Islam and Business Ethics

HISTORY OF SEMITIC RELIGIONS JUDAISM, CHRISTIANITY & ISLAM

ABRAHAM

JACOB ADNAN

JEWS ARABS

PRESENT
DAY JEWS
Historical Background
In 610 A.D., Muhammad, a 40-year-old merchant of the Quraysh tribe in Mecca, in
the Arabian desert (now eastern Saudi Arabia), was commanded by the angel
Gabriel to recite the message of Allah (Arabic for God).
Gabriel said mankind had lost sight of Allahs previous messages to earlier prophets,
Adam, Noah, Abraham, Moses, Solomon, and Jesus, among others, and that
Muhammad was to spread Allahs message to all people so that mankind would
know how to live, how to show respect for Allah, and how to prepare for the
judgement day. The message to Muhammad was to be Gods last; Muhammad was
the seal of the prophets.
Muhammad won some converts to Islam, but his monotheist preaching threatened to
undermine the profitable polytheist pilgrim traffic supporting many Meccan
merchants.
In 622 A.D., the merchants drove Muhammad and his followers out of Mecca to the
city of Yathrib (later renamed Medina, or city - as in the city of the prophet). This
flight (hijra) from Mecca to Medina marks the beginning of the Muslim lunar calendar,
and is celebrated each year in the hajj, the pilgrimage to Mecca.
 Muslims are broadly divided into Sunnis and Shias, based
on their support for different people as Caliphs after the
death of Prophet Muhammad, as his successor. The Sunnis
supported Abu Bakr, the Prophets uncle, while the Shias
supported Ali, the Prophets son-in-law. Eventually, Abu
Bakr went on to be the first Caliph of Islam, while Ali
became the fourth Caliph. Thus, the division was initially
political in nature.
The Quran
The revelation of God to
Muhammad
It has been preserved as revealed
14 centuries ago.
It consists of 114 chapters of
various lengths. In Arabic, it
numbers about 604 pages.
The translation of its meaning is
available in English, Urdu, Hindi
and most of the worlds
languages.
However most commentators
believe the translations loose
meaning and context
The Quran
Appeals to the mind to reflect on
creations and the creator
Glad tidings for the believers
Admonitions to the non-believers
Stories of previous messengers of
God such as Noah, Abraham, Isaac,
Moses, Jesus, Mary, etc.
Rulings on social and commercial
issues.
The Five Pillars of Islam
Shahadad There is no God but Allah; and
Muhammad is the Prophet of God

Salat Prayer, five times every day

Zakat alms giving to the poor and needy

Sawm(Roza) fasting, sun-up to sun-down during

month of Ramadan

Hajj Pilgrimage to Mecca (at least once in a

Muslims life, if able)
Muslim legal code Sharia

Rulings mentioned in the Quran

Precedents in the life of Muhammad as it explains
and complements the Quran in more detail- Sunna
& Hadith
Opinions (fatwa) of Muhammads prominent
companions.
Opinions of previous jurisprudents
Opinions of contemporary scholars
Importance of majority - consensus
n
Aims of the Shariah
The Five Rights that the Shariah seeks to protect:

1) Life
2) Property
3) Honor
4) Reason
5) Religion

Countries with Shariah as law have their own

interpretations of Shariah which need not be similar.
Types of Actions
1. Required (wajib): ex. five daily prayers

2. Recommended (mandub): ex. extra charity

3. Permitted (mubah): ex. wearing a blue dress instead of a

green one

4. Disliked (makruh): not returning the greeting of another

person

5. Prohibited (haram): drinking alcohol

Prohibitions
Halal (permissible) and Haram (prohibited)

No eating of pork (other dietary regulations =

halal)
No gambling
No intoxicants
No usury (charging or paying interest on loans)
(the rich shall not profit from helping the poor)
Women
Respected and Protected by Men
Modest dress for both men and women
Hijab differs from culture to culture
Heavy cover and veil not a religious requirement

Right to vote (citizenship)

Right to inherit
Right to work, earn and keep her own money
Right to keep her own name in marriage
Right to initiate divorce
Right to refuse additional wives
Female infanticide outlawed

Islam historically gave women more rights than any other religion
or state.
Main sections of Sharia

