QUESTION 2 (30 MARKS)

Banking Ethics in Conventional Banks

From conventional perspective, the word ethics originates from the Greek word "ethos" which means "character or custom". Traditionally, banks were seen as financial institutions which focuses only on financial matters leading to economists and policy makers believing that ethics should take a back seat in guiding and shaping the banking transactions (Jaseem, 2015). Unfortunately, the disillusionment with profit maximisation at all costs by the conventional banking has resulted in some unethical behaviour which subsequently has attracted growing interest in ethical good conduct in banking or banking ethics in gaining back the trust while restoring integrity in banking institutions and banks' employees (Mathkur, 2019). The conventional banking industry was rocked by serious scandals and controversy due to unfair treatment to bank consumers which go against "fair treatment principles and international best practices" of multilateral organisations like Organisation for Economic Co-operation and Development (OECD) and the World Bank. In 2017, the big four Australian banks were ordered by the Australian Securities and Investment Commission (ASICS) and Australian Small Business and Family Enterprise Ombudsman (ASBFEO), to abolish unfair contract terms of small business (SME) by making improvements to their loan contracts in ensuring they satisfy unfair contract terms law. In the 2018 World Bank Annual Report, the South Africans bank were rapped for "making banking products too complicated, making it difficult for customers to compare products, charging unfair bank fees, and not disclosing appropriately the terms and conditions". Also, the Irish Law Society Gazette 2018 has warned that attempts by Irish banks to reserve absolute discretion to themselves to vary interest rates in consumer loans in their price variation clauses as unfair terms, which might be the next banking scandal like the recent infamous "tracker mortgage scandal" that rocked Irish banks (to date banks have paid 580 million in redress and compensation to loan lenders for charging them the wrong interest rate for mortgage or wrongly denying their entitled tracker mortgage rate). These banking controversies have outraged citizens and given the scale, scope, and economic impact of such matter so far, it becomes obvious that banking ethics is much needed. The demand for banking ethics is obvious proof of man's failure in following a valuefree banking system void of balanced rules regarding contractual terms and conditions, fair practices in ensuring bank consumers are treated fairly and offered banking products or services that are appropriate for them. Due to the importance of banking ethics in and the dynamic impact of banking sector to the world's economy, there is a need for the banking sector to become ethical in managing trust of stakeholders in banking operations. The basic tenets of business ethics in banking or banking ethics in conventional banking to counter unfair contract terms (Bozovic, 2007;Koslowski, 1995). The impact of the aforementioned banking scandals has tarnished the reputation of the conventional banks involved and consequently have wide-ranging repercussions to the economy and well-being of bank consumers. Clearly, the lack of transparency, disclosure, insufficient accountability and irresponsible banking conduct by banking institutions has led to the desire for banking ethics in avoiding common usage of unfair contractual terms and conditions.

Source: Abu Bakar, Mohd Yasin and Teong (2019)

Based on the article;

a. Analyses the types of unethical conduct occurred in the case above. (9 marks)

b. Explain the consequences of the business dealing that does not follow the ethical conduct. (6 marks)

c. Islamic business ethics is about Islam as a religion teaching moral principles which are directly or indirectly connected with business. Elaborate how Islamic banks can apply Islamic business ethics. (15 marks)

QUESTION 3 (25 MARKS)

Based on the article of 'Law and Islamic finance: How legal origins affect Islamic finance development?' by Rihab Grassa and Kaouthar Gazdar, analyse FIVE (5) differences in legal system could influence the stage of development of Islamic finance. (25 marks)