Understanding ethical fading in the Islamic banking context
ETHICAL fading is an anxiety where a person is unable to observe that his action obliges an ethical judgment. It is a hoary concept introduced in the West in defining certain behaviours considering wrong and vice, good and bad and right and left. The concept, however, is yet extended to Islamic banks due to lack of knowledge and adversity of perspectives of scholars with regard to its concept. Those who hold a normative theory believe that ethical fading has a limited role in the Islamic banking context while those who hold a post-positivism theory believe that there’s a need to test the concept to uncover its applicability.
In this week, I intend to write three issues pertinent to ethical fading.
Issue #1 – Why ethical transactions are really matter for Islamic banking?
Issue #2 – What are ideal dimensions for Islamic financial ethics?
Issue #3 – What are some examples of ethical fading that can be found in the context of Islamic banking? I expound these issues using analytical approach.
As for the first issue, there are five reasons explained but are not confined to:
(1) Public image – A bank with robust ethical practices has a strong image among public at large. Good public image leads to strong customers’ loyalty and helps the bank to create new customers out of good public perception. Good reputation is due to the bank’s ability to promote environmental issues positively, an enhanced financial report, an improved consumer data protection and better executive qualities. These elements are able to protect the bank’s public image.
(2) Trust building – To operate, many banks have relied on the capital injection from a capital provider who is known as a shareholder. For instance, DRB HICOM holds 70% shares in Bank Muamalat Malaysia Berhad (BMMB) while the remaining shares belong to Khazanah Nasional Berhad. Investing in green investment segments allows to gain shareholders’ trust on the banking operation of an Islamic bank. In turn, the shareholders have a better confidence that the bank is well monitored.
(3) Bank goodwill – Bankers and customers have two kinds of duration relationships – be it short or long. The latter, however, is preferred. The better the relationship, the better is the goodwill. It refers to a bank’s reputation. This includes a bank’s brand name, solid customer base, good customer relations and good employees capturing a goodwill. Bank Islam Malaysia Berhad (BIMB), for instance, has employed the code of ethics by Financial Services Professional Board (FSPB) that outlines a set of five broad principles to enhance overall reputation and public trust in the industry. The principles are competence, integrity, fairness, confidentiality and objectivity.
(4) High profit – Ethical practices allow high returns to an Islamic bank. The bank’s involvement in corporate social responsibility (CSR) has resulted in increased price of its stock and an improved demand. Indeed, CSR and profit have a positive relationship.
(5) Employee growth – Better ethical practices provide guidelines for employees to face ethical dilemma with cautious, helping them feel confidence to deal with any sort of situation. Constant checking for ethical issues will ensure an employee meets the bank’s value, which in turn results in better commitment, cooperation and increased productivity.
As for the second issue five points provided but are not limited to:
(1) Mutual cooperation – A golden principle is applied “do unto others as you would have them do unto you”. In the banking context, however, it relates to good rapports between the bank and the customer as evidently prescribed in the Quran “Assist one another in the doing of good and righteousness. Assist not one another in sin and transgression, but keep your duty to Allah” (5:2).
(2) Public interest – The objective of Islamic banks should capture the term maslahah “what is good is lawful, what is lawful must be good”, warding off haram elements while upholding halal elements in financial transactions.
(3) Fair to all stakeholders – Islamic banks should avoid conflict of duties for different stakeholders by observing proper right and justice.
(4) Adequate information – Transactions are free from jahalah and avoids the production of inaccurate information. Islamic banks should release information that guides investors to perform an informed decision.
(5) Warding off unethical practices – Riba, gharar, and other unethical practices are forbidden in Islamic banking operations. Unethical practices invite injustice between transaction parties, which in turn will create a loopholes in achieving maqasid al-Shariah. Banks should be transparent and fair enough to all parties to address these practices efficiently.
In terms of the third issue, ethical fading is of occurrence in the Islamic banking transactions, although small but it’s a growing concern.
(1) Hilah – There exists evidence claiming some products of Islamic banks are practising hilah that make them seem to be seen valid in terms of legal form but contradicts with the maqasid al-Shariah. Buy-back sale (bay al-inah), for instance, is considered extending hilah in its modus operandi in the frame of debt based financing product. In today’s Islamic banking, however, there are at least three Islamic banks that are still offering bay al-inah financing.
(2) The term loan and financing are used interchangeably – There still exists a misconception among some bankers and some customers on this issue. They don’t even care about the proper terms used when referring loan and financing. For them they are identical, until they feel calling a financing as a loan is a normal thing and not offensive.
(3) Creating demand from supply – There is no clear evidence whether a market survey is conducted or not when a bank is about to create new products. To put it differently, some banks simply sell the product to the market and expecting a demand is generated. This has become a norm as the bank does not feel immoral with this issue although the product itself has generated adverse impacts to customers at large.
(4) Purpose of financing – Customers have a tendency to make a financing for different purposes for different amount. It is unfair to judge that an Islamic bank approves a financing, which is used for purchasing a luxury car beyond a customer’s aptitude. Needless to say, debt taking has three verdicts (i.e. forbidden, disapproved and obligatory).
(5) Discrimination – Discriminating individuals in terms of their citizenship, religion, ethnic and gender, inter alia generates a disturbance to one’s feeling and value out of being neglected for the unfair treatment. The doer does not realise that his action hurts other’s emotion and stability.
All in, ethical fading is a concept that explains an individual does not even know he is making an ethical judgment when working with a decision. With a proper understanding of “Why ethical transactions are really matter for Islamic banking?” and “What are ideal dimensions for Islamic financial ethics?” the issues associated with it can be easily spotted to minimise its negative effect on the reputation and performance of Islamic banks, at least.
*The author is an Associate Professor/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163).