Acts of worship, or Al Ibadat

Ritual Purification (Wudu)
Prayers (Salah)
Fasts (Sawm and Ramadan)
Charities (Zakat)
Pilgrimage to Mecca (Hajj)
Human interaction, or Al-Mu'amalat

Financial transactions
Endowments
Laws of inheritance
Marriage, divorce, and child care
Foods and drinks (including ritual
slaughtering and hunting)
Penal punishments
Warfare and peace
Judicial matters (including witnesses and
forms of evidence)
Crimes under Sharia

Hadd [plural Hudud] Crimes (most

serious)- mentioned in Quran and against
Allah

Tazir Crimes (least serious)- against

society and not mentioned in Quran

Qesas Crimes (revenge crimes restitution)

Relationship with God- Khalifah
Theologically, man requires property in order to fulfill his
function as the khalfah, Gods vicegerent on earth.

But in the Quran it refers to every individual man and

woman as Gods agent, or steward, on earth. Legally,
property has been sanctified in Islamic law.

Practically speaking, the objective of falh, prosperity,

cannot be achieved without respect for economic realities.
Freedom of Enterprise
Each individual in an Islamic society enjoys complete
freedom in the earning of his livelihood. He can start,
manage and organize any kind of business enterprise
within the limits set by the Islamic Shariah.

Provided he respects the code of conduct prescribed for

the profession, which broadly means
choosing things lawful and
shunning matters unlawful.
The limits to contract under Islamic law are:

that contracts must be voluntary;

they must be entered into by informed
consent;
they must be among real persons;
they must not impose costs on persons who
have not entered the contract ( harm the
environment or non consuming stakeholders )
and no agreement to commit an
unconscionable act is binding.
Islamic Business Ethics
1.Keenness to earn Legitimate (Halal) Earnings
2.Trade through Mutual Consent
3.Truthfulness in Business Transactions
4.Trustworthiness in Business Transactions
5.Generosity & Leniency in Business Transactions
6.Honoring & fulfilling Business Obligations
7.Fair Treatment of Workers
8. Prohibitions in business
1.Legitimate (Halal) Earnings
Riba (interest), by definition, is the extra sum the
moneylender charges from the borrower for deferred
payment. Islam has forbidden all forms of Riba. The
islam forbids any earning ( Riba) in which the lender
is not part of risk.

Holy Quran says:

Allah has permitted trading and forbidden Riba (usury). (2:275)
Devour not Riba doubled and re-doubled. (3:130)
O you who believe! fear Allah and give up what remains of your demand for
usury if you are indeed believers. If you do it not, take notice of war from Allah
and his Apostle: but if you turn back you shall have your capital sums; deal not
unjustly and you shall not be dealt with unjustly. (2:278)
2.Trade through Mutual Consent
A sale under coercion is not acceptable in Islam
Taking advantage of someones plight and charging high
price is also a form of pecuniary exploitation and as such
forbidden in Islam.

The Holy Quran says:O you who believe! eat not up your
property among yourselves in vanities: but let there be
amongst you traffic and trade by mutual goodwill: nor kill
[or destroy] yourselves: for verily Allah has been to you
Most Merciful .(4:29)
3.Truthfulness in Business Transactions
The seller and the buyer have the right to keep or return the
goods as long as they have not parted or till they part; and
if both the parties spoke the truth and described the defects
and qualities [of the goods], then they would be blessed in
their transaction, and if they told lies or hid something, then
the blessings of their transaction would be lost. (Bukhari, No:
1937)
4.Trustworthiness in Business Transactions
It demands sincerity in work and purity of intention from
every believer. A true Muslim trader will not, therefore,
barter his Akhirah (hereafter) for worldly gains.

The sense of mutual trust demands that the pros and cons
of commodity be revealed to the buyer so that he
purchases the commodity in full satisfaction.

Says the Holy Quran:O you believers! Do not betray Allah

and the Messenger, nor knowingly, betray your trusts. (8:27)
5.Generosity & Leniency in Business
May Allahs mercy be on him who is lenient in his buying,
selling, and in demanding back his money [or debts]. (Bukhari,
No: 1934)

The Prophets exhortation to Muslims means that a creditor

should be easy and generous in demanding back his
money. The debtor, in turn, should also give back the debt
to the creditor on time with due thanks and politeness.
6.Honoring & Fulfilling Business
Obligations

Islam attaches great importance to the fulfilment of

contract and promises.

