Social Obligations of Islamic Banks

SocialObligations of Islamic Banks

Thesocial obligations of Islamic banks fall within the broader conceptof corporate social responsibility (CSR). CSR implies observing lawsand ethical standards that govern business procedures. It alsoentails committing towards the conservation of the environment, andgiving back to the community through charity programs among others.Most organizations, including the Islamic banks have embraced theconcept of CSR particularly because of the related benefits.Arguably, the benefits of CSR exist in three categories, includingcorporate benefits, community benefits, and employee benefits. Forinstance, embracing CSR can improve the image of an organization inthe market. CSR also facilitates the support or establishment ofprograms which focus on benefiting the society in one way or theother. For instance, a company may commit towards reducing the rateof water, land, and air pollution in the society. It also benefitsemployees because it makes them feel better about making positiveimpacts in the society. With respect to the context of thisdiscussion, this paper seeks to explore the social obligations ofIslamic banks.


Theconcept of social corporate responsibility has become popular in thecontemporary business environment. Financial institutions, just likeany other organization, have also been drawn into the trend becauseof the perceived benefits to the organization, community, andemployees. The social obligations of Islamic banking are deeplyrooted in the Shari’ah principles of the Islamic religion (Jusoh &ampIbrahim, 2015). As a result, Islamic financial institutions such asbanks face greater expectation from the public because their socialobligations to the society are embedded in the Islamic principles.Throughout the history of Islamic religion, people have recognizedthe value of social responsibility. In fact, leaders in the Islamicreligion developed systems for endowments and zakat in the 17thCentury. Zakat is a religious tax in Islamic religion. It is one ofthe pillars of Islamic religion.

Thesocial obligations of Islamic banking are intertwined with theIslamic religious culture (Jusoh &amp Ibrahim, 2015). Specifically,the Shari’ah laws provide a guideline which financial institutionscan use to develop their business approaches. Any approach islegitimate within the Islamic economics. Islamic economics can bethought of an ideology which is neutral to both Marxism andcapitalism. It also implies Islamic commercial jurisprudence. TheIslamic commercial jurisprudence outlines laws pertaining tofinancial transactions within the Islamic religion. Thus, whentalking about Islamic banking, then it is important to understandthat it is different from the conventional way of banking (Jusoh &ampIbrahim, 2015). The conventional banking approaches are based onelements of capitalism which allow capital owners to own means ofproduction privately. Capitalism maintains that everyone has thechance to work hard and create wealth, and once such wealth iscreated then they are entitled to how they want to spend them. Incapitalism, money is sometimes treated as a product. For instance,Capital owners can decide to lend their finances to people with fewerresources under the agreement that borrowers would not only repay theborrowed money, but will also repay the accrued interests. Islamicbanking operates differently when it comes to creating and keepingwealth. Wealth is supposed to be spread and shared to enhanceequality and fairness within the society.

Therefore, when discussing the social obligations of the Islamicbanking, it is important to understand that the discussion willdefinitely touch on the Shari’ah laws governing financialtransactions (Sairally, 2007). Social obligations of Islamic bankingare scripted and expected. They are not considered initiatives as isthe case in the conventional banking. Islamic banks are expected tooperate within the law and ensure that profits created are compliantwith the Shari’ah laws on wealth creation (Sairally, 2007).Therefore, Islamic banks majorly act as agents of fairness andequality within the community. It does not mean that Islamic banks donot make profits. They make processes by operating as businesses, andengaging in joint ventures with companies where profits and lossesare shared accordingly. The social obligations of Islamic bankinglargely focus on ensuring that the Shari’ah laws are observed inevery financial process or transaction. Thus, they include aspectssuch as enhancing equality and fairness, and preventing unjustenrichment among others.

Equalityand Fairness

TheIslamic banking sector is unique compared to the general bankingsector because it focuses on guiding the flow of resources fromsurplus to deficit areas in the community (Rosly, 2005). In essence,guiding the flow of resources from surplus to deficit areas is one ofthe major social obligations in Islamic banking. This obligation isdefined within the concept of “Adalah.” Adalah is widely used inIslamic religion to signify that God is just. Adalah is one of theimportant principles of Shia. Within the Shias’ teachings, bothgood and evil exist in everything. Therefore, God commands people tobe just while shunning evil. Islamic perception of financialprocesses can be envisioned on the basis of the teachings relating toAdalah. The banking sector controls the processes in other sectors.Therefore it is a perfect place for controlling the flow ofresources. The conventional banking systems place greater emphasis oneconomic and financial interests. On the other hand, the Islamicbanking system not only focuses on economic and financial interests,but also focuses on the social, ethical, and moral aspects of Islamicteachings.

