This three-part article was adapted from Mr. Ahmed’s speech at the 1st Global Ethical Finance Forum in Edinburgh on September 2, 2015.
Is ethical conduct good for business and finance? Such an idea stands, of course, in sharp contrast with the actual conduct observed in the financial sector in recent times. Indeed, we have learned that what is good for finance may not always be good for the real economy and for broader social goals.
It is useful here to recall a question originally posed by the philosopher and Nobel prize winning economist, Professor Amartya Sen, speaking at the Banca de Italia in 1991: “How is it possible that an activity (finance) that is so useful has been viewed as morally so dubious?”
“Morally so dubious”. Those are strong words. I am indebted to Governor Ignazio Visco of the Banca D’Italia, speaking at the Islamic Financial Services Board (IFSB)’s 4th European Forum held in Rome in April 2013 for referring me to Professor Sen’s words—words that still seem so relevant. Those words were spoken at a time when most economists and policy makers were confident that ethics need not play a central role in the workings of the market economy that could safely, it was thought, operate according to self-interested, and indeed selfish, conduct.
Much has changed since then. The financial crises have spurred a rethinking not only of the assumed stability and resilience of financial markets, but also of the role of ethics in guiding and, indeed, shaping economic and financial transactions. There is widespread acknowledgement of the loss in trust in the financial sector. There are questions of the financial sector’s relevance in an environment of persistent low growth and high unemployment.
As a remedy to these various ailments, the focus is on restoring integrity and trust in financial institutions and market players. A more inclusive finance is also being sought. This is a profound development, for it represents a transformation of the intellectual lens through which policy makers and analysts have long viewed the relationship between ethics and finance, or ethics and economics.
Where does Islamic finance stand in this respect, that is to say, in relation to the role of normative ethics to business and economic transactions? In viewing the moral and ethical underpinnings of Islamic finance it is useful to recall two distinct approaches to normative ethics. First, that ethics is about duties, regardless of their consequences. This is the deontological, duty-bound Kantian view. The second viewpoint, the consequentialist or utilitarian view, stresses the importance of evaluating the consequences of one’s actions. These two viewpoints are not mutually exclusive, or need not be.
Thus, Islamic finance comprises a system of ethics in which both duty and concern about consequences feature prominently through their joint presence and interaction. Islamic finance recognizes the material usefulness of finance, whilst simultaneously subjecting it to higher overarching objectives that give intrinsic value to ethical and moral conduct that accords with the goals of the Maqasid Al Sharīʿah. Indeed, as the IFSB noted in its Islamic Finance and Global Financial Stability Report in 2010, published jointly with Islamic Development Bank and Islamic Research and Training Institute, “Islamic finance derives its key strengths from its inherent underlying principles.” The report, prepared under the leadership of Dr. Zeti Akhtar Aziz, the governor of Bank Negara Malaysia, elaborated the principles, including the prohibitions against unethical or unlawful conduct, and the goals of social justice that are key features of the “embedded governance” that characterize Islamic finance.
In terms of normative ethics, Islamic finance thus encompasses an approach that is both consequentialist as well as deontological. There is a duty to observe high ethical standards and a corresponding requirement to take into account the wider impact of the transactions financed. This view of ethical conduct, and of wider accountability, as envisioned by Islamic finance thus stands somewhat removed from the notion of a firm that needs only to maximize profits for its shareholders without regard to the social or other consequences of its actions. In this latter example, which has been paradigmatic of much but not all of mainstream economics and finance, the duty that a firm has is only to its shareholders, and firms need concern themselves with nothing else.
This notion of the parameters of ethics, or duty, in business and finance is a feature of much of the arguments used in recent times to push back against the concept of corporate social responsibility. That such a limited view of duty is ill suited to finance is now manifestly clear in the aftermath of the global crisis. It must be said that it is sometimes suggested that there is a considerable gap between the claims for ethical conduct in Islamic finance—or rather its true potential—and the actual practice. This viewpoint can be usefully examined in the context of the burgeoning social responsibility industry, and I would like to do so by recognizing the gaps—and the potential for a convergence and synergetic growth of this industry with ethical investing through Islamic finance.
The recent issuance of “green” and “social responsibility” Sukūk points to the very real gains from this convergence. Indeed, there are considerable benefits in terms of greater relevance and scope to be achieved by Islamic finance, in augmenting its negative-screening process so that Sharīʿah compliance, and financial scrutiny, sets the stage for use of the social “impact” criteria, something that is a feature of the social investment industry. This is a view that has much merit, as does the point made by the World Bank that Sukūk can serve as a bridge between the worlds of Islamic finance and that of responsible investment.
The underlying issue, however, is the critical importance of “norms of ethical conduct”—and of adherence to criteria and institutions that will strengthen compliance to these norms. A reputation for compliance with such norms is the key to what has been called “branding”. I will suggest in Part II of this article that this has value for regulation.
