On the Ethicality of Islamic Banks’ Business Model

Abstract

AbstractThis paper scrutinizes the ethicality of Islamic banks’ (IBs’) business model by employing the ‘objectives of Islamic law’ (Maqāsid al‐Sharī’ah). This necessitates developing an ethical framework to construe two primary injunctions of Islamic finance, namely ribā and gharar. The former embodies financial decoupling (aggravating risk‐shifting) and unjust price gouging (provoking economic stagnation and financial exclusion), while the latter involves asymmetric information and excessive risk‐taking behaviour (exacerbating financial fragility and thus systemic risk). We empirically and theoretically illustrate that these unethical issues are still prevalent in the IBs’ modes of financing, despite the Sharī’ah‐compliant endorsement of religious scholars (i.e. Sharī’ah supervisory boards). This affirms that ethicality is merely an impression management exercise of IBs instead of their true business identity. The way forward is to conceptualize IBs’ modes of financing beyond just Sharī’ah compliance by scrutinizing their ethical impact on society at large. This would require updating centuries‐old Islamic rulings (Fatāwā) on financial transactions and consulting finance academics and practitioners.