Blind Pursuit In Islamic Banking And Finance: Al-Wasat (Middle Path) Between Socially Responsible And Maximisation Of Wealth

Chris Meyer, CEO of Bodetree and author of The Enlightened Franchisein his recent article, The New ‘Rules of The Game’: Balancing Profits and Social Responsibility In The 21st Century, in Forbes.com said, “Our society is evolving towards one that articulates its set of social values and demands certain behaviors from the companies we engage with… In today’s day and age, the blind pursuit of profit maximization in the traditional sense will ultimately fail.”

Therefore, this writing aims to critically evaluate from principles of moderation (al-wasatiyah) what would be the “blind pursuit” in the business and practices of Islamic Banking & Finance (IBF).

Theoretically shari`ah that is based on al-maqasid (larger objectives of shari`ah) provides an important and central medium in governing all aspects of human life including economic activities. However, what is ideal and what is in the practices may defer due to push and pull demand of the business operations. If al-wasatiyah or just (al-‘adl) and choice (al-khiyar) here means principles of well balanced, social justice and righteous decision making, therefore the endeavor towards pursuit for wealth maximisation and shareholder interest should not over exulted or neglect justices to the social underclass and under privileges. If exultation towards maximisation of wealth occurs, the Qaroun of modern days will appear.

The justification of balanced and just or principles al-wasatiyah in Al-Quran in relation to the issue discussed here is mentioned in Al-Quran,

“Surely Qaroun was of the people of Musa, but he rebelled against them, and We had given him of the treasures, so much so that his hoards of wealth would certainly weigh down a company of men possessed of great strength. When his people said to him: Do not exult, surely Allah does not love the exultant. And seek by means of what Allah has given you the future abode, and do not neglect your portion of this world, and do good (to others) as Allah has done good to you, and do not seek to make mischief in the land, surely Allah does not love the mischief-makers.” (28:76-7)

In Islam, the Islamic economic system is neither based on individualism (monopoly or capitalist owned) nor collectivism (socialist or state control). It is, neither, meant for the pursuit of worldly wealth and neglect social responsibility, nor human welfare for the rewards of hereafter only. Good deeds here mean principles of social responsibility, cooperation, profit and equity based sharing and compassionate. On that pretext, the purpose of this writing is to review good practices such as social justice and philanthropic responsibility. The danger is when real operations of Islamic Banking and Finance pursuit more for material profit indicators or shareholders’ wealth, but neglect good governance and best practices for social and human well being.

Writings on Corporate Social Responsibility (CSR) and its relation to conventional corporate businesses perhaps have been around since 1950’s. However, its relation to Islamic Banking and Finance (IBF) institutions is relatively new area, although as early as around that year Syed Qutb already advocated idea of social justice in his book Social Justice in Islam. Although social justice is not what it meant by CSR nowadays, the social principles of al-adl wal-ihsan (just and compassion) applies. Literatures on Islamic Economics of the early years such as written by Abu Al-A`la Al-Maududi, and later Umer Chapra and Khurshid Ahmad also deliberated on the issues. Both are now very critical of the state of Islamic banking and finance (IBF) that neglect or not doing justices to the larger ‘underclass’ of community.

Critics from scholars

There are already few concerns from Islamic economic gurus on the failure of the present market and finance system;

“Our collective failure lies in the fact that we have so far not yet been be able to put up a great resistance to the present trend towards globalization of poverty and neo-colonization of our future.” (Prof M. A. Mannan)

“The market system as well as central planning have both failed to lead mankind to such an overall well-being. It is, therefore, necessary to lay down the contours of a new system which could help optimize human well-being.” (Dr. M. Umer Chapra)

“Although wealth is by no means the only determinant of human well-being. Poverty is a source of humiliation and despair..” (Prof. Timur Kuran)

Justice is a very fundamental issue that relates to the very principles of human brotherhood. It’s a universal language of humanity, which the suffering of one person is the suffering and obligations of the others to help out. Therefore although pursuance of one’s self interest to create more wealth economically is not wrong, but to deny the rights of the others who is less fortunate than him to have equally moderate life is inconsistence with human dignity and, thus, is morally wrong.

Even orientations of economic theory and practices (Backhouse, 2002) are evolving. Over the years Adam Smith’s (1723 – 90) moral philosophy on Wealth of Nation has shifted towards classical political economy of Malthus (1766 – 1834) which then transited to Keynes’s (1883 – 1946) Employment, Interest and Money. Then came Welfare Economics and Socialism (1930 – 1960), Development Economics (1930’s – 80’s, and after the US Credit Crunch crisis, people are talking about neo-capitalism theory. But whether capitalism can sustain for another decade is another question not going to be dealt here.

Normative economy is now taking its course. Orientations of economy have moved from a positive economy towards what is known as normative economy where value and social well being is the theme of discussions. Positive economics (Caldwell, 1994) studies consequences of a decision relates to consumption, production and exchange of goods, while in normative one looks into the values that associate with economic decisions. Therefore, positive economy is value free that emphasises on facts and cause and effect consequences, while normative incorporates value judgments on certain economic decisions.

