Main Prohibtions and Business Ethics in Islamic Economics.pdf

MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS Resa Mae C. Laygan Department of Economics Mindanao State University-Iligan Institute of Technology References: https://www.iium.edu.my/media/83343/Mahyudi%20Islamic%20ethics.pdf https://ww...

MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS Resa Mae C. Laygan Department of Economics Mindanao State University-Iligan Institute of Technology References: https://www.iium.edu.my/media/83343/Mahyudi%20Islamic%20ethics.pdf https://www.studocu.com/row/document/university-of-the- punjab/islamic-principles-of-business-and-finance/the-main- prohibitions-and-business-ethics-in-islam/69064474  The Basic Prohibitions Riba (interest) Gharar (the uncertainty or hazardcaused by lack of clarity regarding the subject matter) Maisir (gambling) MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  The Prohibition of Riba “Riba”, meaning prohibited gain, It explains that all income and earnings, salaries and wages, remuneration and profits, interest, rent and hire, etc. can be categorized either as: profit from trade and business along with its liability – which is permitted; or return on cash or a converted form of cash without bearing liability in terms of the result of deployed cash or capital (the act of strategically allocating cash resources in order to achieve specific financial objectives)– which is prohibited. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  The Prohibition of Riba The Quran and Sunnah strongly condemn Riba Differences exist concerning the definition of Riba and what qualifies as Riba. Some liberal Muslims argue that commercial interest is not Riba, while many believe that any prefixed return in transactions is prohibited. Myths and confusion about the exact nature of Riba persist, even among devout Muslims. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  The Prohibition of Riba in Qurán and Sunnah A number of verses of the Holy Quran expressly prohibit Riba. Surah al-Nisa’ “And for their taking Riba although it was forbidden for them, and their wrongful appropriation of other people’s property. We have prepared for those among them who reject faith a grievous punishment.” Surah al-Baqarah “Allah deprives Riba of all blessing but blesses charity; He loves not the ungrateful sinner.” — “O, believers, fear Allah, and give up what is still due to you from Riba if you are true believers.” MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  The Prohibition of Riba in Qurán and Sunnah A large number of traditions of the holy Prophet (PBUH) refer to various aspects of Riba,its prohibition, the severity of its sin and its forms: From Jabir (Gbpwh): “The Prophet (PBUH) cursed the receiver and the payer of interest, the one who records it and the witnesses to the transaction and said: ‘They are all alike[in guilt]’. From Anas ibn Malik (Gbpwh): “The Prophet said: ‘When one of you grants a loan and the borrower offers him a dish, he should not accept it; and if the borrower offers a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favors mutually’. Bilal (Gbpwh) once visited the Messenger of Allah (PBUH) with some high quality dates, the Prophet (PBUH) inquired about their source.. Bilal explained that he traded two volumes of lower quality dates for one volume of that of the higher quality. Prophet (PBUH) said: “This is precisely the forbidden Riba! Do not do this. Instead, sell the first type of dates, and use the proceeds to buy the others.” MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Riba in Loans/ Debt Loan (Qard) any commodity or amount of money taken from any other person with liability to return or pay back the same or similar commodity or amount of money when demanded back by the creditor. Debt (Dayn) a liability to pay which results from any credit transaction like a purchase/sale on credit or due rentals in Ijarah (leasing). The amount of debt has to be paid back at a specified time and the creditor (in case of debt) has no right to demand payment of the debt before the mutually agreed time. As conventional banks’ financing falls into the category of loans on which they charge a premium, it falls under the horizon of Riba as prohibited by the Holy Quran. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  How to Distinguish between various types of transactions to judge either they are permitted or prohibited? The answer lies in differentiating the contracts on the basis of their nature; all real sector business transactions involve: 1. Sale/purchase that may be either cash or credit. 2. Loaning. 3. Leasing. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Sale/purchase that may be either cash or credit. The ownership of the commodity being sold is transferred to the buyer just at the time the sale is executed and this transfer is definite and permanent. It makes no difference whether the payment of the price is on the spot or deferred. In the case of Salam (a special kind of forward sale): although goods have to be delivered at a future stipulated time, both parties are obliged to give/take ownership at a specified time on agreed terms, irrespective of whether the price rises or falls at the time of delivery. If the transaction is that of a gift (Hibah): ownership of assets will transfer there and thenon a permanent basis free of any payment. