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THIS ASSIGNMENT IS A PARTIAL FULFILLMENT


FOR IB2003
CERTIFIED ISLAMIC FINANCE PROFESSIONAL (CIFP)

Title of Paper:
Islamic ethics: The missing link in
corporate governance.

Presented By:
FASHOLA OLAYINKA NURUDEEN
ID: 1100275



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CHARTERED ISLAMIC FINANCE PROFESIONAL (CIFP)
PART 2
IB2003 MANAGING ISLAMIC FINANCIAL INSTITUTIONS (JAN 2013)
PROJECT PAPER ASSIGNMENT (Marking Scheme)

Student Name: FASHOLA OLAYINKA NURUDEEN.
Matrix No: 1100275

Criteria Marks Allocation Marks Obtained
Ideas/ Analysis 20 Marks
Research/ Support 10 marks
Organization & Coherence 10 marks
Style 5 marks
Mechanics 5 marks
Total Marks 50 marks

Over all comments:




Examiner:
Date:



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Abstract.
Defining ethics in a business environment and relating it to corporate governance is a little
different than defining personal morals and values. A business is an entity of many parts. Within
that entity, there are both written and unwritten principles that drive actions, ideas, and decisions.
The individuals within an organization determine whether or not those principles manifest
substantively; that is, in good behavior and positive choices.
Ethical business behavior may be defined by law, but it also can be defined by business
leadership. Generally speaking an action or choice can be considered ethically correct if it's
honest, fair, supports a beneficial outcome for both (or all) parties, and generally enables the
overall corporate image and vision.
This implies that what is right in company A, might be wrong in company B given the same
situation and conditions, but in the Islam and the management of Islamic business what is right is
defined by ALLAH and exemplified by the Prophet of Islam, thus in the management of Islamic
business outfit the ethics as defined in the Quran and the sayings of the Prophet are the standards
that should be followed and implemented by the Muslims, thus given the same situation and
conditions what is right in company A will be right in company B if both companies are
managed with the guiding principles of Islam ethical values.
This write up seeks to highlight the fact that the missing link in corporate governance is the lack
of the infusion of Islamic ethics, thus the reasons for big corporate failures in spite of the
implementation of corporate governance.







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1.0 Introduction.

The religion of Islam is by no means just a religion but a way of life, as it encompasses all
aspects of human endeavourer, thus the adherents of the faith are expected to carry out all their
activities be it spiritual, social, economic or otherwise in the light of the dedicates of the faith as
stipulated in the Quran and practiced by the Prophet of Islam Muhammed (SAW). In the recent
past the Muslims are becoming more conscious of the fact that there financial transactions should
be in the dictates of the Islamic faith, prior to now there were no Islamic financial institution in
the world not until when the first private interest-free bank, the Dubai Islamic Bank, was also set
up in 1975 by a group of Muslim businessmen from several countries. Two more private banks
were founded in 1977 under the name of Faisal Islamic Bank in Egypt and the Sudan. In the
same year the Kuwaiti government set up the Kuwait Finance House
1
. Since then several other
Islamic financial institutions have been established, the industry worth trillion dollars.

With the growth and spread of Islamic Finance from the Muslim dominated countries of the
Middle East to the Europe where you have few Muslim the concept of Islamic Finance as grown
beyond the boundaries of faith it now a world phenomenon, people are embarrassing not just for
faith but for the core principles with which the Islamic financial transaction is built on which is
fairness, transparency, equity and for the good of all.

Just as every other aspect of the Islamic faith like Solat, Fasting, Hajj among others there is a
universal way of performing this acts of worship irrespective of where you come from or where
you perform these acts its uniform all other the world but little can be said of financial
transactions as we see it today, its too diverse and there is need for an effective and common
position and standard on the way the financial transactions products and service are conduct to

1
AbdulGafoor(1995), Interest Free Commercial Banking. Publisher: APPTEC Publications (May 1995) Language:
English; ISBN-10: 9080235415.
Page 5 of 15

ensure its universally acceptance. In order to active this purpose all Islamic financial institution
must be governed by the same corporate principles since the sources of all the financial
transactions are predicated on the verses of the Quran or sayings of the Prophet of Islam which is
universally accepted thus the need for effective corporate governance that is ethically driven
which is a process to ensure that the business and management of corporate entities are carried
out in the best possible manner to safeguard and promote the interests of all stakeholders. In
todays financial world one might finds it difficult to differentiate between Islamic financial
institutions from the conventional finance aside from the name but in terms of operation and
product and services the similarities are more and its very difficult to differentiate at times.