Whenexplored within the Adalah teachings, the Islamic banking system alsofocuses on social, ethical, and moral aspects of Islamic teachingsalong side economic and financial interests in order promote equalityand fairness in the community (Rosly, 2005). Equality and fairnessare among the values encouraged by the Islamic religion. Therefore,one of the social obligations of the Islamic banking is to promoteequality and fairness by controlling the flow of resources. The flowof resources from highly concentrated sector to less concentratedsector is purposely influenced in order to achieve a balance in thecommunity. Under this principle, there would not be very rich peopleand very poor people. People would have adequate resources to livecomfortably. Islamic banks strictly adhere to Shari’ah principlesin order to protect both the interests of the public and privatesector (Hassan &amp Mahlknecht, 2011). Adhering to such principlesensure that bankers do the right thing at the right time tofacilitate equality and fairness in the community.

Preventionof Unjust Enrichment

Withinthe context of Islamic teachings, unjust enrichment refers to asituation where an individual becomes rich at the expense of others.The Islamic banking sector prevents unjust enrichment on the basis ofShari’ah principles. Shari’ah teaches against collecting interestor riba as referred in the religion (Rosly, 2005). Riba is forbiddenaccording to Holy Quran and Hadith. The rejection of Riba orcollection of interest is deeply embedded in the Islamic teachingsregarding wealth. Islamic teaching about wealth is that it should notbe wasted, but rather put to good use so that it may benefit theowner, society, and less privileged in the society. In this context,it is unacceptable for people to leave money idle only to chargeinterests or unfair profits when another person uses it withoutconsidering profits or risks it may generate through such usage.Those who leave money idle in bank accounts and charge interests whenother people want to use them go against the Islamic teachings whichemphasizes on equality and fairness.

Theyare also treated with a lot of suspicion because they want to makehuge profits without being liable for the potential risks. Makingprofits without being liable for the potential risks contradictsSharia’s teachings regarding Adalah (Hassan &amp Mahlknecht,2011). Making unfair profits at the expense of others compromisesbanking system’s processes of establishing balance in thecommunity. In this case, few people will be very rich while otherslanguish in poverty. It will also compromise equal distribution ofwealth. Lastly, it will adversely affect the flow of wealth fromsectors with surplus resources to sectors with deficits. From theassessment of the Islam’s rejection of interests, it is possible todeduce that Islamic banking emphasizes on the principle sharing risksand profits between capital owners and borrowers. Unlike theconventional banking sector, capital owners operating within theIslamic banking framework cannot claim both interests and return oftheir finances when they lend them out. However, capital owners mayreceive compensations on the principle of equal sharing of profitsand losses.

Importantly,the Islamic banking rejects capital trading with the aim of earningsome interest in order to enhance the stability of monetary value.Shari’ah perceives money as a means of payment and valuation ratherthan a commodity (Rosly, 2005). When considered within the context ofcorporate social responsibility, Islamic banking lays down aframework where both lenders and borrowers share the profits andlosses generated by the capital. Otherwise, capital owners would beenjoying risk-free capital at the expense of the borrowers who isliable for the risks generated by the capital. This principlepromotes equality and fairness in the community. It ensures that therich do not amass wealth unjustly while subjecting the poor people tolosses.

IslamicBanks ensure that the Profits are Shari’ah Legitimate

Inaddition, Islamic banking has a social obligation of determine theShari’ah legitimacy of the profits collected within the Islamicfinancial processes (Fahim &amp Porzio, 2010). In other words, theprofits should exploit the common people in way, and must reflect theprinciples of equality and fairness at all the time. Capital ownersmust not be allowed to take unfair advantage over the common peopleor people with fewer resources. In most cases, the approaches used toensure that the profits made within Islamic business transactionsfocus on making sure that lenders and borrowers profits and risksaccording to a realistic agreement. One of the ways though which thebank ensures that the profits made are Shari’ah legitimate includeestablishing Mudaraba contracts (Kettell, 2013).

Islamicbanking social obligations also include providing loans to projectswithout charging interests when such loans are being repaid. In mostcases, Islamic banks use Mudaraba contracts to finance projects.Under the Mudaraba contract, the banks provide financial resourcesnecessary for the completion of the project, while the company incharge provides workers, manage, and execute the related workaccordingly (Kettell, 2013). The contract is executed in two phases.Firstly, capital owner deposits capital into the bank and surrendersthe control of the capital to the bank. In the second phase, the bankacts as the capital provider, while the company acts as the borroweror mudarib as sometimes referred. In this case, the company owning hproject acts as someone who has borrowed money for a particularproject. The profits and losses made in the project are sharedbetween the bank and the company according to agreement put in placebefore commencing the project. Therefore, rather than chargeinterests on loans lent to companies, the banks share the risks andprofits of the money they lend.