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Loaning always free of any charge in Islamic finance, leads to the temporary transfer of ownership of goods/assets free of any payment meaning that the debtor is liable to return or pay back the same asset to the creditor. Riba (in loans or debts) also means the temporary transfer of ownership of goods/assets, but that transfer involves payment of interest, which is prohibited. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Leasing Ijarah is a totally different transaction in that ownership of the leased asset does not transfer and only the legal right to use the asset is made available to the lessee against the payment of rent. As ownership remains with the lessor, he is entitled to rental and is also liable for expenses relating to ownership and loss of the asset, if any. Note: anything which changes its shape altogether in the process of its use, cannot be leased out, this includes yarn, money, edibles, fuel, etc. Example: Yarn, when used, takes the form of cloth; it can be bought and sold but not leased. In Islamic finance, taking rent on leasing of assets like houses, vehicles, etc. Is permissible while charging rent on money is prohibited. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Types of Riba: Riba Al-Nasiah: Nasiah means delay or delaying the delivery of a commodity in a contract. Riba Al-Nasiah or riba of delay is due to exchange not being immediate with or without excess in one of the counter values. It refers to the practice of lending money for any length of time on the understanding that the borrower would return to the lender at the end of the period the amount originally lent together with an increase on it, in consideration of the lender having granted him time to pay. Riba Al-Fadl: It is the quality premium in exchange of low quality with better quality goods e.g. dates for dates, wheat for wheat, etc. The Concept of Riba Al-Fadl refers to sale transactions while Riba Al-Nasiah refers to loan transactions MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  The Explanation for the Prohibition of Riba: “Riba means and includes any increase over and above the principal amount payable in a contract obligation, not covered by a corresponding increase in labour,commodity, risk or expertise.” Take note: the prohibition of Riba is intended to prevent the accumulation of wealth in a few hands. An interest-based system generates unemployment because capital and wealth flow in the direction of high and risk-free return without regard to the efficiency of the fund-borrowing sectors. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  PROHIBITION OF GHARAR “Gharar” means hazard, chance, stake or risk. The Arabic word gharar - literally means deceit, fraud, uncertainty, danger, delusion, or hazard that might lead to destruction or loss. Gharar is found if the liability of any of the parties to a contract is uncertain or contingent; delivery of one of the exchange items is not in the control of any party or the payment from one side is uncertain. Gharar refers to any transaction of probable items whose existence or characteristics are not certain, due to lack of information, ignorance of essential elements in the transaction to either party, or uncertainty of the ability of one party to honor the contract. Example of Gharar: purchase of the unborn animal in the mother's womb, the sale of milk in the udder without measurement, MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Types of Gharar: Gharar Yaseer (minor or slight) This type of gharar is tolerated and will not invalidate a contract. Gharar Yaseer may include the following cases: ✓ The uncertainty is slight or unimportant. ✓ Contract is unilateral or charitable, such as a gift. ✓ There is a public need for the transaction or contract, for example, bai'al salam, istisna'. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Types of Gharar: Gharar Fahish (major or excessive) This type of gharar is not tolerated and may result in contract voidability. According to Shariah scholars, to become prohibited, a hazard or uncertainty would be major and remunerative, e.g. when involved in sale contracts it should affect the principal aspects of the contract. According to Ibn Hazm, Gharar in sales occurs when the purchaser does not know what he has bought and the seller does not know what he has sold. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Types of Gharar: Gharar Fahish (major or excessive) Gharar in the terms and Gharar in the object of the contract essence of the contract includes: includes: (a) Ignorance about the genus. (b) Ignorance about the species. a) Two sales in one. (c) Ignorance about attributes. b) Down payment (‘Arbun (d) Ignorance about the quantity of the object. sale). (e) Ignorance about the specific identity of the c) Future sale. object. (f) Ignorance about the time of payment in deferred sales. (g) Explicit or probable inability to deliver the object. (h) Contracting on a nonexistent object. (i) Not seeing the object. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  In order to avoid uncertainty, Islamic law denies the power to sell in the following three situations: 1. Things which, as the object of a legal transaction, do not exist. 2. Things which exist but which are not in possession of the seller or the availability of which may not be expected. 3. Things which are exchanged on the basis of uncertain delivery and payment. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Causes of Gharar: 1. Uncertainty of ownership and possession The sale of an item that may not exist or is not in the possession of one of the parties and there is uncertainty about its future possession Examples: the sale of birds in flight fish not yet caught stray (runaway) animals the unborn when the mother is not part of the sale MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Causes of Gharar: 2. Inadequacy and Inaccuracy of Information Absence of adequate and accurate information (jahl) is a source of gharar. Lack of knowledge (jahl) could be with regard to the price or the item, characteristics of the price or of the item, or the quantity of the item, or the date of future performance. Examples of Invalid Sales: Selling known or unknown goods against an unknown price, such as the sale of milk in the udder of a cow; selling the contents of a sealed box; or someone may say: “I sell you whatever is in my pocket” Selling goods without specifying the price, such as selling at the “market price”. Selling goods without allowing the buyer to properly examine the goods. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Causes of Gharar: 3. Interdependent and conditional contracts Shariah does not permit interdependent contracts such as combining two sales in one contract, or two sales are linked jointly. The two sales are concluded jointly as when the seller says: ‘I sell you my house at such a price if you sell me your car at such a price’. Such a sale is forbidden because of Gharar in the contract. Gharar exists if the sale price is dependent on a specific event, or the parties are not sure if the sale may or may not take place. Gharar exists on conditional sales so the fulfillment of one sale is conditional upon the fulfillment of the other, or the sale is conditional on external events such as, I will sell if snow falls. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Causes of Gharar: 4. Pure Games of Chance (Al-Qimar & Al-Maysir) Qur'an prohibits contracting under conditions of uncertainty and gambling (qimar). Uncertainty is the same as gharar and under such conditions, exchange or contracting is reduced to a gamble. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Current Issues Two areas where gharar most profoundly affects common practice: Insurance Jurists often argue against the financial insurance contract, where the premium is paid regularly to the insurance company, and the insured receives compensation for any insured losses in the event of a loss Financial derivatives rendered invalid because of gharar are forwards, futures, options, and other derivative securities Forwards and futures involve gharar since the object of the sale may not exist at the time the trade is to be executed. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  PROHIBITION OF MAISIR/QIMAR (GAMES OF CHANCE) Maisir refers to easily available wealth or acquisition of wealth by chance, whether or not it deprives the others' right. Qimar means the game of chance—one gains at the cost of others. Example: a person puts his money or a part of his wealth at stake where the amount of money at risk might bring huge sums of money or might be lost or damaged.” MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  PROHIBITION OF MAISIR/QIMAR (GAMES OF CHANCE) The difference between Maisir and Qimar is that the Qimar is an integral part of the former. Maisir, derived from “Yusr”, means wishing for something valuable with ease and without paying an equivalent consideration for it or without working for it, or without undertaking any liability against it, by way of a game of chance. “Qimar” also means ease of money, benefit or usufruct at the cost of others, having entitlement to that money or benefit by resorting to chance. Both words are applicable to games of chance. Maisir and Qimar are involved in a number of conventional financial transactions and bank schemes/products, which Islamic banks have to avoid. Conventional insurance is not Shariah-compliant due to the involvement of both Riba and Maisir. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Can Islamic banks launch any such bonds or price-carrying schemes? Islamic banks cannot launch prize bond schemes due to their impermissible elements. In these schemes, the investors' money is linked to interest generated from accumulated capital, which is shared between the bank and bondholders. The presence of a chance factor, where participants win prizes without fulfilling any liability, renders it impermissible in Islam. Huge prizes for a few participants lead to losses for the majority, resulting in unfairness. The concept of getting rich overnight through luck contradicts Islamic ethics and sound economic principles. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  QUESTIONS??? MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  QUICK QUESTION: How can Islamic financial institutions develop ethical financial products that comply with the prohibitions of Riba (interest), Gharar (excessive uncertainty), and Maisir (gambling), while still remaining competitive in the global market? MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Ethics, Moral, and Principle Ethics moral principles that govern a person's behaviour or the conducting of an activity Moral concerned with the principles of right and wrong behaviour holding or manifesting high principles for proper conduct Principle a fundamental truth or proposition that serves as the foundation for a system of belief or behaviour or for a chain of reasoning MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Islamic Ethics Knowledge for proper conduct => ‘ilm fiqh & ‘ilm akhlaq Characteristic: Divine, objective, universal, meaningful & purposeful Qalb (heart) is the origin of intentional activities, the cause behind all humans' intuitive conduct On the authority of Abu 'Abdullah al-Nu'man bin Bashir (ra) who said: I heard the Messenger of Allah(SAW) say: “There lies within the body a piece of flesh. If it is sound, the whole body is sound; and if it is corrupted, the whole body is corrupted. Verily this piece is the heart”[Bukhari & Muslim] MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  THE CASE OF ISLAMIC CONSUMER ALL ISLAMIC MORAL PRINCIPLES ARE DEVELOPED BASED ON THE QURAN AND SUNNAH MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  The Principles of Consumption in Islamic Moral Framework Permissibility: Everything is permissible unless prohibited by Shari’ah. Responsibility: Consumption must follow Shari'ah guidelines, ensuring ethical and responsible use. Balance: Avoid extremes such as Tabdhir (wastefulness), Israf (excessiveness), and Bukhl (miserliness). Priority: Consumption should prioritize necessities (Daruriyyat), needs (Hajiyyat), and comforts (Tahsiniyyat) based on Islamic ethics. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Principle of Permissibility All things are consumable (legally) and human beings can consume (freely) anything they like unless there is clear evidence from the texts that Shariah prohibits such action. Boundaries are set not to restrict mankind but to ensure benefits are preserved and harms are avoided in consumption. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Principle of Responsibility To have consciousness in consumption Wealth belongs to Allah and should be consumed in accordance with Shari’ah Controls tendency for human being to pursue consumption in a wrong way Directed in the good cause, with falah (true success) goal in-mind MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Principle of Balance Islam encourages ‘balanced consumption’ Utilizing the resources should be done in balance way Over consumption (wasting, excessive, extravagance) is not allowed! “Allah has created the universe and the earth in a state of equilibrium, which itself is composed of innumerable equilibriums (ArRahman: 1-9)” MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Principle of Balance Islam encourages ‘balanced consumption’ Utilizing the resources should be done in balance way Consumer must avoid: ❑ Tabdhir (wasteful consumption) ❑ Israf (excessive consumption) ❑ Bukhl (Miserliness consumption) “Allah has created the universe and the earth in a state of equilibrium, which itself is composed of innumerable equilibriums (ArRahman: 1-9)” MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Principle of Priority If consumer follows the rules guided by shari’ah, the goal of attaining benefits and preventing harms (i.e. maslahah) can be achieved. 3 types of consumption that should be put as a priority by in an Islamic economic framework : a) Daruriyyat consumption = essential b) Hajiyyat consumption = complementary c) Tahsiniyyat consumption = embellishment MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  Principle of Priority If consumer follows the rules guided by shari’ah, the goal of attaining benefits and preventing harms (i.e. maslahah) can be achieved. 3 types of consumption that should be put as a priority by in an Islamic economic framework : a) Daruriyyat consumption = essential The consumption of basic needs in order to maintain the survival of individuals for their religious and worldly affairs. An absent of daruriyat consumption would lead to destruction of the individual. b) Hajiyyat consumption = complementary The complementary consumption that would facilitate individual lives to achieve a better live. Without it will lead to hardship in lives. c) Tahsiniyyat consumption = embellishment The consumption that would improve the quality of life into perfection. Such as the consumptions promoted without any violation of good moral standards or an excessive or extravagant lifestyle. MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS  QUESTIONS??? MAIN PROHIBITIONS AND BUSINESS ETHICS IN ISLAMIC ECONOMICS