Dr. Mohammad Omar Farooq, Head of the Centre for Islamic Finance, Bahrain Institute of Banking and Finance (BIBF), implores Islamic institutions to take the higher moral ground

The ongoing economic global crisis that began in 2007 as a financial crisis gradually unfolded as a full-scale, resilient economic crisis. Given the kind of behaviour on the ethical and governance front in leading economies, such as the US and UK, the current crisis has also been aptly identified as a crisis of ethics and governance.

Following Lehman Brothers and several years of frantic 'damage control' efforts by the US, many were beginning to relax as they thought lessons would be learned and financial institutions would get their acts together.

LIBOR OR LIE-BOR?

The latest revelations surrounding the LIBOR scandal has reignited the fear that our entire financial edifice is based on a foundation of a big LIE (perhaps LIBOR should be called LIE-BOR). Anyone with minimal knowledge of the workings of global finance knows LIBOR is pivotal to the financial industry. Although there are other benchmarks, such as Euribor or Federal Funds Rate, based on the sheer volume of funds that it is benchmarked to, amounting to some $300 trillion, LIBOR is more important than any other financial benchmark
of relevance.

What is the crisis about? The modern conventional financial system is interest-based and some kind of benchmark is pivotal for this system, which is where LIBOR and other similar benchmarks come into the picture. Big banks or global financial powerhouses are among the institutions that submit their reported rate on the basis of which an average (interquartile mean), which is calculated to yield LIBOR. Also, due to a variety of maturity and 10 different currencies leading to multiple LIBORs, these are quoted several times a day, based on which member and non-member banks throughout the world set their own rates.

Given the scale of funds, reaching hundreds of trillions, even minute manipulation of rates may mean substantial profits that add up over time for the lenders. Consider, for example, one tenth of a per cent of $300 trillion amounts to $100 billion. Not a paltry sum; of course, and all at the expense of the borrowers or users of funds. However, the story is about more than funds or their scale. It is about ethics and governance. Evidently, almost five years since the beginning of the current crisis, the lapses in ethics and governance seem to persist. Should it be surprising that a current study of 500 top senior executives in the US and UK reveals that 26 per cent of respondents believe that wrongdoing or being unethical is a key to success? This raises a related and fundamental question about education, especially from the business schools.

The ongoing crisis, credit-market meltdown and governance misconduct have bared the discourse about what exactly the business schools are teaching their graduates. More specifically, what is the nature and impact of business ethics education? Business schools cannot simply brush aside the challenge as if the problem of ethics involves only a few isolated cases and educate the new generation about those precedent cases. The other approach has been analytical, to prepare the graduates for practical reasoning and decision-making focused on duty, rights or utilitarianism, which has not been very effective either.

TEACHING VALUES

Thus, Mary Gentile, a former Harvard Business School faculty, gives a failing grade to business schools and calls for a value-orientation approach in business ethics education and value-based empowerment of the ethical voice. Sounds rather compelling. However, the problem may be deeper and more complex than being just a matter of business education.

In his research, Three Ethical Dimensions of the Financial Crisis, (November 2011) Prof. Antonio Argandona observes that "this is a crisis of leadership or governance in a wide range of institutions, and this, in turn, reflects the failure of an economic and social model grounded on certain anthropological and ethical assumptions, and it is these assumptions that have failed."

He further elaborates that modern economics in its positivist tradition has become vulnerable to extremism of "absolute separation between ethics and economics ... if the market takes care of the self-regulating economic relations, individual actions, which ethics regulate, are not important; whatever the conduct, the market will find a social optimum."

While Wall Street, representing and epitomising the financial sector, is often identified as singularly blameworthy for the financial crisis, Argandona argues that this crisis can be better understood and explained as "...caused by the fortuitous confluence of events such as a credit expansion sustained for too long, some financial innovations and an array of failures in the monitoring, prevention and control mechanisms that had been created."

Importantly, if blame is to go around, it should not just go to the executives and analysts of the financial sector, but also to the consumers, entrepreneurs, government and policy makers, regulators, supervisors and so on.

If in the ethical context leading by example is important or even crucial, one can easily identify the problem as endemic by looking at governance and politics, where lobbying processes and projects have become tantamount to flushing ethics down the toilet.

