ISLAMIC FINANCE; EVADING UNJUSTIFIED SPECULATION AND UNCERTAINTY IN BUSINESS CONTRACTS

By, Muhammed jaseel K.K

Imam Shafi Collage of Islamic Science, Busthanabad.

Muhammedjaseelkk0@gmail.com

Presented in NATIONAL SEMINAR ON “TRANSPARENCY AND ETHICS IN BUSINESS : AN OVERVIEW ON SOCIAL AMBIENCE” (Jan/20/2019, Imam Shafi College of Islamic Science)
Organized by Imam Shafi College of Islamic Science in association with the Department of Commerce and Management Studies, University of Calicut.
ABSTRACT
Islamic finance and banking basically promote the financial justice. The Western financial system looks at making profit through interest payment and makes the beneficiary liable for any risk. Islamic finance paves way for the sharing of profit/loss and the risk involved, in a proportional manner between the lender and the beneficiary. Therefore, if a financier is expecting a claim on profits of a project, it is necessary that he/she should also carry a proportional share of the loss of that project.
Islamic trades and investments are processed more slow compared to conventional finance. By the way companies with a risky situation are usually kept away by Islamic financing companies because Islamic trade tries to reduce the risk and invest in more safe. Al Rayan Bank, Britain’s biggest sharia-compliant retail bank by assets, says around one in three of its customers is non-Muslim, up from one in eight in 2010. The Bank of London and the Middle East (BLME), another Halal outfit, also has the following outside the faithful: the “vast majority” of customers are not Muslims. It proves that Islamic finance possesses more safe. And the rich and poor stand alike to benefits from participating in products based on Islamic principles. Anyone with access to Islamic financial products has the potential opportunity to enter a partnership with one or more investors in an economic venture.
Trough my paper I focus to prove the basic benefits by adopting Islamic finance and banking and how it differs from unjustified business contracts.

INTRODUCTION
In this modern era Business organizations are being kept to new mode of strategies and ideas with the main aim of profit maximization. In this context the basic principles of Business ethics and morality are being taken away from every form of enterprises. Trough this paper I tend to make an enquiry to these sorts of enterprises and Islamic Finance, by considering consumers and sellers as well as the nation and the society. Rather than profit motive and financial betterment of entrepreneurs, there are something that they have to consider in day to day life. Because, the nature and the society exist as the fuel of every business organization there is no entity for them without these two. Islamic finance is something that only considers the Sharia laws but also it is a new mode of business activity, could be accepted for any country. Money exists here as a medium of exchange and stock of value not as a commodityIn this modern era Business organizations are being kept to new mode of strategies and ideas with the main aim of profit maximization. In this context the basic principles of Business ethics and morality are being taken away from every form of enterprises.

Trough this paper I tend to make an enquiry to these sorts of enterprises and Islamic Finance, by considering consumers and sellers as well as the nation and the society. Rather than profit motive and financial betterment of entrepreneurs, there are something that they have to consider in day to day life. Because, the nature and the society exist as the fuel of every business organization there is no entity for them without these two. Islamic finance is something that only considers the Sharia laws but also it is a new mode of business activity, could be accepted for any country. Money exists here as a medium of exchange and stock of value not as a commodity..

ISLAMIC FINANCE- FOR WHAT?
Sharia law has many rules that affect a Muslim’s daily life; including detailed requirements relating to commerce. Practicing Muslim ensure that act in ways that are permissible (Halal) and not forbidden (Haram) by the rules set out in the Quran and Sunnah. So, the approach with common financial sectors will not be allowed in Islam. In this context Islamic finance is a financial system that operates according to Islamic law.

