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2021 | Book

Ethical Discourse in Finance

Interdisciplinary and Diverse Perspectives


About this book

Ethical discourse is commonly not a priority in a conventional finance syllabus. Moral sentiments often take a back seat to market sentiments, even in shaping the direction of ethical finance business. This anomaly persists despite growing interest in ethical finance. Taking an interdisciplinary and diverse perspective, this book enriches the evolving definition and scope of ethical finance literature by focusing on actors, products and regulation that shape markets. Considering the gap between theory and practice, this book bridges academic and professional knowledge in unpacking ethical and governance issues in the financial industry. In an effort to include as many viewpoints as possible, regardless of popularity or who holds them, the book editors gathered thoughts from diverse fields, including accounting, economics, ethics, finance, governance, law, management, philosophy and religion. Appealing to academic and non-academic stakeholders with an interest in ethics and finance, this book is the result of and a testament to a distinct educational and public engagement project that included different generations and communities, for future reference.

Table of Contents

Chapter 1. Introduction
This book introduces a distinct educational and public engagement project on ethical discourse in finance by considering interdisciplinary and diverse perspectives. The project was hosted by the International Centre for Management and Governance Research (ICMGR) at Edinburgh Napier University, UK. Since its launch in autumn 2016, the Centre actively reached out and engaged with local and international stakeholders through its regular seminars, conferences and forums on governance and ethical finance. The intellectual activities featured collaborative initiatives between academics, faith leaders, professionals, social entrepreneurs, and diverse members of the public irrespective of background. When the world stood still due to the COVID-19 outbreak that erupted in 2020, it was a time to reflect; hence, the birth of this edited volume. The contents offer an insightful perspective as evidence of diversity in ideas and opinions, which ICMGR genuinely promoted and celebrated throughout its intellectual activities.
Marizah Minhat


Chapter 2. Does Professionalism in Financial Services Have a Future?
The purpose of this chapter is to examine how the concept of ‘professionalism’ in modern day financial services in the UK is understood and practised. It examines how computerisation, competition, remuneration strategies, Big Bang and misplaced regulation have all contributed to a reduction in professional standards. It goes on to examine how structural changes in the provision of financial services and the dash for profit growth have led to a reduction in ‘professional services’ and how they have been replaced by a sales culture. It further reflects on how these changes have altered the trust relationship between customers and providers. Finally it reflects on how professional bodies might assist in the restoration of professional standards and trust in the provision of financial services.
Charles W. Munn
Chapter 3. Boardroom Morality and the ‘Fit and Proper’ Test: An Aristotelian Perspective
This chapter argues that Aristotle’s character-based ethics are immanent in the regulatory frameworks of the UK financial services industry; and that questions of character can never be entirely removed from the regulator’s assessment of a person’s suitability to work in it. It proposes some Aristotelian methods by which this factor can be taken into account. The ‘Fit and Proper Test’ is a cornerstone of the UK’s approach to regulating the industry. Only people who pass a test can hold certain senior roles and responsibilities. While most of the test concerns empirically measurable matters, such as compliance with professional standards and legal codes, it retains an element of character judgement—applicants need to have honesty and integrity. Aristotle provides the definitive account of how individual ethics derive from character. This chapter argues that he also provides practical guidance for contemporary financial regulators, as they seek to prevent unethical behaviour.
Owen Kelly
Chapter 4. Optimising Employee Engagement Through Effective Ethical Leadership: A Case Study of a Canadian Based Insurance Company
This chapter investigates how optimising employee engagement with an appropriate leadership style and ethical values could improve an organisation’s overall performance. Surveys and interviews were conducted with various managers (leaders) and employees to identify common themes, the impact of each leadership style and ethics on employee’s engagement. Five leadership styles were reviewed to identify the best set of leadership styles to positively impact employee engagement. A framework was developed to optimise employee engagement, enhance the relationship between employees and managers, and therefore improve the organisation’s overall performance. The chapter concludes with Transformational Leadership style having the most positive impact on employee engagement above and beyond reward. However, to further optimise employee engagement, a combination of leadership styles overlaid with ethical values is recommended. As an innovative recommendation inspired by the impact of Diversity & Inclusion on companies, this chapter suggests adopting ‘Employee Engagement’ as a core ethical value.
Alethia Amoy O’Hara-Stephenson


