
- Conventional insurance is not Shari’ah uncompliant because it involves both Riba and Maisir.
- Third, entrepreneurs offering incentives and additional products to customers when products are sold for a price.
- Next, some bank schemes in which the bank offers a prize through a lottery for the depositors.
- The winner in this case can take the prize through the lottery, and others will wait for their chance.
- Ghubn is the difference between the manipulated price at which a transaction is executed and the fair price according to the evaluation by experts.
- The Holy Prophet prohibited Ghaban-e-Fahish, which means selling something at a higher price and giving the impression to the client that he is being charged according to the market rate.
- The purchaser has the option to revoke the sale and get back the price paid.
WeeK 2: Norms of Ethics in an Islamic Financial System > Norms Relating to Profit > Unit
- The financial system promotes the practice of sharing both profit and losses.
- In risk and return, profit-sharing is based on the principle that money by itself is not considered as capital.
- Since all commercial activities involve risk, one has to bear that risk for the legality of the profit or earnings.
- The return expected on funds invested often determines how willing and capable a business person is to add value or bear potential loss.
- On the ownership transfer risk, transfer of commercial risk without the transfer of the reward is not permitted under Shariah.
- In trade, the risk of loss or destruction is the responsibility of the owners as long as the assets remain with them.
- The practice share both profit and losses in proportion to the individual investments.
- In the case of bank depositors, the risk comes from the failure of business and the uncertainty regarding the profit that has to be shared.
- When financing through the Shirkah mode, the bank faces the risk that clients may conceal their profits.
WeeK 2: Norms of Ethics in an Islamic Financial System > Norms Relating to Mutual Cooperation > Unit
- Norms relating to mutual cooperation. Norms concerning mutual cooperation, solidarity and brotherhood are central to Islamic ethics. These norms are laid out in the forms of validations of age-old practices such as the ‘aqila and daman Khatr al-tariq advice on good and ethical behavior and instances that encourage good living. Surah al-Ma’idah and al-Hadith. The second verse of Surah al-Ma’idah says,”Help one another in Al-Birr and At-Taqwa, virtue, righteousness and piety, but do not aid one another to sin and transgress.
- ” The following al-Hadith support mutual collaboration, “Believers are to other believers like parts of a structure that tighten and reinforce each other.
- The tribal members of the Arabian peninsula practiced mutual cooperation 14 centuries ago.
- Then people started associations by means of Al-hilf and signed agreements for mutual assistance.
- All these forms of cooperation and assistance led to social insurance.
- First stipulation for social insurance, for the Jews, the Ansar and the Christians.
- The statement, “The immigrants among the Quraish shall be responsible for their word and shall pay their blood money in mutual cooperation.