Ethical values in conventional and Islamic finance with reference to recent financial crises

This paper examines the impact of three ethical values in the services of finance sector and how they affect the function and outcome of financial behaviour of economic units, especially financial intermediaries. The three values we select to examine are realism, commitment to non-harm, and contractual balance. The paper argues that these three ethical values are incorporated in the legal formulation of contractual relationships in Islamic finance while they are left to the moral judgmental assessment of contracting units in conventional finance. This affects the structure and role of finance in the economy and may be an important cause of financial crises. The paper, within the spirit of these three ethical values, discusses proposed remedies to the 2008 financial crisis and recommends alternatives derived from Islamic finance. The paper suggests reform steps in the short run that consist essentially of taming speculation and removing virtual assets and zero sum transactions from the financial markets. And in the long run, we call for a four-pillar reform that eliminates speculation and speculative contracts, provides finance through principles and methodologies based on real ownership, creates a financial ombudsman and sets stand-by financial providers.