The Holy Quran emphasizes the moral obligation to fulfil

ones contracts and undertakings. A verse states thus: O you
who believe! Fulfil [your] obligations. (5:1)
7.Fair Treatment of workers
It is the religious and moral responsibility of the employer to
take care of the overall welfare and betterment of his
employees. Fair wages, good working conditions, suitable
work and excellent brotherly treatment should be provided
to the workers.

This principle in the following words: Those are your brothers

[workers under you] who are around you, Allah has placed them under
you. So, if anyone of you has someone under him, he should feed him
out of what he himself eats, clothe him like what he himself puts on,
and let him not put so much burden on him that he is not able to bear,
[and if that be the case], then lend your help to him. (Bukhari, No:
2359)
Prohibitions In Business
Dealing in Prohibited
Al Najsh (Trickery)
(Haram) Items

Sale of Al Gharar
Cheating & Fraud in Business
(Uncertainty)

Arbitrary Price Fixing Swearing

Hoarding Foodstuff Giving Short Measures

Exploiting ignorance of
Dealing in stolen goods
market conditions
Dealing in Prohibited (Haram) Items
Dealing in unlawful items such as carrion (dead meat),
pigs and idols is strongly prohibited in Islam. Dead meat
would mean the flesh of any bird or animal dead from
natural causes, without being properly slaughtered in an
Islamic way.

Forbidden to you [for food] are: dead meat, the blood, the
flesh of swine and that on which name of other than Allah has
been mentioned. (5:1)
Prohibition :Sale of Al Gharar (Uncertainty,
Risk)

Sale of a commodity or good

which is not present at hand;
the consequences or outcome of which is not yet known;
involving risks or hazards where one does not know whether at all
the commodity will later come into existence.
quality, whether good or bad, is not known to the buyer at the
time of the deal and there is every possibility that the contract may
give rise to disputes and disagreements between the concerned
parties
Acceptable if the element of Gharar does not exist and the quality
and the quantity of the goods are pretty well known and
predictable.
Prohibition: Arbitrary Price Fixing
Islam grants absolute freedom to traders provided they
adhere to the code of lawfulness.
It does not, therefore, encourage the practice of price
fixing and leaves the traders to earn the profits from each
other within the lawful limits.
However, the role of public authorities comes into play if it
becomes absolutely essential to do so, especially in order
to prevent exploitation and other unjust practices in the
market.
Prohibition: Hoarding of Foodstuff
The Arabic word for hoarding is Ihtikar. It means storing
foodstuffs or withholding them in expectation of rise in
their prices

The Prophet (sws) is reported to have condemned the

hoarders when he said: No one hoards but the traitors (i.e.
the sinners). (Abu Daud, No. 2990)
Prohibition: Exploiting Ignorance of Market
Conditions

Sometimes it may happen that a buyer arrives in a town

with objects of prime and general necessity for selling
them in the market. A local trader may persuade the new-
comer to transfer all of the goods to him so that he will sell
them on his behalf in the market.

A tradition reads: A town dweller should not sell the goods

of a desert dweller. (Bukhari, No: 2006)
Prohibition: Al Najsh (Trickery)
The term Al-Najsh means an action in which a person
offers a high price for something, without intending to buy
it, but just to cheat or defraud another person who really
means to buy it.

Prophet Muhammad said : Do not harbour envy against one

another; do not outbid one another [with a view to raising the
price]; do not bear aversion against one another; do not bear
enmity against one another; one of you should not enter into a
transaction when the other has already entered into it; and be
fellow brothers and true servants of Allah. (Muslim, No: 4650)
Prohibition: Cheating & Fraud in Business

Cheating & Fraud is prohibited

The seller and the buyer have the right to keep the goods or
return them as long as they have not parted. He also said that
if both the parties have spoken the truth and described the
defects as well as the merits thereof (the goods), they would
be blessed in their deal. If they have told lies or concealed
something, then blessings of their transaction would be lost.
(Bukhari, No: 1937)
Prohibition: Swearing
Trying to persuade the buyers to purchase their
commodity by invoking Allahs name.