PRICIPLES
1. Paying or charging interest
Islam considers lending with interest as an exploitative practice that favours the expense of the borrower. According to Islamic sharia it is prohibited.
2. Investing in business involved in prohibited activities
Some activities such as producing and selling alcohol or pork are prohibited. It is forbidden.
3. Speculation
Sharia strictly prohibits any form of speculation it known as Maisir. Thus, Islamic financing institutions cannot be involved in contracts where the ownership of goods depends on an uncertain event in the future.
4-Uncertainty and risks
The rules of Islamic finance ban participation in contracts with the excessive risk and uncertainty. The term khadar measures the legitimacy of risk or uncertain in the nature of investment. The term can be observed with derivative contracts and short selling which are forbidden in Islamic finance. At a primary level all financial instruments and transactions must be free of at least the following five items; (i) riba (usury), (ii) rishwah (corruption), (iii) maysir (gambling), (iv) gharar (unnecessary risk) and (v) jahl (ignorance). Objects in trade to be traded must exist and be owned by the seller at the time of contract. This is important because the Purpose of a sale contract is to transfer ownership of the object of the sale to the Buyer and ownership of the price to the seller. Otherwise the sale contract is invalid.

ETHICS AND MORALITY IN ISLAMIC FINANCE AN ANALYSES
It is more important to understand that interest will make nothing except a rich richer and a poor poorer, These sort of attitudes allows economic imbalances in the country through the concentration of wealth in a few. Unhealthy human instincts are exploited to make money immoral and injurious products. Today many Muslim economists, social scientists and even a number of capitalist economists have questioned about the so called positive impact of interest from both theoretical and technical points. They often insist in an important point that money capital cannot be treated as capital goods on the same basis as productive factors.

An eminent western economist Harrod (1973) recommended the abolition of interest in order to collapse capitalism. It will also act the roots of human love Brotherhood and fellow feeling and undermines the Welfare and happiness of human society. Greek philosophers also have taken a very negative crew of interest. Aristotle Plato and other leading Greek scholars condemned the interest.
The famous Austrian economist Eugen Von Bohm (known as Boem Bawerk) wrote in his famous work capital and interest:” the hostile expression of the ancient world not few number consistent part of a number of Legislative acts for bidding the taking of interest and in part incidental utterance of philosophers such as Plato, Aristotle, the two catos, Cicerio, Seneca, and Puntus, etc. Greek philosophers regarded money as nothing but a medium of exchange and therefore they denied the productivity of money loans. A piece of money cannot create another piece was the doctrine of Aristotle”. So it cannot give anything to the consumer as well as for the nation except the utmost scarcity and capitalist form of economy.

Speculation also hits the moral and ethical nature of the business. In the time of scarcity speculators can corner the commodities from the market and reap Monopoly profits. This is a feature typical of every commodity market. And speculators may often rice or lower price artificially. They often try and are able to push prices down by their own activities just before they make purchases, and rice prices just before they sell.
The basic reason behind the forbidding of speculation in Islam is winners’ curse and economic Bubbles. Auctions, the method of squeezing out speculators from a transaction may make their own pervasive effects by winner’s curse. It is not however significant to markets with high liquidity for both buyers and sellers as the option for selling the product and option for buying a product occur simultaneously, and no single price are separated only by a relatively small spread.

Economic bubbles indicate deception in transactions. A bubble will be accrued when the price of an asset exceeds its intrinsic value buy a significant margin. Speculative Bubbles are characterized by rapid market expansion given by word of multi feedback loops as essential rises in the asset price attract new buyers and generate further inflation. The growth of the bubble is followed by a precipitous collapse fuelled by the same phenomenon. Speculative bubbles are essentially social epidemics whose contagion is mediated by the structure of the market.

In 1936 J M Keynes wrote: “speculators do no harm as Bubbles on a steady stream of enterprise but the situation is serious on the whirlpool of speculation.” Derivative contracts also consists some drawbacks and hindrances the moral and ethical concepts of the business. The drawbacks resulted in disastrous consequences during the financial crisis of 2007-2008. The rapid devaluation of mortgage-backed securities and credit-default swaps led to the collapse of financial institutions and stock markets around the world.

Firstly, it is more risky one. While the high volatility of the derivatives exposes them to potentially huge losses; the sophisticated design of the contracts makes the valuation extremely complicated or even impossible. Thus, they bear the high inherent risk.

Secondly, it comprises some speculative features because; Derivatives are widely regarded as a tool of speculation. Due to the extremely risky nature of the financial instrument and their unpredictable behaviour, the unreasonable speculation may lead to huge losses.