Thus the importance of an ethically structured Islamic approach to corporate governance cannot
be over emphasized. This write up is aimed at discussing ethics as the missing link in the
implementation of corporate governance and how the Islamic approach which is founded on
ethical values should be implemented by Islamic financial institution so that what befell the
conventional companies will be avoided.

2.0 Definition of Ethics
The word ethics is derived from the Greek word ethos, which means character or custom
2
. It
represents a wide meaning of character, behavior or code of conducts. In Islam, the word ethic is
synonym with the term adab and khuluq
3
.
2.1 Ethics in the Western World.

Ethics in the western world is not based on any religious values, its base on what the individual
or the community feels its right, thus the definition of what is right and wrong is epitomizes in
the individual and the communitys view. Every day, individuals face ethical issues at work, and
rarely know how to deal with them. A review of articles published in the Wall StreetJournal

2
Solomon, Robert. C. (1984). Morality and the Good Life. New York: McGraw-Hill.
3
Siddiqui, Ataullah. (1997). Ethics in Islam: Key Concepts and Contemporary Challenges. Journal of Moral
Education, 26 (4), 423- 431.
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during only one week in 1991 uncovered a whole array of issues being faced by employees:
stealing, lying, fraud and deceit, etc
4


Surveys both in the USA and internationally reveal rampant unethical behavior in businesses.
For instance, a recent survey of 2,000 major US corporations revealed that the following ethical
problems (arranged in order of importance) concerned managers:
1. Drug and alcohol abuse
2. Employee theft
3. Conflicts of interest
4. Quality control issues,
5. discrimination in hiring and promotion,
6. Misuse of proprietary information,
7. Abuse of company expense accounts,
8. Plant closings and lay-offs,
9. Misuse of company assets, and
10. Environmental pollution
5


Internationally, the ethical values of businesses are also deficient. In a survey of 300 companies
across the world, over 85% of senior executives indicated that the following issues were among
their top ethical concerns: employee conflicts of interest, inappropriate gifts, sexual harassment,
and unauthorized payments
6
.

The problem of ethical standards is a great issue in the west because there is no common
consensus on what is right and what is wrong and that is why in these societies people can do
anything and justify it.


4
Cherrington, J. O. and Cherrington, D. J. 1993. A Menu of Moral Issues: One Week in the Life of the Wall Street
Journal. Journal of Business Ethics, 11, pp. 255-265.
5
Americas Most Pressing Ethical Problems. 1990. Washington, DC: The Ethics Resource Center, p. 1.
6
Baumann, Mary. 1987. Ethics in Business. USA Today. She was citing data from the Conference Board.
Page 7 of 15

2.2 Ethics in Islam.
Islam places the highest emphasis on ethical values in all aspects of human life. In slam, ethics
governs all aspects of life. Ethical norms and moral codes discernable from the verses of the Holy
Quran and the teachings of the Prophet (SAW) are numerous, far reaching and comprehensive.
Islamic teachings strongly stress the observance of ethical and moral code in human behaviour.
Moral principles and codes of ethics are repeatedly stressed throughout the Holy Quran. Besides,
there are numerous teachings of the Prophet (SAW) which cover the area of moral and ethical
values and principles. Says the Holy Quran:
You are the best nation that has been raised up for mankind; You enjoin right conduct,
forbid evil and believe in Allah.
7

The Prophet (SAW) also says:
I have been sent for the purpose of perfecting good morals.
8


This goes without saying that there is a general consensus among human beings about certain
fundamental ethical values. However, the Islamic ethical system substantially differs from the
so-called secular or western ethical systems as well as from the moral code advocated by other
religions and societies. In the Islamic scheme of things, adherence to moral code and ethical
behaviour is a part of Iman (faith) itself. According to the Islamic teachings, Muslims have to
jealously guard their behaviour, deeds, words, thoughts, feelings and intentions. Islam asks its
believers to observe certain norms and moral codes in their family affairs; in dealings with
relatives, with neighbours and friends; in their business transactions; in their social affairs, nay in
all spheres of private and public life.

