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color: black;">&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp;</span></b><span style="font-size: 18pt; color: black;"> </span></p> <div class="MsoNormal" style="margin: 0in 0in 0.0001pt; text-align: center;" align="center"><span style="font-size: 18pt; color: black;"> <hr align="center" size="1" width="100%"> </span></div> <div style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color rgb(79, 129, 189); border-width: medium medium 1pt; padding: 0in 0in 4pt;"> <p class="MsoTitle" style="text-align: center;" align="center">FAITH&nbsp;AND&nbsp;FINANCE: VALUE GUIDED PURSUIT OF INTERESTS</p> </div> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt;"><b><span style="font-size: 18pt; color: black;">&nbsp;</span></b></p> <p style="text-align: center;" align="center"><span class="MsoSubtleEmphasis">Mohammad Nejatullah Siddiqi</span></p> <p style="text-align: center;" align="center"><span class="MsoSubtleEmphasis">Professor Emeritus, </span></p> <p style="text-align: center;" align="center"><span class="MsoSubtleEmphasis">Aligarh Muslim University</span></p> <p style="text-align: center;" align="center"><span class="MsoSubtleEmphasis"><a href="mailto:mnsiddiqi@hotmail.com"><span style="color: gray; text-decoration: none;">mnsiddiqi@hotmail.com</span></a></span></p> <p><b><i><span style="font-size: 18pt; color: black;">&nbsp;</span></i></b><span style="font-size: 18pt; color: black;"> </span></p> <h1>Introduction </h1> <p class="MsoNormal">Conventional wisdom would keep faith and finance in different boxes never to be mixed with one another. This has not served society well. A holistic view of human personality would like finance to be guided by faith inspired&nbsp;values<i>. </i>Faith impacts finance through motivation and value-orientation which, in turn, influence wealth creation as well as use of wealth for enhancing well being. All wealth is joint production involving both natural and manmade&nbsp;inputs. Natural inputs such as land, air, water, minerals, solar and other forms of energy need to be combined with human resources like ideas, accumulated&nbsp;knowledge, new skills, as well as&nbsp;trust, hope and sympathy, etc. The joint nature of wealth creation necessitates sharing of the wealth among those involved in its creation. Product sharing, profit-sharing, renting, wage contract--all involve sharing. But renting and wage contracts are more vulnerable to unfairness. This may take place, for example when a rented piece of agricultural land fails to produce any crop due to draught or flood. Regulators are called upon to ensure fairness in sharing joint products. Regulation of business practices is a well established tradition going back to the earliest periods of history. Its earliest forms are the obligation to fulfill promises and tell the truth. Not tampering with socially approved weights and measures and not indulging in clipping metallic coins soon followed. All these are examples of faith inspired values as they reflect a moral view of human relationships. In the absence of faith moral values&nbsp;have to be anchored into pragmatism which can easily succumb to relativism depriving morality of the strength needed to prevent predatory practices. To assert that these values&nbsp;reflect the evolutionary necessity to preserve and promote vital interests ensuring survival does not contradict their essentially moral nature. There is no conflict between morality and survival necessitated pursuits. It is faith that provides the trust needed to remove any fear of dissonance between well being enhancing values and survival ensuring interests. By enhancing trust morality reduces transaction costs and increases efficiency.</p> <p class="MsoNormal"></p> <p class="MsoNormal">Faith as you know answers for us questions beyond the reach of our sensory means of knowing. Who are we? Where to are we headed? are we accountable for our choices here and now? Faith impacts finance through the answers it provides to such question as why to produce and for whom to produce. The strength of one&rsquo;s faith is reflected in the intensity of one&rsquo;s efforts to produce. It is also reflected in one&rsquo;s decision on what to do with one's earnings. The nature of our faith determines where one stands in the broad spectrum of exclusive pursuit of self interest and reaching out to the entire humanity. Faith broadens the scope of and widens the horizon for productive efforts. The realistic middle ground (to which most of us stick) is avoiding harming others while serving one&rsquo;s self interest, and aspiring to do good to others if and when circumstances call for it. Faith does this through generating moral obligation towards others. However, all societies have not been the same in this regard. In the recent experience of humanity, western secularism has pushed back faith and encouraged greed and pursuit of self interest as a means to social well-being; concern for others has dimmed. The natural tendency of faith to generate morality is ruptured by false notions about the efficacy of amoral behavior in delivering social good. It is also weakened by man&rsquo;s proclivity to selfish behavior in absence of spiritual roots.</p> <p class="MsoNormal"> </p> <p class="MsoNormal">The overriding focus on shareholder value maximization has pushed out other stakeholders such as customers, employees and society at large. A moral approach to finance has the potential to take stakeholder approach, be long term focused and to address the issue of compensation based on fairness and equity.