BREAKING THE CODE

Every party is simply pursuing its self-interest. That explains how some of the leading financial powerhouses were aggressively promoting securitised products while taking short positions against the same, which led to not only undermining the very same clients they serve, but also undermining themselves. Notably, Lehman Brothers did have a respectable code of ethics, which explicitly stated that the code was "to help maintain a culture of honesty and accountability." And, earlier, even Enron had a rather elegant code of ethics affirming that "Employees of Enron, Corp., its subsidiaries, and its affiliated companies ... are charged with conducting their business affairs in accordance with the highest ethical standards."

So, what is really the problem? What is with business ethics education and why are we failing so miserably? There is no panacea or simple solution. However, while there is room for improvement and innovation in business ethics education, the reality might be that there is a bigger challenge of ethics and culture deeply embedded in our life.

ENDEMIC LIE

What is the condition of ethical standards in a family environment? In politics and governance? In churches and other religious institutions? In all of these areas, if America is to be taken as an example, the situation is deplorable and alarming. A government and its leader lie and deceive about the threat of weapons of mass destruction, invades, destroys and occupies another country, loses thousands of valuable lives including those of its own soldiers while racking up trillions of dollars in cost. This cannot demonstrate ethical and moral commitments among the country's authorities.

A family environment where pre-marital and extra-marital affairs are rampant, where parents can easily walk away from or abandon each other, deceive or even kill each other does not support an environment for high ethical standards. Resorting to performance-enhancing drugs to get an edge or to fulfil one's earthly ambitions defies the very idea of sportsmanship. Religion or its label does not automatically mean an ethical standard, as indicated by numerous high profile cases of church leaders preaching something while doing just the opposite in their lives.

The reality is that trying to get an edge over others or earn fame, wealth or power by hook or by crook has become de-stigmatised. Codes and laws have their place, but a conducive environment to foster ethical and moral standards must exist simultaneously to produce the desired result. Restoring ethics and morality requires all parties - codes of conduct to uphold standards, laws and penalties to deter violations of legal statutes, ethics in education, including business ethics education to nurture healthy attitudes and perspectives - to come together to make a difference.

However, since general patterns of behaviour or conduct are rooted in family and school from an early age, ethical conduct needs to be emphasised and upheld in these spheres as well. Most importantly, all those at the leadership level, whether in family, society, business, or government, need to publicly uphold certain ethical and moral standards. Commitment to such standards cannot merely comply with the laws and codes, but must be internalised as a person's second nature.

As part of its soul-searching Harvard Business School now offers an opportunity to its graduating MBAs to sign 'The MBA Oath', which affirms that as business managers they will "serve the greater good" and will "act responsibly, ethically and refrain from advancing their 'own narrow ambitions' at the expense of others." It is a major shift in approach from top institutions like Harvard. Interestingly and unfortunately, only 20 per cent of the class of 2009 voluntarily signed the oath.

Columbia Business School also came up with an 'honour code' that all students must abide by, which states, "As a lifelong member of the Columbia Business School community, I adhere to the principles of truth, integrity, and respect. I will not lie, cheat, steal, or tolerate those who do." These are notable efforts of the major business schools to deal with the ethical challenges aggressively. Many educators as well as students are embracing such public commitments as part of a generational shift regarding ethics and social responsibility. However, as mentioned already, the challenge of ethics cannot be addressed by business schools alone. It needs a much broader social compact.

MORALS AND MUSLIMS

What about the same challenges from an Islamic perspective? The Islamic finance industry generally presents its distinction in terms of its ethical foundation. Is the industry doing or expected to fare much better? The answer cannot be given in a definitive affirmative. The Islamic finance industry in its current practice has emerged as a prohibition-driven industry that is only legalistically distinct from its
conventional counterpart.

Most of its top executives, whether in full Islamic banks, window operations or subsidiaries of conventional banks, are educated and trained in the conventional educational system, environment and perspective. Whether in customer service or customer sensitivity, the industry is yet to establish itself as anything better or even at par with its conventional counterparts. While criticism is hurled against the conventional counterparts as lacking adequate transparency, in reality the Islamic finance industry has much less transparency, which continues to be a major concern.