Islam highlights some basic ethical standards which every financial/ business transaction must
adhere to these are but not limited to:
1. Prohibition of Riba: Allah says: O you who have attained faith! Remain conscious of
God, and give up all outstanding gains from Usury, if you are (truly) believers
9


7
Quran 3 verse 110
8
Collection of Hadith by Ibn Hambal, (No: 8595)
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2. Prohibition of Maysir (Gambling): Allah says: O you who believe! Intoxicants and
gambling, (dedication of) stones and (divination by) arrows, are an abomination of Satans
handwork: Abstain from such (abomination), that you may prosper. Satans plan is (but)
to excite enmity and hatred between you with intoxicants and gambling, and hinder you
from the remembrance of Allah, and from prayer: Will you not then abstain?
10

3. Prohibition of Gharar (Uncertainties): Abu Hurayra reported that the Prophet (SAW)
prohibited the pebble sale and the gharar sale
11
.
4. Good Character and Behavior (Islam insists on obligation to observe good character
and behavior as the Prophet himself is sent to us for purpose of perfecting the best of
character.): Abd Allah ibn 'Amr said, the Prophet used to say: "The best of you are those
who have the most excellent morals
12
Hadith narrated by Abu Hurairah, the Messenger
of Allah said: "The most perfect of the believers in faith is the best of them in moral
excellence, and the best of you are the kindest of you to their wives
13
". Muadh Ibn Jabal
reported that the Prophet said: Fear Allah wheresoever you may be, follow up an evil
deed by a good one which will wipe (the former) out and behave good-naturedly to
people
14

5. Generosity in Doing Business (Generosity in doing business refers to willingness and
kindness in giving away either rights or property or times for the benefit of others):
Uthman bin Affan reported that the Prophet said: Allah will admit to the Paradise a man
who is lenient as a seller and a buyer.
15
Jabir bin Abdullah reported that Allahs

9
Al Quran, 2: 278, 2: 275, 3: 140, 4: 161 and 30: 39.
10
Al Quran, 5: 90-91
11
Hadith narrated by Muslim, Ahmad, 'Abu Dawud, Al Tirmidhi, Al Nasa'i, Al Darami and Ibn Majah
12
Reported by: Bukhari, 61: 23
13
Reported by: Al Tirmidzi, 10: 11
14
Reported by: Al Nawawi, 2001: 35
15
Reported by: Ibn Majah, 3: 2202
Page 9 of 15

Messenger said: May Allah have mercy on the bondsman who is kind when he sells,
kind when he buys and lenient when he demands (his debt)
16


On the contrary, all that is defined and recognized by Islam as an ethical standard which should
not be engaged in is what thrives in the west and in fact its the best rock of their financial
transaction for example Riba is a core principle of banking in the west, the insurance sector is
riddled with uncertainty and gambling, while good charter and behavior is defined by individual
as opposed divinely defined as it is in Islam. Generosity in business is only done under the guise
of corporate social responsibility, that is, given back to the society while in Islam its seen as a
duty which should be performed in order to purifies ones wealth and earn the pleasure of Allah.

3.0 Corporate Governance.
3.1 Definition.
The term corporate governance has gained prominence only during the last two decades.
17
This
terminology clearly had its origin from a Greek word kyberman which means to steer, guide or
govern. This passed on from Greek to Latin word as gubernare and the old French governer,
but this word has been defined in different ways by different organizations or committees,
according to their own ideological concerns. The OECD has defined it as the set of relationships
between a companys management, its board, its stakeholders and other stakeholders
18
. The
World Bank President has gone a step further by explaining that corporate governance needs to
be fairness, transparency and accountability
19
.
In the practical sense, corporate governance involves the nuts and bolts of how corporations
should fulfill their responsibilities to their shareholders and other stakeholders. Corporate
governance is the mechanism by which agency problems of corporation stakeholders, including

16
Reported by: Ibn Majah, 3: 2202
17
Zingales L. Corporate governance. The new Palgrave dictionary of economic and the law; 1997. p. 1.
18
OECD. OECD Principles of Corporate Governance; 2004.
19
Wolfensohn. Financial Times, 21 June (1999). Cited by the Encyclopedias of Corporate Governance in the Article
on What is Corporate Governance. (www.encycogov.com); 11 July 2001. p. 1.
Page 10 of 15

the shareholders, creditors, management, employees, consumers and the public at large are
framed and sought to be resolved. Transparency, accountability and adequate disclosure are three
essential ingredients in corporate governance. Hence, therefore, it can be concluded here that
corporate governance is a set of mechanism that helps in confirming, with fair and just dealing to
all the stakeholders and to strengthening transparency and accounting
20
.
3.1 Principles of Corporate Governance.
The OECD Principles of corporate governance originally adopted by the 30 member countries of
the OECD in 1999 have became a reference tool for policy makers, corporations, institutional
and regulatory frameworks and others. It also provides practical guidance and suggestions for
stock exchange, investors, corporations and other profound organizations of the world other than
OECD member countries. The following are the main areas of the OECD principles and its
annotation:

Principle 1: Ensuring the basis for an effective corporate governance framework.
Annotation: The corporate governance framework should promote transparent and efficient
markets, be consistent with the rule of law and clearly articulate the division of responsibilities
among different supervisory, regulatory and enforcement authorities.