</p> <p class="MsoNormal"> </p> <p class="MsoNormal">Faith has often been replaced by aggressive ideologies justifying cruelty, even brutality in the name of rapid growth. Faith emphasizes inclusive growth even though vested interests care only about impressive growth, The modern scenario of mega cities divided into luxurious living quarters and shiny suburbs on one side and dark, dilapidated slums lacking basic amenities such as clean drinking water and schools on the other side, is largely a product of economics that has purged faith and morality. Despite their claim to be guided by reason, modern economic ideologies have resulted in the most unreasonable scenario in what is aptly called the global village. The same division between the rich and poor that afflicts our mega cities afflicts the global village too. Modern economics has no answer to the question: why? even when it grudgingly admits such an outcome to be undesirable.</p> <p class="MsoNormal"> </p> <p class="MsoNormal">The cause of affliction lies in a moral deficit in the contemporary structure of social, political and economic edifice. This moral deficit lies in lack of concern on part of individuals for the good of others, which sometimes degenerates further into exploiting others in pursuit of one&rsquo;s own gain. The moral deficit itself is caused by the absence of faith; sometime a weak faith or faith diluted by confusing world views produces the same result: impotent faith incapable of moral uplift. A robust faith brings into focus the essential oneness of mankind as owing existence to the same Creator. Brotherhood of man, equality in dignity and identical rights to God given resources in environment as well as in human relations; all belong to this focus and are sustained by it. Regaining this focus should be high on agenda of all concerned. </p> <h1>Ground Reality and Desired State of the World </h1> <p>Going forward one needs to explore two parallel concepts: the actual conditions pertaining to faith-finance relations in contemporary society and the potential of faith in correcting finance's current course. I begin with the latter, the potential of faith for ameliorating the contemporary economic crisis. The nature of finance is too complex to issue a simple list of do-s and do-not-s in the name of faith. Its ever changing nature defies any list of prohibitions and obligations to suffice for all places and all times. However, the crucial values that promise to help in securing fairness in changing conditions are: the concern for others&rsquo; well-being; the will to abstain from harming others even at the cost of personal sacrifice; and the willingness to submit to democratically-enacted social regulations. Most of the recent adverse developments in financial markets&nbsp;&nbsp; responsible for widespread sufferings are rooted in the absence of these values. Current economic theories do not embody or promote these values.&nbsp;For example, the Friedman school that has been influential from early nineteen eighties through today openly warns against firms and individuals trying to care for others.&nbsp; The ruling dogma is that one best serves society by serving oneself. No wonder the other two values, the will to abstain from harming others and a willingness to abide by rules also evaporated under the encouragement of unlimited pursuit of self interest. Given this environment, who would not twist rules to make them serve one&rsquo;s interest?</p> <p> </p> <p class="MsoNormal">The answer necessitates pondering over what the quest for fairness in financial system entails. In the absence of hard and fast regulations capable of ensuring fairness it is not structures but perspectives, understandings and morals that matter. People who want to behave will find ways to do so, if not straight away then haltingly, by experimentation. They may even find ways to constrain deviants and minimize the loss of social weal due to individual perfidy. Much has been made of lack of full information to economic decision makers in debunking the idea of caring for social good. The reality is there is no way to have full information about future values. The falsity of the assumption of market mechanism somehow magically solving this human predicament has been exposed by a succession of crises. Man must try to make up for inevitable information deficit by experimentation, pooling of available information and sharing the consequences of ill-informed decisions. They can do so at the individual level as they have been doing at the societal level. Faith is a positive aid insofar as it creates an incentive to cooperate for the social good.</p> <p class="MsoNormal"> </p> <p class="MsoNormal">People of faith have learnt some lessons during the quest of fairness in the past. These deserve to be our starting point in a similar quest today. As I proceed to summarize them I beseech you not to get stuck with them, quibbling over variety of interpretations and controversies surrounding the circumstances in which they are applicable. I also underline the fact that these form the first steps to be taken in man&rsquo;s search for a just and fair financial system. By no means would they be sufficient to usher in a just society. </p> <h1>Pillars of Fair Finance </h1> <p>The prerequisites of fairness in finance&nbsp;include the prohibition of interest,&nbsp;fraud (in its myriad forms) and&nbsp;gambling and transactions involving excessive uncertainty (<i>gharar</i> in Arabic). These prohibitions are to be seen in the perspective of private ownership, freedom of enterprise and a supervisory role of state as the guardian of the poor and the weak. Faith encourages charitable giving which includes lending to the needy and expecting to receive no more than what