Swearing [by the seller] may persuade the customer to purchase

the goods but the deal will be deprived of Allahs blessing.
(Bukhari, No: 1945)
Prohibition: Giving short measures
A form of deceit is to manipulate weights and measures.

One of the verses says:

And give full measure when you measure, and weigh with a just
balance. That is good and better in the end. (17:35)
Prohibition: Dealing in Stolen Goods
Almighty Allah has declared thievery unlawful and
warned of severe punishment ----- if the necessary legal
conditions for the award of punishment are met.

Even if the thief escapes worldly punishment and gets

away with stolen goods, it is not permissible for a
Muslim to knowingly purchase or sell these items.

The one who knowingly purchases a stolen good, is a partner to

the act of sin and the shame. (Kanz Al-Ammal, No: 9258)
Islamic Finance
 PRINCIPLES OF ISLAMIC FINANCE

Prohibition of Interest - Riba

Risk sharing

Social Mission

Prohibition of speculative
behaviour-

Sanctity of contracts

Shariah-approved activities.
The main principles of Islamic finance
1. the prohibition of taking or receiving interest- riba;
2. capital must have a social and ethical purpose beyond
pure, unfettered return;
3. investments in businesses dealing with alcohol, gambling,
drugs or anything else that the Shariah considers
unlawful are deemed undesirable and prohibited-
haraam
4. a prohibition on transactions involving masir (speculation
or gambling);
5. and a prohibition on gharar, or uncertainty about the
subject-matter and terms of contracts this includes a
prohibition on selling something that one does not own
Riba
By definition, Riba is an Arabic word that literally means
extra. In regards to Islamic Sharia, Riba means the
lending of money for a specific time whereupon the lender
receives his money with an EXTRA amount agreed upon.
When loans are given for business purposes, the lender, if
he wants to make a legitimate gain under the Shariah,
should take part in the risk. If a lender does not take part
in the risk, his receipt of any gain over the amount loaned
is classed as interest
Islamic Banks

Traditionally an Islamic bank offers two kinds

of services:
those for a fee or a fixed charge, such as safe
deposits, fund transfer, trade financing,
property sales and purchases or handling
investments; and
those that involve partnerships in investments
and the sharing of profits and losses.
Shariah Board
Shariah board monitors the workings of
the Islamic bank and every new
transaction that is doubtful from a Shariah
standpoint has to be cleared by it. These
boards include some of the most
respected contemporary scholars of
Shariah and the opinions of these boards
are expressed in the form of fatwas.
In addition, the International Association of
Islamic Bankers, an independent body,
supervises the workings of individual
Shariah boards while its Supreme
Religious Board studies the fatwas of the
Shariah boards of member banks to
determine whether they conform with
Shariah.
 Shariah law is open to interpretation and
Shariah boards often have divergent views on
key Shariah issues. In this regard, there is no
practical guide as to what constitutes an
acceptable Islamic financial instrument. A
document or structure may be accepted by one
Shariah board but rejected by a different
Shariah board.
Three forms of Islamic Financing

Modaraba (Participation Financing)

Morabaha (Financing Resale of
Goods)
Ijara (Lease financing)
MURABAHA
The Murabaha is a method of asset acquisition finance. It involves a
contract between the bank and its client for the sale of goods at a
price that includes an agreed profit margin, either a percentage of
the purchase price or a lump sum. The bank will purchase the
goods as requested by its client and will sell them to the client
with a mark- up.
The profit mark-up is fixed before the deal closes and cannot be
increased, even if the client does not take the goods within the
time stipulated in the contract.
Some Islamic banks use an agency arrangement, where the client
takes delivery of goods from the seller as agent of the bank.
Payment will usually be over time by installments.
MUDARABA

The Mudaraba is a profit sharing contract, with one party providing

100 per cent of the capital and the other party (the mudarib)
providing its expertise to invest the capital, manage the investment
project and, if appropriate, provide labour.
Profits generated are distributed according to a predetermined
ratio, but like the capital itself, cannot be guaranteed.
Losses accrued are therefore borne by the provider of capital, who
has no control over the management of the project.
Mudaraba structures are often used for investment funds, with
investors providing money to the Islamic bank, which it invests as
mudarib, taking a management fee.
MUSHARAKA
The Musharaka involves a partnership between two parties
who both provide capital towards the financing of new or
established projects.
Both parties share the profits on a pre-agreed ratio, allowing
managerial skills to be remunerated, with losses being shared
on the basis of equity participation. One or both parties can
undertake management of the project.