Principle 2: The right of shareholders and key ownership functions.
Annotation: The corporate governance framework should protect and facilitate the exercise of
shareholders rights.

Principle 3: The equitable treatment of shareholders.
Annotation: The corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should have the
opportunities to obtain effective redress for violation of their rights.

Principle 4: The role of stakeholders in corporate governance.

20
Hakim Sam R. Islamic banking, challenges and corporate governance, LARIBA; 2002.
Page 11 of 15

Annotation: The corporate governance framework should recognize the rights of stakeholders
established by law or through mutual agreements and encourage active co-operation between
corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound
enterprises.

Principle 5: Disclosure and transparency.
Annotation: The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the financial
situation, performance, ownership, and governance of the company.

Principle 6: The responsibilities of the board.
Annotation: The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and boards accountability to
the company and the shareholders.
21


3.2 Issues with Corporate Governance in the west.
The way and matter the term corporate governance is being brandish in journals and different
academic materials in the past few decades one will want to come to a conclusion that we have
come to the end of business failures, some see it as a perfect strategy to ensure that companies
are run in the most effective and efficient ways. Also the most prestigious schools where MBA
degrees are being awarded corporate governance is one of the most talked about courses. The
thinking is that we have come to the end of business failures as a result of negligence and
compliance to codes of conduct and ethics, however, the number of failed companies keeps
increasing as it were from WorldCom, Anderson, Merrill Lynch, Enron, Martha Stewart, Global
Crossing, Qwest Communications, Tyco International, Adelphia Communications, Computer
Associates, Parmalat, Putnam, Boeing, Rite Aid, Xerox ... Falling stock markets, corporate
failures, dubious accounting practices, abuses of corporate power, criminal investigations
indicate that the entire economic system upon which investment returns have depended is
showing signs of stress that have undermined investors confidence.

21
OECD. OECD Principles of Corporate Governance; 2004.
Page 12 of 15

Some corporations have grown dramatically in a relatively short time through acquisitions
funded by inflated share prices and promises of even brighter futures (many of these corporations
have now failed). In others, it seems as if the checks and balances that should protect shareholder
interests were pushed to one side, driven by a perception of the need to move fast in the pursuit
of the bottom line. While some failures were the result of fraudulent accounting and other illegal
practices, many of the same companies exhibited actual corporate governance risks such as
conflicts of interest, inexperienced directors, overly lucrative compensation, or unequal share
voting rights
22
.In the face of such scandals and malpractices, there has been a renewed emphasis
on corporate governance.
The major problem and issues with the current set of corporate governance principles is that it
lack ethical value, that is, its not structured ethically and the people who are meant to implement
the rules, law and policies are lacking in ethical values, in place where these so called values are
in place its based on human logic and reasons as oppose to a divinely inspired values which is
the hull mark of Islamic principles and teachings, thus any law or principles that is not in line
with the guidelines of the creator will fail though it might seem like its successful but in the long
run it will be a failure.

3.3 The Islamic approach to corporate governance.
Islamic corporate governance model in Islam has its own unique features and presents distinctive
characteristics in comparison with the western concept of corporate governance as exemplified in
the OECD Principles of corporate governance. The Islamic approach combines the element of
Tawhid, Shura, Shariah rules and maintains the private goal without ignoring the duty of social
welfare. Though from Islamic perspective corporate governance does not differ much with the
conventional definition as it refers to a system by which companies are directed and controlled
with a purpose to meet the corporations objective by protecting all the stakeholders interest and
right. Uniquely, in the context of corporate governance within the Islamic paradigm it presents
distinct characteristics and features in comparison with the conventional system as it refers as a

22
Anderson G. and M. Orsagh (2004), The Corporate Governance Risk, Electric Perspectives, 29(1), pp 68.
Page 13 of 15

special case of a broader decision-making theory that uses the premise of Islamic socio-scientific
epistemology which is premised on the divine oneness of God
23
.
4.0 Islamic ethics the missing link.
There are no doubts that the world economy is in shambles, from the most advanced continent
Europe to the most developed country and the acclaimed super power of the world USA, the
story is the same, the world economy is nose diving and there are no imminent solutions in the
horizon. The economic down turn of the 2008-2009 is still very fresh in our memories, the heart
of the problem which is well known to everyone is due to greed and non-ethical behaviors of
some few CEOs that snow ball to the financial/ economic crisis that griped the United States
and had a ripple effect on the entire world economy.