was given. Regarding business loans shifting all risk onto the borrower is repugnant to faith while encouraging partnership and profit-sharing instead suits faith. This follows from nature of environment in which business is done, as future value-productivity is surrounded by risk and uncertainty. Gambling is creating risks to play with chance. Financial speculation that thrives by trade in other people&rsquo;s risk is a contemporary example of gambling. Some activities are surrounded by uncertainties to an extent that makes contractual relationships built around them problematic. The contracts through which these activities are carried on are not transparent affording the same information to all concerned. The means of just sharing missing, it is better to avoid them. That sums Islamic thinker&rsquo;s attitude towards excessive uncertainty<i> </i>(<i>gharar)</i>.&nbsp; In Islam the jurists have worked hard to translate the three principles listed above: prohibition of interest, prohibition of gambling and minimization of <i>gharar</i>, into rules governing business relationships. But the ever changing nature of these relations, in itself largely shaped by changing technologies, defies being caught into the net of rules framed at a particular time and place. Innovation in ways of doing business necessitates making new rules, so the process of rule making must go on!</p> <p> </p> <p class="MsoNormal">Protecting the weak from the strong, the knowing from the unknowing and the poor from the rich necessitates some socially imposed restraints to human freedom, including freedom of enterprise. Securing fairness would, however, need more than imposing restraints. That is where the values mentioned above: concern for others, readiness to limit one&rsquo;s potential gains in that context and following democratically enacted laws become relevant. We need to harness human ingenuity in positively enhancing justice and equity, not only in preventing injustice.&nbsp; Faith is capable of doing so. The nature of a competitive economy is often cited as the reason for the inability of an individual firm&nbsp;to promote social good. It is a challenge to our ingenuity to harness the forces of cooperation to counteract this. </p> <h1>Faith versus Cult</h1> <p>Faith knows no land, race, language, nor culture. But people of faith sometimes develop strong attachments to one or more of these to the extent of identifying their religion with a particular land, race, language or culture. Worse still, sometime religion is made to serve national, racial and other narrow goals. As a result faith loses its power to generate a universal morality overriding narrower interests.&nbsp; That provides answer to the second query made above: the actual condition relating to the faith-finance nexus. In today&rsquo;s world faith has had little influence on finance since faith has been made a tool of national, racial and other social ambitions. Religion is the expression of faith in particular people, translating faith&rsquo;s demands into rules of conduct. Over time these rules have often been turned and twisted to suit particular interests. Even today some countries are in danger of state-religious establishment-corporate alliances which would effectively rule out universal morality.</p> <p class="MsoNormal"><br> Rejuvenation of faith necessary to transform the current financial system would first involve the disentangling of faith from other narrower loyalties such as religion or citizenship. Faith in its purest&nbsp;form, i.e. faith detached from religion, citizenship, etc. has the capability to cut across all ideologies and promote morality. By creating positive sympathetic relationships with others faith would make men accountable and responsible to each other. But faith in its current state, faith that is made subservient to nationalism or imperialism, fails to do so. Impure faith creates an artificial distinction between morality and faith. Loyalty to a nation or race, for example, dictates certain ethics and priorities that are generally in conflict with those of another nation or race. In combination with the first and major barrier to moral behavior in finance, human greed, faith cannot impact finance unless and until these barriers are removed.&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;&nbsp;</p> <p class="MsoNormal">&nbsp;&nbsp;</p> <p class="MsoNormal">Islam&rsquo;s contribution to universalizing faith-generated morality lies in pushing back these barriers to their proper secondary positions. The best periods of Islamic history have been when tribal or racial loyalties were kept in check and universal morality reigned supreme, as reported about the early decades of Islamic history. Conversely, the worst period occurred when tribal and racial identities surpassed universal morality in creation and sharing of wealth. The resilience of the Islamic morality necessitates calling for a review of financial system in the light of Islamic ideals of justice and equity (<i>Adl</i> and<i> Ihsan</i>). The fifty year old movement of Islamic banking and finance is a recent example. </p> <h1>Diluting Faith&rsquo;s Mandate </h1> <p class="MsoNormal"><span style="" times="" new="" roman="" ,="" serif="" '="">Above I stated the original position of people of faith regarding interest on loans: charging interest on consumption loans to the needy was considered immoral; charging interest on commercial loans was considered unfair as it amounted to shifting risk to the borrower. As is well known this position was later modified by many faith groups to allow moderate rates of interest on commercial loans. We need to take notice of this development.