As both parties take on project risk, it is relatively rare for

banks to participate in Musharaka transactions.
IJARA
The Ijara is a contract where the bank buys and leases out
equipment required by the client for a rental fee. The
duration of the lease and rental fees are agreed in advance.
Ownership of the equipment remains with the lessor bank,
which will seek to recover the capital cost of the equipment
plus a profit margin out of the rentals payable.
There are two types of Ijara: operating leases and lease
purchase.
ISTINSNA
Gharar prevents one from selling something that one does not
own. The technique of Istisnaa has been developed as an
exception to this.

Istisnaa is a contract whereby a party undertakes to produce

a specific thing that is possible to be made according to
certain agreed specifications at a determined price and for a
fixed date of delivery. Accordingly, the technique is
particularly useful in providing an Islamic element in the
construction phase of a project, as it is akin to a fixed price
turnkey contract.
 Difference between Islamic & Regular banking
Money is earned through Through profit sharing or
interest rent

Deals with money & Deals with assets

papers
Actively participates in trade
Not involved in trade or , production and services
business with clients through contractual
agreement
Advantages of Islamic Banking
The underlying principle of Islamic business
model is that of justice and fairness
Worthiness & profitability of projects is the
centre rather than credit worthiness of
consumers
Development of relationships with customers
Reduction of greed since there is no concept
of earning interest
How can Muslims invest?
Investment in listed companies that are approved by
the Shariat board is allowed.

You cannot invest in companies that commit riba and

gharaar

Fixed income investment are allowed

Insurance is prohibited but cooperative insurance is

allowed Grameen bank
Is speculative day trading allowed?

YES if intentions are long term and

strategic and not for the motive of
gambling
Can interest be charged?

Interest on all types of loans are

forbidden
Deposits with fixed interest forbidden
If interest excess and profits accumulate ,
the moneys should be spent on public
services as atonement purification. ( this
is not charity)
Can you lend in Islam ?

Lending is halaal
Lending should be based on exchange of
equivalent goods
Loan can be asked back anytime
In Islam you do not lend money for making
money ; nor do you borrow to start
business
Players- Western bank
Citi Islamic
ABN Amro Barclays
Bank

Deutsche BNP
Lloyds
Bank Paribas

Standard
Chartered
Alternative Approaches to Corporate Governance
Decision-making Managed Socially Islamic corporate
Basis corporation responsive governance
model corporation
Legal concept of CEO and senior Executive and Shuratic decision making
firm: decision making management supervisory process:
By whom? processes consultation and
Consensus seeking

Economic Maximize profits Stakeholders Institution of

concept of firm: Maximize shareholder Hisba ( state controlled
decision-making value supervison )
for whom?
Role of mutasib- supervisor
Accounting Financial Corporate Shariah
concept of firm: governance by responsibility supervision
decision-making shareholders and Triple bottom process
with what suppliers of line: economic, Religious audit
resources and to finance social and
whom is environmental
accountability accountability
due?
Medical ethics in Islam
The guiding principles of Islamic Law

1. Maintenance of life
2. Protection of an individuals freedom of belief
3. Maintaining the intellect
4. Preservation of honour and integrity
5. Protection of property
 The process of deductive logic described as Ijtihad forms the
third source of Islamic Law. It is Ijtihad that provides Sacred Law
with its dynamism, allowing it to remain relevant when
responding to novel challenges and concerns that regularly arise in
the Muslim culture which values learning and the scientific
process.

One example likely to bring considerable health benefit to

communities worldwide, is the move towards outlawing cigarette
smoking on the grounds that its adverse consequences to health
are now well established. The more culturally aware of British
health authorities have responded by putting the quit smoking
message within an appropriate religious framework when
targeting Muslim communities.
Discussion points

What is the Islamic ethical view on the issue?

What are cross-cultural differences based on law and social
ethics in India and some western countries regarding the
issue?
What are implications of Islamic view point for business and
its management in a globalized world specially in the health
sector ?