Although lease based contracts in providing financing. Profit/loss-and-risk-sharing

Although theology and religion have in the past been important in
promoting ethics in business, their contributions may be ignored in the current
discourse and literature on business ethics. Currently, business ethics is
treated narrowly as an applied philosophy and social science, even though, on a
practical level, religious teachings inform and shape the morality of a
substantial portion of the business population. The literature is fragmented
and spread over a variety of sources, and does not sufficiently provide a
systematic framework of business ethics despite the existence of many rich
discussions about this concept in Islamic sources. The institutionalisation of
Islamic finance aimed at promoting certain ethical values, such as the
prohibition of unjust practices, encouraging moderation, balance and harmony in
life, and assisting the underprivileged. However, current practices of Islamic
financial institutions have been criticised for failing to promote such values,
as they often adopt a ‘form over substance’ approach in Islamising conventional

Bank Negara Malaysia has made it compulsory for Malaysian banks to
be transparent and disclose pertinent information, and that corporate and shariah
governance structures are in place to promote integrity in fulfilling their
duties. However, in general, the banks depend heavily on sale and lease based
contracts in providing financing. Profit/loss-and-risk-sharing contracts are
almost absent. The banks have also yet to actively introduce microfinancing
schemes, and there seems to be a decline in the percentage of financing
provided to small and medium enterprises. 

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Since an inadequate emphasis on ethics is one of the banes of the
conventional system, there is need to guard against all sorts of market
indiscipline on the part of the stakeholders. Policy makers and standard
setting organisations need to exhibit knowledge, integrity and, most
importantly, the fear of Allah. Regulators are to implement regulations to the
best of their ability. To avert a systemic crisis in the industry, or to
prevent Islamic finance from being assimilated to conventional finance, thereby
compromising its identity, issues of ethics need to be adequately addressed.
There is a need for a transition from a shariah compliant to a shariah based
approach. Shariah screening should be both internal and external. While it has
been argued that ethics and profits are valid business objectives,
complementary to each other rather than substitutes, there is no empirical
evidence to demonstrate that a trade-off exists between the two. Lastly, ethical
concerns need to be given priority over profitability, if the long-term
survival of the industry is to be ensured.


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