Thirdly, counter-party risk is possible here. Because derivatives traded on the exchanges generally go through a thorough due diligence process, some of the contracts traded over-the-counter do not include a benchmark for due diligence. Thus, there is a high probability of counter-party default. Through this share holder, creditors and other relevant parties tend to lose their confidence in the company’s performance. It leads the share holders to start to sell their markets; and creditors to ask for early replacement of credit. It damages the reputation of the company.

There are four types of derivative contracts which available in the market today. 1-Future contracts 2- Optioncontracts 3- Swap contracts 4- indexes. In future contracts there are no control over the Future Events. Natural disasters, unexpected weather conditions, political issues, etc. can completely disrupt the estimated demand-supply equilibrium. Secondly Leverage Issues are possible here. high leverage can result in rapid fluctuations of futures prices. The prices can go up and down daily or even within minutes. Thirdly, Future contracts involve a certain expiration date.

The contracted prices for the given assets can become less attractive as the expiration date comes nearer. Due to this, sometimes, a futures contract may even expire as a worthless investment. Option contracts As a form of insurance may expire worthless. This risk increases the greater the extent to which the option is out of the money and the shorter the time until expiration.
Islamic finance also put some restrictions on what to sell and trade. Islamic finance says that every transaction must be gainful for both seller and the consumer at the same time. The things which may totally destruct any of them will be prohibited and the exploitative products like alcohol are also not allowed to sell. Because while the seller will only try to exploit the addiction of the consumer in a particular item.

Alcoholism is a bad practice which creates dehydration in our metabolism of the liver and brain. Delayed reflexes and the cancer risks are possible to be happened for the users. World Health Organisation (2014) Says: “harmful alcohol consumption caused about 3.3 million deaths annually worldwide”. Global Status Report 2018 says: “alcoholism is the only cause of more than 5% of the burden of disease worldwide. “ Islam also have prohibited the use and sell of pork.

Today science also possesses the same opinion for the following reasons. Firstly, it contains a problematic digestive system. Rid of excess toxins as we as other components of the food eaten that could be dangerous to wealth. In pig many of these toxins in its system to be stored more than adequately. Sweat glances taking off the toxins from the body. They have only a few functional sweat glances and the toxins will be left in its body. According to World Health organisation processed pork meat causes cancer. It will also carry variety of parasites in its body some of these cannot be killed even while coking and also carry many debilitating disease causing viruses and worms like Taeniasodium epatitis E virus.

CONCLUSION

Islamic Finance is a mode of organization which considers all set of people and also insists in the moral and ethical values of business. Not only for the profit maximization and selfish motives but also the economic growth of the country. And financial justice in the society exists as the main goal of every Islamic financial institution.

Any form of business which hit the consumers’ interest and society’s morality will be prohibited here. Through the new form of business modes Capitalism is possible for every country through market imperfection and economic power for the minority. Through this Islamic Finance paves the way to an equitable law and inheritance.
New form of enterprises creates up solute private ownership in the economy. So the economic developments to which we have being victimized today are not fatal; because, it is based only on the physical and material growth. Development to the human and spiritual growth can be obtained with these forms of business. It shows the pervasiveness of Islam and its acceptability.

REFERENCE
1. Quera (https://www.quora.com/Are-financial-derivatives-halal-in-Islam)
2. Imran Khan Nyazee, (1993, December), Islamic Law of Business Organization (1st edition) International Institute of Islamic thought
3. Manuel G. Valesquez, (2013, July), Business ethics; Concepts and causes (2nd edition), Broadview Press
4. Wikipedia (https://en.m.wikipedia.org/wiki/Speculation)(https://en.m.wikipedia.org/wiki/Economic_bubble)
5. Researchgate.net (https://www.researchgate.net/publication/46545934_Why_is_interest_prohibited_in_Islam_A_statistical_justification)(https://www.researchgate.net/publication/322546761_Futures_Contracts_in_Islamic_Finance_An_Analytical_Approach#downloadCitation)
6. Economicdiscussion.net (http://www.economicsdiscussion.net/stock-markets/speculation/speculation-benefits-and-evils-commodities-economics/25747)

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