Undoubtedly, Islam places ethical conduct at the core of a Muslim's way of life, of which the financial aspects - from institutions to transactions - are parts. From an Islamic viewpoint, there are laws and codes - and there must be - but doing the right thing, the ethical thing, should be primarily because of our God-consciousness or Taqwa. This is particularly reinforced from the viewpoint that while the conventional system generally commits to taking into consideration all relevant stakeholders' interests and concerns in its conduct and decision-making, Islam brings into the picture one additional - missing - stakeholder, which is God. Any business will legitimately pursue profit, but in doing so it must be fair to all recognised stakeholders; however it will also be vigilant regarding God - our benevolent creator and sustainer to whom we are also inescapably accountable in the life hereafter - as the missing stakeholder.

The current crisis of ethics is so endemic and the Islamic finance industry is so closely rooted in and interfaced with the conventional system that there cannot be strong confidence that this new industry would be significantly less vulnerable than its conventional counterpart on the ethical front. Several failures and bankruptcy cases in the new industry that have already become public indicate that the mode of behaviour in Islamic finance institutions (IFI) when dealing with lapses and failures are quite similar to their
conventional counterparts.

Certain practices, for example smoothing of returns, that have been validated by the religious scholars of the industry and standard-setting bodies, have facilitated the industry's becoming significantly less transparent by allowing the IFIs to hide losses during any particular business period.

While there is no reason to generalise, the public often find that IFIs that get in trouble also engage in the blame-shifting game without taking responsibility for their actions in an Islamic manner. As Professor Volker Nienhaus, well known expert in the field of Islamic finance, aptly stated in a 2011 paper in Ethical Perspectives: "In its present form, it [Islamic finance] is neither more ethical nor more efficient or stable than 'prudent' conventional banking." Islamic finance must have its edge in ethical dimensions.

It is not uncommon in some countries where Islamic finance has a strong presence to recommend or even mandate training for the banking staff in ethics from an Islamic perspective. However, although the potential benefit from such training is relevant to all levels, such training or exposure is more fundamentally needed at the level of executives and management. Both in the conventional and Islamic context, conviction at the top echelon is that to be successful one must be unethical needs to be replaced with the opposite: that not only being unethical is not necessary to be successful and profitable, but also that whatever is achieved through being unethical is anything but success. This is where Islamic finance, and in my view, Islamic business (since finance is part of the broader world of business), should have an edge.

THE MISSING STAKEHOLDER

Ethical conduct is not a monopoly of any religion or people. Thus, from an Islamic perspective, it should be our universal aspiration that we, as human beings, emphasise, uphold and insist on ethical behaviour for all, especially not forgetting ourselves. As far as Islam is concerned, the consequence of unethical behaviour extends beyond this world, and whether anyone is able to make some extra profit in this world, if it is at the expense of others or clients in an unethical manner, the missing stakeholder still would hold us accountable, as this stakeholder missing in our decisions and approach is still "the Master of the Day of Judgment" [The Qur'an 1/al-Fatiha/4].

Notably, taking into consideration this missing stakeholder means to be conscious of one's responsibility toward others, especially those whom we serve or those who are impacted by our conduct at the individual or broader level. This commitment to ethical standards and concerns are not pathways to failure or lack of success; rather in the long run it is the key to success that is not just enduring, but also a success that an individual or an institution can be proud of. As Warren Buffet asserted, "Honesty is a very expensive gift. Do not expect it from cheap people." Well, it is a culture that modulates itself in terms of valuation of values, such as honesty, and it does not necessarily have to be expensive or rare. A society and culture can grow in ways that place higher value on honesty and integrity. However, hardly anyone would disagree with Buffet that people without honesty are "cheap people", without any honour and their success should be fundamentally devalued and stigmatised by the society, not rewarded.

The unethical tendency in the business/financial world, exemplified in cases like LIBOR where leading institutions are colluding, is a wake-up call. However, such a call neither requires knee-jerk reactions nor are there quick-fixes. Rather, the full weight of law and education in the direction of a moral/ethical reformation is needed where the people, governments, businesses, customers, educators, students, policy-makers and preachers need to join hands to make a serious dent in the problem and then gradually turn the tide in an ethical direction. As ethical conduct is an Islamic imperative as part of human accountability to God, Muslims in general and IFIs in particular, where the latter claims a higher ethical ground compared to their conventional counterpart, need to rise up to the challenge and set a model that others can emulate. Otherwise, with all the growth and success of the industry, it will be merely a niche.

"Verily, God does command you to render back your Trusts to whom they are due" (Quran 4/an-Nisa/58). Let this be a common ground for all toward humanity's ethical reformation.

© Islamic Business and Finance 2012