</span></p> <p class="MsoNormal"><span style="" times="" new="" roman="" ,="" serif="" '=""></span> </p> <p class="MsoNormal"><span style="" times="" new="" roman="" ,="" serif="" '="">The distinction made between loans for consumption purposes (which do not result in anything marketable) and loans for productive purposes has no basis in the texts to which these faith groups swear allegiance. They did it supposedly on pragmatic grounds to facilitate financial transactions between owners of money capital and users of money capital for creating additional wealth. It was argued that interest payment was needed to compensate for loss of opportunity of profitable employment of that capital on part of the lender, ignoring the fact that no opportunity for guaranteed profit existed in the real world. Man&rsquo;s environment is characterized by uncertainty of future value productivity of capital as Frank Knight demonstrated in his 1921 book <i>Risk, Uncertainty and Profit</i>. Furthermore,</span> <span style="" times="" new="" roman="" ,="" serif="" '="">as the author of the article on usury in the Encyclopedia of Religion and Ethics (1967) points out, any legitimacy accorded to interest in one sector permeates throughout the economy with the passage of time. Islam eliminated that possibility by declaring excess payment above the initial amount lent as prohibited <i>Riba</i> .As the Quran says:</span></p> <p class="MsoNormal"><span style="" times="" new="" roman="" ,="" serif="" '=""></span> </p> <p class="MsoQuote">Believers! Have fear of Allah and give up all outstanding interest if you do truly believe. But if you fail to do so then be warned of war from Allah and His Messenger. If you repent even now, you have the right of the return of your capital; neither will you do wrong nor will you be wronged. [II:278-80].</p> <p class="MsoQuote"> </p> <p>The distinction between low&nbsp;and high rates of interest or between loans for business and loans for need-fulfillment is not recognized by the Quran. As regards the presumption that commercial loans were not prevalent at that time, it has no basis in history. On the contrary <i>Riba</i> in seventh century Arabia was overwhelmingly common in commerce. This is underlined by the declaration made by the Prophet, peace be upon him, in his last Hajj sermon canceling all interest owed to his uncle, Abbas bin Abdul Muttalib. Abbas advanced money capital to the growers of dates in Medina as well as to the growers of grapes in Taif. Failure to pay at the time the loan was due then justified an increase in the amount to be repaid.</p> <p> </p> <p class="MsoNormal">Some have tried to grant legitimacy to interest arguing that it is analogous with rent.&nbsp; Unlike money capital which must first be spent to acquire real goods and services, rented goods like machines and real estate are usable right away. Islam, like all other religions allowed charging rent as a price for usufruct. Jurists often absolve the lessee from the obligation to pay rent should the rented property lose its ability to provide the expected usufruct.</p> <p class="MsoNormal"> </p> <p class="MsoNormal">Legitimacy of profit and rent is hedged with the provisions directed against monopoly and hoarding in order to maintain fair competition. The rest is largely left to the market functioning under the watchful eyes of the social authority.&nbsp; Abu Bakr, the first ruler succeeding the Prophet Muhammad, peace be upon him, described the ruler's duty as protecting the weak from the strong.</p> <p class="MsoNormal"> </p> <p class="MsoNormal">Speculation in financial markets often takes the form of betting on the uncertainty of the outcome of future events. Regulators must realize that such trading in risk is no more than gambling and serves no legitimate financial purpose. As such, regulators should prohibit such trades and they should examine all associated financial instruments, such as derivatives, for such characteristics. &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</p> <h1>Conclusion </h1> <p class="MsoNormal">Faith has the potential to influence financial markets by molding human behavior in accordance with moral values conducive to social weal. The essential universality of moral values has to be protected from being made subservient to hegemonic ambitions rooted in racial, national or&nbsp;religious identities.&nbsp; People of faith have devised institutions to realize the ideal of a just society. Within the framework of private ownership, freedom of enterprise and state supervision, prohibition of fraud, gambling and interest form necessary parts of these arrangements. &nbsp;&nbsp; Rapid technological changes necessitate adapting&nbsp;these institutions to new circumstances and making new arrangements in order to realize social goals. Continuing innovations in financial markets present new challenges for regulators .The quest for fairness in finance becomes a continuous process. The recent resurgence of&nbsp;Islamic finance should be looked upon as part of that process.</p> <p style="margin-right: 22.5pt;"><span style="font-size: 18pt; color: black;">&nbsp;</span></p> <div style="margin-top: 12pt; margin-bottom: 12pt;" id="google_footer"> <p><span style="font-size: 10pt; color: black;">Inputs from the following are gratefully acknowledged: </span></p> <p><span style="font-size: 10pt; color: black;">Anas Zarqa,Valeed Ansari, Shaheer Rizvi, Jennifer Schwalbenberg, Sarah Akhtar, Asiya Nafeesa Ali, Husam&nbsp; al-Khateeb, Taha Abdul Basir,</span></p> </div> <p class="MsoNormal" style="margin: 0in 0in 0.0001pt;"><span style="font-size: 18pt; color: black;">&nbsp;</span></p> </div> </body> </html>