Perhaps based on the latter that one can understand what Kofi Annan (Banerjee, 2007:1) means when he urged the need for business leaders to consider beyond shareholders’ interest towards what is best for ‘millions of people’. He understands well the relation between business and social well being. The role of which corporations are just another part of social well being rather then limited only for the shareholders’ interest. In his keynote speech to the United States Chamber of Commerce in 2001, he states;

“because your business will see benefits on its bottom line. You will see direct benefits, such as protecting investment and reducing risk. And you will make less tangible, but no less important, gains in assets such as reputation and customer loyalty. In fact, there is a happy convergence between what your shareholders pay you for, and what is best for millions of people the world over.”

Social responsibility and Islamic injunctions

At the interpersonal level, Islam has always emphasised on balance (al-tawazun), and the coherence between doing justice, goodness and well being of man in all sectors of human activities even in the actualisation of economics and optimising profit. The call for doing good and justice towards other human beings is a divine obligation as stated in the Al-Quran, “Allah commands justice, the doing of good, and liberality to kith and kin, and He forbids all shameful deeds, and injustice and rebellion. He instructs you, that you may receive admonition”. (16:90)

In economy and business activities too, the very objective of Islamic Law (maqasid al-shariah) is to eradicate hardships, monetary injustices (riba) and all forms of uncertainties (gharar) which are known as forms of corruption and mischiefs (al-fasad). Therefore, in pursuance of wealth, one must seek to obey the principles of doing good to others and sensitive towards the well being of the environment.

One of shariah legal maxims states, al-dhararu yuzal, which commands the eradication of any forms of difficulties, hardships or uncertainties not only within the tools structure but also the eco system.

On that note, if any of the society falls into trap of poverty or earns less then the minimum affordable standard of living, it is more of a divine obligation for the corporations to help them out of their hardships. To leave them remaining in the cycle of poverty means to leave them as liability rather than asset to the society and economy.

Therefore, a CSR compliant company should have the human conscious to help out in closing the source of human despair and humiliation such as high illiteracy rate, poor housing sanitation, slumps, family at risk and others and uplift level of human dignity and rights.

What is Corporate Social Responsibility?

Perhaps Lord Chancellor of England, the first Baron Thurlow (1731 – 1806) was right when he stated, “Did you ever expect a corporation to have a conscience, when it has no soul to be damned and no body to be kicked? And by God it ought to have both!“

Indeed, corporations need to have soul and body to have a conscience as socio being and not just wealth maximisation mechanism. In fact, record shows that corporations with good public image in voluntary philanthropic and environmentally concern is corporations that attract more customers, churn more profits and thus earns shareholders trust. The ‘good’ done by corporations earns them many names: corporate social responsiveness, corporate citizens, corporate philanthropy, corporate community and many others.

Some popular definitions of corporate social responsibility as quoted by Banerjee (2007) are:

“Actions that appear to further some social good beyond the interests of the firm and that which is required by law.” (McWilliams and Siegel, 2001: 117)

“A commitment to improve community well being through discretionary business practices and contribution of corporate resources.” (Kotler and Lee, 2005: 3)

“A concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis.” (European Commission, 2005)

Dr. Mehmet Assutay, an economist, underlines the following four components which form CSR in a conventional business entity (the Shari`ah Responsibility compliance applicable only in an Islamic business setup) (See image below).

Points of concern on CSR in IBF institutions

Firstly, while theoretically, Islam seems to provide the solutions to human sufferings and disparities, that is not the case in reality, however. Muslims seems not to have a resistance to overcome neo-colonisation and globalisation effects. Our justification of economy need to be changed from positivism towards normativism where moral values and social obligations towards human well-being is equally factored in. Thus a statement such as, “As far as (my bank) is concerned, we are very committed to the development of the Islamic financial market. It is a means to enhance our shareholders’ value. From an institutional perspective we do not see Islamic banking either as a religious requirement or a social need. We see it more in terms of how we might enhance shareholders’ value.” is rather worrying and disturbing.

Secondly, full pledged Islamic Banking and Finance institutions (IBF) have been existed for the more than 30 years, although academic researches and literatures on Islamic economics as the base for its establishment have started much earlier. However contemporary trends show that while the Islamic market and finance institutions are moving away from their original philosophy of equal wealth distributions, Islamic economics as a principle too seems to be moving at the opposite directions by emphasis more on wealth creations more rather than development of the human well-being.

Thirdly, recent calls for Islamic scholars to reevaluate rulings of certain approved Islamic compliant products such as Murabahah trade financing in the Gulf, Bay` Bithaman Ajil (BBA) practices in Malaysia, Tawarruqpractices in Saudi and others seems to show that certain shariah rulings on approved products need to be more cautious, so as implementations of those products in open market not only viable for commercial convenience, but also divinely blessed and human well-being of its used. Certain Islamic products must not only cater for high influential traders and entrepreneurs but also accessibly convenience for the poor and lay men on the street needs.

