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By: Saebani Hardjono Jakarta 28 th , August 2009
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ObyectiveBringing understanding to the audience what
the ethics is.Giving discription of the ethics in the financialsystem. To share perspective on the ethics of Islamic
financial market.
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Introduction and
BackgroundWhat ethics does mean?
What should we understand of the Islamicethics ?
Why does ethics matter ?
Why does we need to study an ethics of Islamic financial market ?
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Introduction (continue)What ethic does mean ?Ethics is:1. A system of moral principles governing the appropriate
conduct (encarta).2. The system of code of morals of person, religion, group
(yourdictionary.com)
3. The philosophy of the good and right thing to do(socialscience.cypresscolledge.edu)
4. A set of values that represent the ethical ideals (ethics.org)5. The principles of human conduct, incl: values, rights,
morality (businessdictionary.com)
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Introduction (continue)What should we understand of the Islamic ethics ?Muslim derive their ethical system from the Quran andSunnah and also from concensus of scholars ( Ijmaa ) and
analogy ( Qiyass ). The goals of Islam are not primarily materialist, but humanwell being and good life, socio economic justice, andbalanced both material and spiritual for ummah (Chapra,1992).
The Islamic ethical system contains a concepts of unity
(Tawhidi), justice and trusteeship.
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Introduction (continue)Why does ethics matter ?
Over the centuries, Value-free society developed and
economists focused on the mechanics of economics, andreligion became seperated.A free-market capitalist economy uses market determinedprices as filtering mechanism. However, it has frustrated therealization of socio-economic goals.Empirical studies suggest that global managers shouldunderstanding and committed to pursuing the best inethical and moral decision making and behavior(Al-Khatib et. al; 1995, Amine, 1996).
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Introduction (continue)Why do we need to study an ethics of Islamicfinancial market ?
Islamic wordlview implies that the market system(incl. financial) should be maintained, with thedevice that minimizes unnescessary claims onresources. This device is the moral filter/ethics(Chapra, 1992).
The Islamic ethical system contains specific guidelinesfor achieving the moral filter and for business (incl. infinancial market). It is derived from the interrelatedconcepts of unity, justice and trusteeship.
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Financial Market (Background) The financial products are relating to many players:
commercial banking,investment banking,insurance andthe markets where these are traded.
The Islamic financial products and market have toconform with Shariah and Islamic ethics.
We need to correctly understand the norms of Shariah andIslamic ethics.We notions of financial system ethics as understoodconventionally and of Islamic.
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e principles:
Financial system must be efficient, ethical, and fairto all participants.
Ethics and fairness are an entitlements or rights of
savers and investors.
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Seven classes of fairness :
1. Freedom from coercion,2. Freedom from misrepresentation,3. Right to equal information,4. Right to equal processing power,
5. Freedom from impulse,6. Right to trade at efficient prices,and7. Right to equal bargaining power.
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eedom from Coercion
Investors have the right not to be coerced into a transactiThe free will of all the parties to the contract.
The right not to be prevented from entering into a transac
The right to search for information.Not to be forced into making specific disclosures.
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Freedom from Misrepresentation
All investors have the right to rely on truthful
information.
This does not imply any kind of compulsion toreveal
information.
Deliberate disclosure of inaccurate informationcan be
claimed.
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Right to Equal Information
Equal access to a particular set of information.
Information is forced to disclose it to others.
Privileged access to inside information is
prevented.
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Right to Equal Information ProcessingPower
Equal access to a common set of information.
Compulsory disclosure of information in a
processed form.
Prohibition where certain groups may be atdisadvantage .
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Freedom from Impulse (forced action)
Protection from imperfect self-control.
Prevented from making mistakes, which are
harmful
to his own interest.
Regulator assumes a paternal role and seeks to
protect
the investors.
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Right to Trade at Efficient Prices
Trade at prices they perceive as efficient or
correct.
Let prices adjust by whatever amount necessary
to equate
demand & supply (market price).
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Right to Equal Bargaining Power
Equal power in negotiations leading to a
transaction.
Unequal bargaining power can occur when one
party:
has deficiencies in information processing or
imperfect
self-control.
low-networth investors competing for
allotment in an IPO
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Norms
Islamic scholars have undertaken a thorough
examination of relevant verses from the holy Quranand the Sunnah and have long established the
basic principles, which govern the rights and
obligations of participants in a financial system.
