Content area
Full text
I. INTRODUCTION
Ethics are inherent in Islamic finance and are accepted by those wishing to enter the marketplace of Islamic finance; however, in America where ethics have only recently been integrated through Sarbanes-Oxley into our existing system of business, ethical compliance is met with resistance. Islamic financing is based on a system of ethics derived from the principles of the Quran. ' These ethical principles are applied to the financial industry through Shari'a law.2 Shari'a law governs all business transactions of devout Muslims who must be in compliance with Shari'a law in order to observe the principles of Islam articulated in the Quran.3 As wealth has increased in the hands of Shari'a compliant Muslims, so has the opportunity and demand to create Shari'a compliant investments.4 Regulatory standards have been created by the Accounting and Auditing Organization for Islamic Financial Institutions ("AAOIFI") to standardize the governance of every Islamic business product and service.5 Any institution offering a Shari'a investment product must conform to the ethical principles of Shari'a law set forth in the Accounting, Auditing, and Governance Standards for Islamic Financial Institutions created by the AAOIFI.6 The principles of Shari'a are enforced and monitored by Shari'a scholars through the issuance of a "fatwa," a religious blessing, certifying Shari'a compliance, at which point the investment product is deemed a Shari'a product.7
In response to corporate governance failures such as Enron, the United States took the first stride towards adopting a similar, ethical business model.8 The Sarbanes-Oxley Act of 2002 heightened disclosure requirements and raised the level of accountability.9 Sarbanes-Oxley introduces ethical principles to the United States corporate environment through the application of many rules.10 Currently, however, there is a backlash against Sarbanes-Oxley as it is perceived as being too costly,11 demonstrating the continued chasm between ethics and corporate law in America.
II. Ethics in Islamic Finance
Islamic finance flows from the principle that religion cannot be divorced from any aspect of life, including business.12 Shari'a law governing Islamic finance is derived from the guidance from God found in the Quran and the Sunnah (teachings) of the Prophet Muhammad.13 This necessitates tailoring conventional financial practices to fit within religious rules stemming from as far back as the time of Muhammad in 632 AD.14 Therefore, the industry of...