Fourthly, certain bureaucratic regulations and rulings of Islamic banks such as placement of collateral on small bank loans proof to be a hindrance and accessibly inconvenience for the poor and needy, thus creating institutional injustices for the small consumers.

Fifthly, “To remain competition with mainstream financial institutions, Islamic Finance Institutions are keeping pace with new financial developments. Islamic alternatives to hedge funds, securitisation and market indices are recent additions to the industry. Islamic investment managers only targeting high-net-worth and even super-high-net-worth individuals and financial institutions – a growing practice observed in the Middle-East”. (Salma Sairally)

Sixthly, “Financial experts and practitioners appear to devote more attention to the achievement of ‘economic efficiency’ than be concerned with the principle of ‘socio-economic equity’.” (El-Gamal)

The above concerns are not exhaustive pertaining to IBF institutions being too commercially motivated and, thus, neglecting its social and human well beings.

Muslims academia responses and suggestions

However, sadly to say while Muslims often generalise that western counterparts have secularised social ethics with economics activities, there are only handful among Muslims corporate circles and academia who dealt the issue dedicatedly.

Sairally only quoted two academicians, Hasan (2005) and Taq el-Din (2005:45) who voiced out the need to evaluate the performance of Islamic Finance Institutions with reference to their contribution in meeting social responsibilities.

She concluded “that the social commitment emphasised by the Islamic economics literature is being neglected within the practise of Islamic finance which appears to focus more on the efficiency/profit aspects and less on equity/social aspects”.

Sairally’s analysis coincides with the concerns from the gurus of Islamic Economist (Manan and Chapra) as mentioned above, that there is an urgent need for a reform in current financial market system, “to lay down the contours of a new system which could help optimize human well-being”. Manan is concerned of the absence of “strong resistance to the present trend towards globalization of poverty and neo-colonization of our future.”

Some suggestion on CSR instruments

a) Institutionalising through policy decisions

As leveling up the internalising effort, Prof Nejatullah Siddiqui (Caldwell) suggests the need to internalised moral and social awareness beyond individual behaviour of the IBF operators, that is through institutionalising it with clear reflections in the policy decisions of financial institutions. On this aspect Sairally observes that ethical screening criteria of IBF institutions showed little commitment towards ethical employment policies and charities to community and staff causes. It was stated that the amount spent on charities donations are less then 2% of their profits despite their claims to be socially responsible institutions.

b) New CSR indices

This is another worthwhile exploration which could be emulated along the line of Dow Jones Islamic Index and FTSE Global Islamic index introduced in 1996 and 1999. Along that experiences a form of qualitative measures (CSR indices) may be able to track down social performance of companies whose activities are consistent with shariah principles. This is inline with a call to measure the performances of IBF with reference to CSR that has been made by both Hasan (2005) and Tag el-Din (2005).

c) Increase size of Musharakah financing

Similarly the same being observed by both Sayd Farook and Roman Lanis in their shared article, Banking on Islam? Determinants of Corporate Social Responsibility Disclosure, which also claims that Islamic banks are not adopting social roles especially in enhancing small scale traders in leveling economic involvement. They suggested for an increase to the size of Musharakah financing and advancing profit and loss sharing in gradual phases to leverage participations of small scale traders.

d) Supervision by Shari`ah Supervisory Board – corporate governance mechanism

Interestingly too is of a suggestion to clarify shariah compliance report to also include level of commitment towards corporate responsibility;

“This is because the nature of compliance with Islamic laws and principles from an Islamic point of view entails not only assurance of compliance through issuing the Shariah report, but also greater involvement in CSR activities and CSR disclosures. The Shariah Supervisory Board (SSB) function as stated by the AAOIFI also concurs with this rationale. Hence, it is generally expected that the existence of a SSB in an Islamic bank would lead to greater levels of CSR disclosures.”

e) Setting up trust fund or social foundations

The Stakeholders Perception studies among banking customers in Malaysia (Asyraf Wajdi Dusuki and Humayon Dar) proves of the close relation between CSR factors and customer banking selection decisions. The finding also proves that the issue of CSR is not foreign to Islamic banks, although it is still small either in number or part of its profit allocations compared to the counterpart in conventional companies. Big corporations like Toyota, Ford, Starbuck and McDonald have community foundations as part of their social arms.

Islamic Bank of Bangladesh Limited in its annual report reveals of it success stories in welfare-oriented schemes, Environment Friendly Business program with small traders and also Empowerment and Humanising Family Credit program which all geared towards enhancing social responsibility.

Conclusion

Despite having some of the unsatisfactory pertaining to IBF progress on CSR, IBF as a new industry player compared to much established corporations, may need to take another phases of time to be firm-footed with all of its short comings may it be legalistic, shariah supervisory opinions, operational dealings or product acceptance.

Many more public educations programs and awareness need to be paved through for it to be accepted beyond social persuasion but religious obligations that level up innate taqwa of both the IBF operator, shareholders and customers. As a Muslim, social persuasion only motivates short term goals, but the cause for Hereafter not only increases human inner spiritual resistance (taqwa) but serves an everlasting reward.

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