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eedom to Contract
m provides a basic freedom to enter into transactions, contracts or traran (2:275), says: Allah has made trade lawfu l.
ther, no contract is valid if it involves an element of coercion forher of the parties. Quran (4:29), says: Let there be among you traffic
trade by mutual goodwill.
hange is permitted only when undertaken in permissible commodities
perty ( maal ).
de is not permissible in alcohol and pork. Even trade in stocks ornership interests in companies dealing with or producingse commodities is not permissible.
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Freedom from Al Riba
All forms of contracts and transactions must be
freefrom rib a (excess) payment.
No reward for time preference.
Reward, returns or benefits must alwaysaccompany
liability or risk.
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Freedom from Al Gharar (ExcessiveUncertainty)
Contracts and transactions must be free from
excessive
gharar (or uncertainty).
Contracting under conditions of excessive
uncertainty is
not permissible.
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edom from Al-Qimar (Gambling) and Al-Maysir
Contracting under excessive uncertainty (gharar) is akin
to gambling (al-qima r).Quran and the traditions of the Prophet (pbuh) explicitly prohibit
gains made from games of chance, which involve unearned inco
(al-maysi r).
Speculation always involves an attempt to predict the future
outcome of an event (without analysis and interpretation
of relevant information).
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Freedom from Price Control and ManipulationIslam foresees a free market: prices are determined by D &
S.
No interference in the price formation process even by the
regulators.
Price control and fixation is generally considered as
unIslamic.Some scholars admit of its permissibility:
that price fixation is intended to combat cases of market
anomalies
caused by impairing the conditions of free competition.
Islam therefore, condemns any attempts to influence
prices:
through creating artificial shortage of supply (ihtika r).
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Transact at Fair Prices
Prices without any intervention or manipulation
are believedto be fair.
Pricing is based on a valuation exercise.
The presence of ghubn makes a transactionunethical.
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Equal, Adequate and AccurateInformation
Great importance to the role of information in themarket.
Release of inaccurate information is forbidden.
To hide of vital information (ghish ) also violates the
norms
of Islamic ethics.
Transaction must be free from jahalah or
misrepresentation.
Transparent market is, thus, quite important.
Transactions should be based on relevant information.
Information should be equally accessible to all
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Freedom from Darar (Detriment/damage)
The possibility of a third party being adverselyaffected
by a contract between two parties.
A case in point is the pre-emptive right ( alshufa )of a partner
in joint ownership.
Where existing minority shareholders are beingadversely
affected by any decision of the controlling
shareholders
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Mutual Cooperation and Solidarity
This norm is central to Islamic ethics. Q: Surah Al
Maida (5:2) , says:"Assist one another in the doing of good and
righteousness.
Assist not one another in sin and transgression, but
keep your duty
to Allah"
The following ahadith by the Prophet (pbuh) reinforce
this principle of
cooperation and mutual assistance. Believers are to
other believers like parts of a structure that tighten
andreinforce each other."
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e list of norms of Islamic ethics stated above is by no meanhaustive.
iffers from the norms of mainstream financial ethicsnificantly in imposing injunctions against al-riba,qima r, and al-maysi r.
so far as the rights relating to information are concerned,re is a lot in common between Islamic and mainstreamancial ethics.
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Maslahah Mursalah (Unrestricted Public Interest)
The framework of maslahah-mursalah orunrestricted public
interest. which is a valid framework of Islamiclegislation.
Unrestricted public interest on account of its beingundefined
by the established rules of Sharia h. Maslahah consists of considerations, which secure abenefit or
prevent a harm but are, in the mean time,harmonious with the
objectives (maqasi d) of Sharia h.
These objectives consist of protecting five essential
values, namely:reli ion, life, intellect, linea e and ro ert .
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There is possibility of conflict between concernsabout
financial system ethics and efficiency.
In an Islamic financial system, by definition,concerns about
conformity to norms of Islamic ethics dominateall other
concerns.
All transactions in an Islamic system must be
governed bynorms of Islamic ethics as enunciated by the
Shariah .
Islamic systems are, in essence, ethical systems.
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An Islamic financial system, by definition,provides a linkage
between SSUs and SDUs through an array of financial
products and services that do not violate theabove norms of
Islamic ethics.
And Islamic scholars have not only establishedthe basic
principles and norms, but also identified thecontractual
mechanisms that conform to these norms anddo not violate
them in any manner.