READING MATERIALS ON ISLAMIC BUSINESS ETHICS

BY
DR A A LADAN
SECTION A.

The significance of ethical conduct in Islamic business practices. Provide

examples from the Quran and Hadith to support your arguments.

The significance of ethical conduct in Islamic business practices is rooted in the

teachings of Islam, which emphasize moral and ethical behavior in all aspects of
life, including business transactions. Ethical conduct in business aligns with the
broader Islamic principles of justice, honesty, fairness, and accountability. Here are
key points explaining the significance of ethical conduct in Islamic business
practices with examples from the Quran and Hadith.

1. Preservation of justice and Fairness:

 Quranic Reference: "O you who have believed, be persistently standing firm
in justice, witnesses for Allah, even if it be against yourselves or parents and
relatives." (Quran 4:135)
 Hadith: Prophet Muhammad (peace be upon him) emphasized the
importance of justice, stating, "The nations before you were destroyed
because they used to inflict the legal punishments on the poor and forgive
the rich."

2 . Honesty and Trustworthiness:

 Quranic Reference:: And do not mix the truth with falsehood or conceal the
truth while you know [it]." (Quran 2:42)
 Hadith: Prophet Muhammad (peace be upon him) said, "The signs of a
hypocrite are three: when he speaks, he lies; when he promises, he breaks his
promise; and when he is entrusted, he betrays his trust."

3. Avoidance of unethical practice:

Quranic Reference: "And do not devour one another's wealth unjustly or send it [in
bribery] to the rulers in order that [they might aid] you [to] consume a portion of
the wealth of the people in sin, while you know [it is unlawful]." (Quran 2:188).

Hadith: Prophet Muhammad (peace be upon him) warned against engaging in

usurious transactions, stating, "A time will come when a man will not care how he
earns his money, whether legally or illegally."

4. Social Responsibility and Charity:

Quranic Reference: "Righteousness is not that you turn your faces toward the east
or the west, but [true] righteousness is [in] one who believes in Allah, the Last
Day, the angels, the Book, and the prophets and gives wealth, in spite of love for it,
to relatives, orphans, the needy, the traveler, those who ask [for help], and for
freeing slaves..." (Quran 2:177)..

Hadith: Prophet Muhammad (peace be upon him) said, "The upper hand is better
than the lower hand. The upper hand is that of the giver, and the lower hand is that
of the beggar."

In summary, ethical conduct in Islamic business practices is crucial for upholding

the values of justice, honesty, fairness, and accountability as prescribed in the
Quran and Hadith. By adhering to these principles, individuals and businesses
contribute to the establishment of an ethical and socially responsible business
environment in accordance with Islamic teachings.
SECTION B :

Core Principles of Islamic Business Ethics and how they guide ethical
behavior in business

1. Trustworthiness (AMANAH): Trustworthiness, or Amanah in Arabic, refers to

the obligation of fulfilling commitments, keeping promises, and safeguarding
entrusted property or information. In Islamic business ethics, individuals and
organizations are required to be trustworthy in their dealings. This includes
fulfilling contracts, maintaining confidentiality, and ensuring that stakeholders can
rely on their commitments.

2. Honesty (Sidq): Honesty, or Sidq in Arabic, emphasizes truthfulness, sincerity,

and transparency in communication and business transactions. Islamic business
ethics dictates that honesty is crucial in all interactions. Business practitioners are
expected to provide accurate information, avoid deceptive practices, and be sincere
in their dealings to build trust within the business community.

3. Justice (Adl): Justice, or Adl in Arabic, refers to the fair treatment of all
individuals, ensuring that rights are respected, and everyone is treated equitably.
Islamic business ethics emphasizes the application of justice in all business
dealings. This includes fair pricing, equitable distribution of resources, and
unbiased treatment of employees, customers, and business partners.

4. Fairness (Qist): Fairness, or Qist in Arabic, involves acting justly and

impartially, avoiding discrimination or favoritism in business practices. Businesses
are encouraged to adopt fair and equitable practices in hiring, promotions, and
resource allocation. Fairness extends to pricing policies, ensuring that all
stakeholders receive fair value for their contributions.

How the principles guide ethical behaviour in Business?

1 Building trust: Trustworthiness and honesty form the foundation of ethical
behavior. By consistently demonstrating trustworthiness and honesty in business
transactions, individuals and organizations build trust among stakeholders. This
trust is essential for long-term relationships and the success of business ventures.

2. Conflict resolution: Justice plays a critical role in conflict resolution. When

disputes arise, the principles of justice guide fair and impartial resolution, ensuring
that conflicting parties are treated equitably and resolutions are based on ethical
considerations rather than personal biases.

