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Ethical Foundations of the Islamic Financial Industry

Author

Listed:
  • Saad Azmat

    (Lahore University of Management Sciences)

  • Maryam Subhan

    (Lahore University of Management Sciences)

Abstract

This paper examines the ethical foundations of the Islamic financial industry which is strongly criticized for its similarity with conventional finance. In this paper, we argue that this criticism is based on the consequentialist reasoning. The deontological considerations are largely ignored when the focus is on aggregate returns and associated product features. We build an economic model which allows us to examine the implementation of deontological rules in the Islamic financial products along with examining their consequences. We show that the market forces may cause the returns and the attributes of Islamic financial products to converge with conventional finance even though the industry may be adhering to the Islamic deontological rules. We build a model to show that there may exist ‘Epsilon States’ where the deontological rules are followed by the Islamic finance industry, but their impact is not significant. We argue that the source of these ‘Epsilon States’ could be either moral uncertainty or costly monitoring. The presence of these ‘Epsilon States’ enable Islamic financial institutions with weak ethical commitments to create financial products where the deontological rules are followed, but their impact remains insignificant.

Suggested Citation

  • Saad Azmat & Maryam Subhan, 2022. "Ethical Foundations of the Islamic Financial Industry," Journal of Business Ethics, Springer, vol. 180(2), pages 567-580, October.
  • Handle: RePEc:kap:jbuset:v:180:y:2022:i:2:d:10.1007_s10551-021-04882-5
    DOI: 10.1007/s10551-021-04882-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Islamic finance; Consequentialist ethics; Deontological rules;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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