Ethical Foundations of the Islamic Financial Industry

This paper examines the ethical foundations of the Islamic financial industry which is strongly criticized for its similarity with conventional finance. In this paper, we argue that this criticism is based on the consequentialist reasoning. The deontological considerations are largely ignored when t...

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Bibliographic Details
Published in:Journal of business ethics 2022-10, Vol.180 (2), p.567-580
Main Authors: Azmat, Saad, Subhan, Maryam
Format: Article
Language:English
Subjects:
Business and Management
Business Ethics
Criticism
Education
Ethics
Finance
Financial institutions
Islam
Islamic countries
Islamic financing
Management
Market forces
Original Paper
Philosophy
Quality of Life Research
Uncertainty
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Summary:This paper examines the ethical foundations of the Islamic financial industry which is strongly criticized for its similarity with conventional finance. In this paper, we argue that this criticism is based on the consequentialist reasoning. The deontological considerations are largely ignored when the focus is on aggregate returns and associated product features. We build an economic model which allows us to examine the implementation of deontological rules in the Islamic financial products along with examining their consequences. We show that the market forces may cause the returns and the attributes of Islamic financial products to converge with conventional finance even though the industry may be adhering to the Islamic deontological rules. We build a model to show that there may exist ‘Epsilon States’ where the deontological rules are followed by the Islamic finance industry, but their impact is not significant. We argue that the source of these ‘Epsilon States’ could be either moral uncertainty or costly monitoring. The presence of these ‘Epsilon States’ enable Islamic financial institutions with weak ethical commitments to create financial products where the deontological rules are followed, but their impact remains insignificant.
ISSN:0167-4544
1573-0697
DOI:10.1007/s10551-021-04882-5