Islamic Finance and Ethics
Theories of Motivation
Islamic finance advocates ethical finance and is built upon eight strong pillars. First, the invested money must always be collateral with a tangible asset; the religion Islam tends to encourage economic activity. However, it considers that the production of goods and services, investments, and trade should take place within the framework of the real economy, which creates practical value. Money cannot create money; it is the contribution of human effort that consecrates the creation of the value made possible by money (Sole, 2007).
Secondly, all contracts must be concluded over the ideologies of balance and fairness. A contract relating to an investment must call for the equitable or just sharing of the profits, losses, and risks it may entail. In Muslim law, contracts by which one of the parties would unfairly exploit his co-contracting party or perceive a gain to his detriment are deemed null. For instance, it is strictly forbidden to make a financial profit, such as a late payment penalty on a debtor in default of payment. A Muslim can only make profits from any trading activity or transactions that are conducted on a transparent basis of risk sharing.
Third, contracts must remove uncertainty elements, and contract loyalty is built by eradicating uncertainty as comprehensively as possible. Any contract whose underlying object is uncertain is deemed null (Tahir & Haron, 2010).
Fourth (this is the most well-known point, but they are all equally important), money is seen as a mere medium of exchange and money uncorrelated as a contribution. Human effort is not measured to have the capability of creating value, hence the illegality of the interest amount paid over the provision of a sum of money. The objectivity of this prohibition is based on several moral considerations, including the following two: (1) the unfair and discriminatory nature which makes it is tough, if not impossible, to gain access to credit for those who are the most disadvantaged, (2) the rate of interest generates an uncertain or unequal distribution as to the risks taken, the profits made and the failures suffered, whether for the investors’ benefit, as such remuneration could exempt the person from the consequences of the failure, mainly because the rate of interest can be a form of remuneration without risk, or it is for the benefit of the entrepreneur who would be likely to capture most of the profit in the event of success. Such a position confirms this concern for a fair balance between the contribution of money and the contribution to industry to create compelling value (Abedifar, Molyneux, and Tarazi, 2013).
Fifth, a sharing obligation must apply to the gains made. Islamic finance practices share finance, reserving part of the profits for non-governmental organizations, humanitarian organizations, or low-income people. Believers fulfill this moral obligation by donating part of the profits made through zakat; this obligation can be compared to the wealth tax, but the base and the base are different. There is also another way to pay zakat. Islam recognizes the part of imperfection which can attach by their nature to specific human projects and ensures that this inevitable character of imperfection is compensated by devices of purification on inevitable activities, whereas they are illicit. Ethical compliance must be verified and monitored (Beck, Demirgüç-Kunt and Merrouche, 2013).