3. Ethical decision making: The core principles of Islamic business ethics provide a
framework for ethical decision-making. When faced with dilemmas, individuals
can refer to the principles of trustworthiness, honesty, justice, and fairness to make
decisions that align with Islamic values and promote ethical conduct.

. 4. Promoting social responsibility: The principles of fairness and justice extend

beyond individual transactions to encompass social responsibility. Businesses are
encouraged to contribute positively to society, address social inequalities, and
engage in charitable activities, aligning their practices with broader ethical
consideration.

5. Employee relations: Trustworthiness and fairness are particularly important in

employee relations. Upholding commitments to employees, providing fair
compensation, and ensuring a safe and equitable work environment contribute to a
positive workplace culture and employee consideration

6. Consumer confidence: Trustworthy and honest business practices enhance

consumer confidence. When customers perceive businesses as trustworthy and
honest, they are more likely to make repeat purchases, recommend the business to
others, and contribute to the overall success of the enterprise.

In summary, the core principles of Islamic business ethics guide ethical behavior
by providing a moral framework for decision-making, fostering trust and
transparency, promoting social responsibility, and ensuring fair treatment of all
stakeholders. Adhering to these principles contributes to the creation of ethical,
sustainable, and socially responsible business practices in accordance with Islamic

SECTION C:
Application of principles of Business Ethics

The importance of transparency in financial reporting within the context of

Islamic business ethics

1. Ensures Accountability

2. Build trust and credibility

3 Facilitates informed decision-making

4. Prevents fraud and unethical behaviour

5. Encourage shariah compliance

6. Enhance corporate governance

Transparency in financial reporting is a fundamental aspect of Islamic business

ethics, aligning with the principles of honesty, accountability, and justice. It serves
to provide clear and accurate information about the financial health and
performance of an organization to its stakeholders, including investors, employees,
customers, and the broader community. The following points highlight the
importance of transparency in financial reporting within the context of Islamic
business ethics:

1. Ensures Accountability: Transparency fosters accountability by holding

businesses responsible for their financial decisions and actions. By openly
disclosing financial information, businesses demonstrate a commitment to ethical
conduct and accountability to their stakeholders.

2, Build trust and credibility: Transparent financial reporting builds trust among
stakeholders. When businesses are open and honest about their financial standing,
investors, customers, and partners are more likely to trust the organization. Trust is
a key element of ethical conduct in Islam and is vital for sustaining long-term
relationship.

3. Facilitates informed decision-making: Stakeholders, especially investors and

potential business partners, rely on transparent financial reporting to make
informed decisions. Access to accurate financial information allows stakeholders
to assess the risks and benefits associated with engaging with a particular business,
contributing to ethical decision-

4. Prevents fraud and unethical behaviour: Transparency acts as a deterrent to

fraudulent activities and unethical practices. When financial reporting is open and
subject to scrutiny, there is less room for manipulation or misrepresentation. This
contributes to a fair and just business environment, aligning with Islamic
principles.

5. Encourage shariah compliance: Transparent financial reporting is essential for

ensuring Sharia compliance in business operations. By providing visibility into
financial transactions, businesses can demonstrate that their practices adhere to
Islamic principles, including the prohibition of interest (Riba) and engaging in
lawful and ethical business activities.

6. Enhance corporate governance: Transparency is a cornerstone of effective

corporate governance. It ensures that decision-makers within the organization are
accountable to stakeholders and that there is a clear delineation of responsibilities.
This, in turn, promotes fairness and ethical behavior at all levels of the
organization..

SECTION D

HOW TRANSPARENCY CONTRIBUTES TO ETHICAL CONDUCT IN

BUSINESS

 Open disclosure of financial statements

 Details notes and explanations
 Regular audits by independent parties
 Disclosure of corporate social responsibility (CSR) initiative
 Clear communication with stakeholders

1, Open disclosure of financial statements: Businesses practicing transparency

openly disclose their financial statements, including income statements, balance
sheets, and cash flow statements. This allows stakeholders to assess the financial
health of the business and make informed decisions.

2 Details notes and explanations: Transparent financial reporting includes detailed

notes and explanations that provide context and clarity. For example, businesses
may explain the methodology used in revenue recognition or disclose any potential
risks associated with their financial position.

3 Regular audits by independent parties: Transparent businesses often subject

themselves to regular financial audits conducted by independent auditing firms.
These audits provide an unbiased evaluation of the financial statements, assuring
stakeholders of the accuracy and reliability of the information presented.

4. Disclosure of corporate social responsibility (CSR) initiative: Transparency

extends beyond financial figures to include the disclosure of corporate social
responsibility initiatives. Businesses may openly report on their social and
environmental impact, demonstrating a commitment to ethical and socially
responsible practices.

