Ethics in Islamic Finance and Banking

• One objective of Islamic finance and banking is to assist in the spread of economic prosperity.

•The other objective is to do this in accordance with Shari’ah principles.

•xAmong the norms concerning Islamic finance are a free market, where prices are determined by demand and
supply, freedom from manipulation, prevention of hoarding, profit and loss sharing in partnerships,
information efficiency etc.

Q/Among the norms in Islamic finance that we want to elaborate on here are the following three topics?

• 1. The Prohibition of Riba (Interest or Usury) – Money is not to be exchanged for money with profit. As a
result of this prohibition, alternative solutions are given which encourage trade and equity participation. even
at low interest rates, as both illegal and unethical or usurious. Islamic banking has provided several
workarounds to accommodate financial transactions without charging explicit interest.

• 2. The Prohibition of Gharar (Uncertainty) – This demands transparency in contracts as well as in buying
and selling. Prices should be specified, there should be clarity of the delivery details, quality of goods, quantity
of goods etc. The information should be available to all parties involved and the outcomes of a contract should
be free from ambiguity etc.

• 3. Sanctity of Contract – Contracts should be fair and agreed upon by both parties. Therefore, the contract
should be free from the elements of Gharar and reach Shari’ah approval in their content.

Q/Types of Riba?
There are two major categories of riba.

• The first category is known as Riba An-Nasee’ah which relates to riba in debt. It increases with time (e.g.
interest on borrowed money). This is the most common type of riba today and it relates to return of money on
money at any rate (fixed or floating, compounded or simple interest).

• The other category is Riba Al-Fadl which refers to riba in exchange. This type of riba refers to the six
commodities (e.g. Gold) mentioned in the hadith.
It increases with the transaction. Which u cand buy for example gold for gold u must buy gold first then recive
money and then buy another gold.

Prohibition of Gharar
it relates to excessive uncertainty or ignorance by way of a contract, or the goods involved in a sale, the price,
ownership, possession of goods, deliverability, dates of exchange etc.

Minor Gharar (‫النسيئه‬

Gharar is major and minor. It is expected that minor (or trivial) accounts of gharar will exist and for that
reason it is tolerated and not given concern. Such is the case of catching a taxi, there is an element of
uncertainty in the price as it rises with the mileage, yet this is a minor form of uncertainty and is permissible.
Another example is buying fruit without peeling the skin to see inside.

Major Gharar
Causes for alarm are the major or substantial forms of gharar which are clearly prohibited from a Shari'ah
perspective.

 Lack of Transparency -transparency must exist in order for contracts to be legitimate. For example,
the terms of the contract must be clear to both parties involved in order to be just and fair.
Under such measures, individuals are protected from fraud, deceit and exploitation.

 Deception - Gharar can also imply deceit.

It means cheating for example in product or business suck when chicken sellers manipulate chicken by
throwing it into water for the water to be absorbed and the chicken weights more

 Selling what you do not have

-Goods not to be sold before obtaining their possession. The common example of this is the selling of
the fish in the ocean which has not been caught yet, or selling vegetables that the seller is yet to
purchase for the reason to avoid the risk of uncertainty.
An exception to this rule is a salam contract Such a contract is paid up-front and an agreed upon
amount of goods must be delivered at a later date when the produce is harvested.

 Ignorance - The buyer should have relevant information about the goods they intend to buy or the
contract they intend to sign. (for example) the quantity, the attributes, species etc. Or in the case of a
contract, both parties should have a sufficient understanding of the details.

 Unspecified Price - As for the delivery of goods, the price can be delayed or the goods can be delayed
in delivery, yet this should be by mutual consent of the buyer and seller.

Sanctity of Contract
 Sharia contracts must include transparency and honesty. Prices should be specified, there should be
clarity of the delivery details, quality of goods, quantity of goods etc.
The information should be available to all parties involved and the outcomes of a contract should be
free of ambiguity.

 When full disclosure is present, both parties eliminate or reduce financial speculation and avide
complexity in contracts (due to gharar). This will include discloser of the risk involved by providing
as much information as possible for buyers or investors.