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Ethics and Finance

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Ethical Dimensions of Islamic Finance

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Abstract

Discussing the role of morals and ethics in economics and finance is not new but several developments including the financial crisis of 2007–2008 and its aftermath have led to a debate about the need to consider the role of ethics and morality in the economic and financial workings of contemporary capitalism. Financial scandals, crimes, and unethical practices by financial institutions leading to financial repression are being noticed and the moral failure of capitalism is being discussed. Gradually, attention is being paid to the most fundamental change—the erosion of morality. In addition, repeated failure of governance, regulations, and accountability are considered a sign of deteriorating ethics in financial markets. Finally, new evidence is emerging on a widening gap in income and wealth, and reduced opportunities for the poor to share growth and prosperity, which raises ethical questions. All these developments call for a deeper understanding of the strong roots of ethics in finance, which has been mostly ignored by mainstream research.

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Notes

  1. 1.

    Hoepner and Wilson (2010) show that the annual number of publications indexed by Factiva for the search words ‘Bank’ and ‘Ethics’ increased by 357.9 percent from 4164 in the year 2000 to 19,069 in the year 2009. This indicates a sudden increase in the topic in the post-financial crisis era.

  2. 2.

    See for example, the initiative “Citizen Ethics in a Time of Crisis” by Citizens Ethics Network (2010).

  3. 3.

    Chapra (2008).

  4. 4.

    See Boulding et al. (1972).

  5. 5.

    Chapra (2008).

  6. 6.

    Chapra (2008).

  7. 7.

    See Mirakhor and Alaabed (2013).

  8. 8.

    Dowd (2009) provides a detailed exposition of the involvement of moral hazard in the recent financial crises .

  9. 9.

    Such as Occupy Wall Street movement after the financial crisis of 2007–2008.

  10. 10.

    See also Mirakhor and Alaabed (2013).

  11. 11.

    Zuboff (2009) found appropriate the philosopher Hanna Arendt’s formulation of “the banality of evil” in her observation of Eichmann in his trial in Jerusalem. Arendt observed that Eichman did not appear “perverted and sadistic,” but “terribly and terrifyingly normal” (Arendt 2006). Accordingly, Eichmann was motivated by nothing except “an extraordinary diligence in looking out for his personal advancement.” The same motivation animated the practitioners of the “narcissistic business model” operative in the run-up to the crisis. Zuboff argues that “the crisis has demonstrated that the banality of evil concealed within a widely accepted business model can put the entire world and its people at risk.” She concludes that “in the crisis of 2009 the mounting evidence of fraud, conflict of interest, indifference to suffering, repudiation of responsibility and systemic absence of individual moral judgment produced an administrative massacre of such proportion that it constitutes economic crime against humanity.”

  12. 12.

    Porter and Kramer (2011).

  13. 13.

    Fernandez (2017).

  14. 14.

    Stiglitz (2010a, b).

  15. 15.

    Karstedt and Farrall (2006).

  16. 16.

    Schumpeter (1943).

  17. 17.

    Piketty (2013).

  18. 18.

    Reinhart and Rogoff (2009).

  19. 19.

    Gresham’s law is a monetary principle stating that “bad money drives out good”.

  20. 20.

    Abdullah et al. (2015).

  21. 21.

    United Nations (2006), McAuley (2011).

  22. 22.

    Beloof et al. (2010).

  23. 23.

    Karstedt and Farrall (2007).

  24. 24.

    Serio (1998), United Nations (2006).

  25. 25.

    Holloway (1999), Porpora (2001), Kateb (2011).

  26. 26.

    Akinbo (2009).

  27. 27.

    Holloway (1999, p. 188).

  28. 28.

    McCarthy (2011), Banuri and Eckel (2012).

  29. 29.

    Folsom (2007).

  30. 30.

    Krishnan (2011).

  31. 31.

    Akinbo (2009).

  32. 32.

    Ades and DiTella (1997).

  33. 33.

    Ades and DiTella (1997, pp. 496–497).

  34. 34.

    Turco (2003).

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Authors and Affiliations

  1. Islamic Development Bank, Jeddah, Kingdom of Saudi Arabia

    Zamir Iqbal

  2. INCEIF, Kuala Lumpur, Malaysia

    Abbas Mirakhor

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  1. Zamir Iqbal
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  2. Abbas Mirakhor
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Iqbal, Z., Mirakhor, A. (2017). Ethics and Finance. In: Ethical Dimensions of Islamic Finance. Palgrave Studies in Islamic Banking, Finance, and Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-66390-6_1

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  • DOI: https://doi.org/10.1007/978-3-319-66390-6_1

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