5. Clear communication with stakeholders: Transparent communication with

shareholders involves providing timely and accurate information about the
company's financial performance, strategy, and potential risks. This ensures that
shareholders are well-informed and can actively participate in decision-making
process.

In conclusion, transparency in financial reporting is integral to ethical conduct in

Islamic business practices. It enhances accountability, builds trust, prevents fraud,
and promotes informed decision-making, all of which are aligned with the
principles of honesty, justice, and fairness as outlined in Islamic teachings.
Businesses that prioritize transparency contribute to a more ethical and sustainable
business environment.

SECTION E

Definition of Interest (Ribah) and the position of islam

In Islamic Finance Riba" refers to the prohibition of usury or the charging of
interest on financial transactions. Riba is considered unethical and is strictly
prohibited in Islamic economic and financial systems. The term Riba is derived
from Arabic and generally means an increase, addition, or growth. In the context of
Islamic finance, Riba specifically pertains to any unjustified increase in the amount
of a loan or debt, whether in monetary terms or in kind, beyond the principal
amount.

There are two primary types of Riba recognized by Islamic finance:

1. Riba al-Fadl (Excess in Exchange)

2 .Riba-al-Nasiah ( Exchange in Delay)

1.Riba al-Fadl (Excess in Exchange): This type of Riba refers to the unjust
enrichment through an exchange of goods or commodities. It occurs when there is
an unequal exchange of goods, and one party receives more than the fair value of
the items exchanged. Riba al-Fadl is often associated with transactions involving
commodities such as gold, silver, and food items.

2.Riba-al-Nasiah ( Exchange in Delay): Riba al-Nasi'ah refers to the charging of

interest or any increase in a loan amount in exchange for a delay in repayment. It is
associated with the time value of money, where an additional amount is charged if
the repayment is postponed. This type of Riba is commonly found in conventional
interest-based loans.

Islamic finance promotes ethical and Sharia-compliant financial transactions, and

the prohibition of Riba is rooted in several Quranic verses and Hadiths (sayings
and actions of Prophet Muhammad, peace be upon him). The Quran explicitly
condemns the practice of Riba and emphasizes the importance of engaging in fair
and just financial dealings. The prohibition of Riba is part of the broader Islamic
principles of economic justice, wealth distribution, and ethical conduct in financial
matters.

SECTION F:

What is the position of Islam on Interest?

Islam unequivocally prohibits the charging or paying of interest, known as "Riba"
in Arabic. The prohibition of Riba is rooted in Islamic teachings found in the
Quran and the Hadith (sayings and actions of Prophet Muhammad, peace be upon
him). The stance of Islam regarding interest is clear, and it is considered one of the
major prohibitions in Islamic finance The key sources outlining the Islamic
perspective on Riba include:

1. Quranic verses

2. Hadith of the Prophet Muhammad SAW

3. Consensus of Islamic Scholars

1. Quranic verses: Several verses in the Quran explicitly condemn Riba. One of
the key verses is found in Surah Al-Baqarah (2:275): "Those who consume interest
cannot stand [on the Day of Resurrection] except as one stands who is being beaten
by Satan into insanity. That is because they say, 'Trade is [just] like interest.' But
Allah has permitted trade and has forbidden interest.

The Quran emphasizes the distinction between trade and interest, making it clear
that while engaging in lawful trade is permissible, the practice of Riba is strictly
forbidden”.

2. Hadith of the Prophet Muhammad (Peace Be Upon Him): The Prophet

Muhammad (peace be upon him) also condemned the practice of Riba in various
Hadiths. One of the well-known Hadiths states:

 "Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for
dates, salt for salt, like for like, same for same, hand to hand. If the types are
different, sell however you like, as long as it is hand to hand”.
 This Hadith underscores the principle of fair exchange and prohibits any
exchange involving different types of commodities with a delay in payment,
which would lead to the charging of interest”.

3. Consensus of Islamic Scholars (Ijma): There is a consensus among Islamic

scholars that Riba is prohibited in Islam. The majority of scholars agree on the
prohibition of both Riba al-Fadl (excess in exchange) and Riba al-Nasi'ah (excess
in delay).

The prohibition of Riba is rooted in the broader Islamic principles of economic

justice, fairness, and ethical conduct in financial transactions. The Islamic
economic system aims to promote social welfare, equitable wealth distribution, and
the avoidance of exploitative practices. As a result, Muslims are encouraged to
engage in Sharia-compliant financial transactions that adhere to the principles of
fairness and justice.

Islamic finance offers alternative financial instruments that do not involve interest,
such as profit-sharing arrangements, equity-based contracts, and Islamic banking
products. The goal is to create a financial system that aligns with Islamic principles
and promotes economic justice while avoiding the harms associated with usury.