At the hearth of capitalism which is the philosophy upon which the world economy is being
managed is immoral and unethical where CEOs get ever-larger pay rises and bonuses while the
asset values of their companies slump. Pension rules are unilaterally changed without consulting
those who will lose out, and insurance companies and financial institutions that are supposed to
offer protection try to escape from their obligations through legal loopholes embedded in the
small print of their contracts which most offent than not is not visible to the customer.

Although there has been a lot of talks are regards ethics in the management of the business
outlook, most MBA degree teaches ethics in the management of business, but alas most of the
CEO of collapsed companies do have MBA degrees from ivy league schools but have failed to
use what they learnt in the management of their companies but have succeeded in running it
aground. The ethics taught in these Ivy League schools are essentially socially derived, relative
and secularist rather than being based on religious moral authority. It is often difficult enough to
ensure that national laws are enforced in business, but business ethics, which promotes codes of
good conduct over and above the legal minimum, lacks any enforcement mechanism, and instead
relies on individual moral conscience. In the absence of a higher moral authority and religious

23
Choudury, M,A. and Hoque, M.Z. 2004, An Advanced Exposition of Islamic Economics and Finance, New
York, Edward Mellen Press.
Page 14 of 15

guidance, personal conscience cannot determine social standards but merely results in
individuals determining their own rules, moral uncertainty and even chaos.

The Muslims are in a vantage position because the religion of Islam teaches about guidance of
ethics in business and financial dealings; belief in Allah provides not merely the motivation, but
the imperative for adhering to shariah law, which is to be applied in all spheres of life including
financial and business dealings. For Muslims moral conduct in their daily lives is part of their
devotion. Revealed teaching provides moral certainty, and a set of standards to which the entire
community of believers can adhere.

Thus the practice of financial dealing in Islam cannot and should not be devoid of ethics as this is
the edifice of the entire Islamic way of life rests on absolute ethical values. One cannot be a true
Muslim unless one adheres to these values. Justice and equity, honesty, integrity, veracity,
leniency, compassion, tolerance, selflessness, benevolence, cooperation, mutual consideration,
sacrifice and harmlessness, are the guiding values in all walks of life, business being no
exception. Muslims are ordered truly to observe these values in whatever position they are:
whether employer or employee, landlord or peasant, trader or customer, ruler or ruled, officer or
subordinate, transporter or passenger, depositor or fiduciary, relatives or strangers, neighbours or
fellow-workers, nobody is allowed to disregard these values at any time. To recognize these
values as binding is a concomitant of true faith; to neglect them in practical life means a serious
lapse these values are laid down and emphasized in the Qur'an and reinforced in the sayings of
the Prophet Muhammad (SAW)
24
. Thus the implementation of corporate governance without the
face of Islamic ethics will be a total failure as we are witnessing today.





24
S. M. Hasanuzzaman (2003). Preface of Islam and Business Ethics, published by the Institute of Islamic Banking
and Insurance, London, UK 2003
Page 15 of 15

5.0 References.
AbdulGafoor(1995), Interest Free Commercial Banking. Publisher: APPTEC Publications (May
1995) Language: English; ISBN-10: 9080235415.
Anderson G. and M. Orsagh (2004), The Corporate Governance Risk, Electric Perspectives,
29(1), pp 68.
Baumann, Mary. 1987. Ethics in Business. USA Today. She was citing data from the
Conference Board.
Cherrington, J. O. and Cherrington, D. J. 1993. A Menu of Moral Issues: One Week in the Life
of the Wall Street Journal. Journal of Business Ethics, 11, pp. 255-265.
Choudury, M,A. and Hoque, M.Z. 2004, An Advanced Exposition of Islamic Economics and
Finance, New York, Edward Mellen Press.
Hakim Sam R. Islamic banking, challenges and corporate governance, LARIBA; 2002.
OECD. OECD Principles of Corporate Governance; 2004.
S. M. Hasanuzzaman (2003). Preface of Islam and Business Ethics, published by the Institute of
Islamic Banking and Insurance, London, UK 2003
Siddiqui, Ataullah. (1997). Ethics in Islam: Key Concepts and Contemporary Challenges.
Journal of Moral Education, 26 (4), 423- 431.

Solomon, Robert. C. (1984). Morality and the Good Life. New York: McGraw-Hill.
Wolfensohn. Financial Times, 21 June (1999). Cited by the Encyclopedias of Corporate
Governance in the Article on What is Corporate Governance. (www.encycogov.com); 11 July
2001. p. 1.
Zingales L. Corporate governance. The new Palgrave dictionary of economic and the law; 1997.
p. 1.

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