Mudarabacontracts are essential for the development of a community becausecompanies find it easy to borrow money since they do not have to payinterests. In such a case, people find it easy to start projects andfacilitate their growth within the community. There seems to beequality when it comes to the access of financial resources fordevelopment. As a result, there is an even distribution of wealthwithin the society. Not only does it promote equal access tofinancial resources necessary for kick starting development, but alsoensures that the owners of the banks do not exploit the common peopleby charging them interests on the money they lend them for projects.Under the Shari’ah law, charging interests for money borrowed fromthe bank is like making profits without being liable for thepotential risks regarding how the borrowed money has been spent(Kettell, 2013). By being part of the project, the bank participatesin how the financial resources are used to facilitate the completionof the related project.

Anotherway of ensuring that the profits comply with the Shari’ah laws offinancial transactions is by setting up Ijara contracts. Ijaracontract implies an arrangement between customers and Islamic banks,where banks purchase items for customers and leases them back tocustomers (Kettell, 2013). This kind of arrangement is particularlyvalid in cases where customers have fewer resources to get the itemsthemselves. For instance, a customer may be in need of a car, but donot have adequate financial resources to get one. In such a case, thecustomer may enter an Ijara agreement with a particular Islamic bank.Under this agreement, the bank purchases the car and leases it backto the customer or gives it to the customer. They may also makeanother agreement where the car would be paid at a particular timewithout changing the terms of the agreement. In doing so, the bankrefrains from taking advantage of the customer’s lack of resources.This approach gives customers simpler and cheaper alternatives toowning the items that they lack and are important in their lives.

Bankinginstitutions also ensure that the generated profits are Shari’ahcompliant by establishing Wakala agreements with customers. In thistype of agreement, the bank works individually. The customer saveshis or her finances in the bank and allows the bank to act alone withregard to making investment choices (Kettell, 2013). Therefore, thebank invests the customers’ money to generate a particular profitfor them. This kind of arrangement is essential because it ensuresthat capital owners do not leave their finances idle in the accounts.It is against the Shari’ah teachings to leave money idle in theaccount whereas it can be used to generate wealth and help those whoare in need or the less privileged in the society. It also preventscapital owners from investing their finances in ways which are notShari’ah compliant. The Islamic banking works under framework whereevery investment aims at benefiting capital owners as well as thecommunity, especially the less privileged people within thecommunity.

IslamicBanking Prevents Usury in Debts

Inaddition, Islamic banking has a social obligation of determine theShari’ah legitimacy of the profits collected within the Islamicfinancial processes (Rosly, 2005). An example of usury in debtsconsists of a case where a lender gives out goods on condition thatthe borrower will pay for the goods later at a value relativelyhigher than when the goods would have been paid immediately in cash.Shari’ah forbids repayment at later dates with increased prices.However, goods whose payments are differed can be sold at higherprices according to Shari’ah. Shari’ah only allows for this kindof arrangement because both parties are liable for some risks in theprocess. For instance, the seller of the goods agrees on a price withthe buyer, and that price remains constant irrespective of whetherthe market prices of the goods increase in the future. On the otherhand, the buyer is liable for the risk associated with the immediatetransfer of the goods bought from the buyer. In other words, whensuch an arrangement is made, the goods are immediately transferred tothe ownership of the buyer.

Thisbanking principle is also based on the Islamic teachings whichprohibit unfair enrichment. Usury in debts gives sellers unfairadvantages of making unjust profits while at the same time subjectingbuyers to extreme risks (Fahim &amp Porzio, 2010). In most cases,buyers who opt to pay later for goods do not have adequate resourcesand face the dilemma of balancing their resources in order to meetall objectives. Islamic banking principles are founded on theShari’ah teachings which emphasizes on equality and fairness in thecommunity. Therefore, this principle is an aspect of socialresponsibility of Islamic financial institutions to the community.The Islamic banking sector protects people from would seem asextortion according to Islamic values. Prior to the emergence ofIslamic teachings, Usury in debts was a common practice around theworld. It subjected borrowers or buyers to more debts, thus making itdifficult for them to experience social mobility in the society.Islamic banking ensures that buyers only pay for what is fairirrespective of whether they agree with sellers that they would payfor the goods at later dates.


Thepaper has established that the social obligations fall within thebroader concept of corporate social responsibility (CSR). However,the social obligations of Islamic banking system are predeterminedand restricted within the laid down Shari’ah laws. The Islamicfinancial institutions are expected to behave in a particular waythat is essential to enhancing fairness and equality in Islamicreligion. The expectations on the Islamic banks entail meetingShari’ah laws and ensuring that every financial transaction followsIslamic teachings. The Islamic banking can be said to be alwaysfulfilling social obligations which focuses on establishing fairnessand equity within the community. Thus the primary social obligationof Islamic banking is controlling the flow of resources within thecommunity in such a way that financial resources from regions withsurpluses to regions with deficits. The


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