Chapter 5. A Christian Approach to Interest
This chapter relates Christian beliefs to interest and the modern banking system, and discusses how ethical approaches to interest have developed over time. After seven ‘snapshots’ of attitudes to charging interest, from ancient Greece and Rome up to the present day, it outlines five beliefs shared by Christians which have correlates in the field of economics and society. It then examines the question of interest today, the modern banking system and arguments for and against using interest as part of it. It concludes that there are some good moral and practical reasons for a non-interest banking system, but it cannot easily co-exist with a conventional banking system. Christians are more concerned with the spirit and purpose, than with the letter of any law. If there are good arguments for interest-free banking, they will want to pursue them, but they will not postpone finding other ways to help the poor when one particular way may be unavailable.
Jock Stein
Chapter 6. The Integrity of Islamic Finance
This chapter provides a critical account of popularly used Islamic financial instruments and discusses the gap between theory and practice in Islamic financial industry. The critical discussion is mainly related to financial innovations, which were derived from concepts including murabahah, ijarah and sukuk. Empirical evidence and/or real-life examples are illustrated to elucidate points. The central thesis of this chapter suggests that an ideal Islamic principle of risk-sharing has not been successfully implemented due to challenges associated with governance (or lack thereof) and behavioural factors including perverse incentives. A solution can be found through effective stakeholders’ education and activism to steer the Islamic finance industry in the right direction.
Marizah Minhat, Nazam Dzolkarnaini, Mazni Abdullah
Chapter 7. Diversity in Ethical Funds
This chapter provides an overview of ethical funds, including the history, asset screening strategies, markets of ethical funds, and motives to invest in ethical funds. It identifies seven ethical fund styles that follow different asset screening strategies and tailor to specific moral and social beliefs of investors. These are ethically balanced fund, negative ethical fund, sustainability-themed fund, environmentally themed investing fund, social-themed fund, ESG integration (Plus) fund and responsible ownership fund. This chapter reviews literature relating to various aspects of ethical funds. Mixed evidence is gathered regarding the comparative performance between ethical and conventional funds. The performance of ethical funds also varies across different styles. However, empirical evidence on risk exposure of ethical funds is scant. Therefore, this chapter calls for further research relating to the risk exposure of ethical funds to enrich our understanding and enlighten investors of this important aspect of investment.
Shaikh Masrick Hasan, Marizah Minhat
Chapter 8. Investing Ethical: Harder Than You Think
In this chapter, the authors use fundamental insights of modern capital market theory to find out if, and under which conditions, ethical investments can be expected to generate economic effects in line with ethical investors’ intentions. The authors distinguish between three different forms of ethical investments: direct investments, the use of specialised intermediaries, and market investments through, e.g., ethical funds. With regard to market investments, ethical investments should have no direct impact if they do not change the price of capital. Some authors assume that ethical investments should outperform the market, as the criteria depicts an unpriced risk factor. Others state that ethical investments should underperform the market, as investors are willing to support the respective projects with cheap capital. The main tenor of the empirical results on the topic is that both are wrong: the high degree of market perfection neutralises the good intentions of ethical investors. Thus, to have a direct impact, ethical investors must employ different and, presumably, costlier means.
Hans-Peter Burghof, Marcel Gehrung


Chapter 9. Regulating Islamic Finance in the UK: Issues and Possible Solutions
This chapter reveals critical issues and risks in relation to the regulatory strategies for Islamic financial market in the UK. It is argued that improper regulation would expose the Islamic financial market to (1) sharia compliance risk, (2) restrictive practice of Islamic finance ethics, (3) becoming a façade for conventional financial practices and (4) a lack of transparency that raises legal uncertainty and risk. Recognising the distinctive characteristics of Islamic finance, this chapter critically evaluates the existing regulatory strategies and offers suggestions for improvement. It proposes that regulators introduce standardised rules on sharia supervision, facilitate the growth of mudarabah capital as equity capital, and refine accounting and disclosure rules that properly account for murabahah transactions and complex Islamic securities, such as sukuk. This proposal is consistent with the goals of financial regulation to protect consumers and investors as well as to promote financial stability and market efficiency.
Marizah Minhat, Nazam Dzolkarnaini
Chapter 10. The Debt Burden of Social Enterprises: How Choices Around Legal Form and Purpose Can Impact the Funding Options for Social Entrepreneurs
In this chapter, the status of social entrepreneurship and social enterprise are considered with a particular focus on the UK ecosystem. In looking at both regulatory and structural issues, the author is able to bring her wealth of knowledge as a practitioner in, and consultant to, the Third Sector to pose crucial questions about the ways in which social enterprises are funded. This chapter also addresses the impact of the stage of an organisation on its funding options, the issue of the disparate ways that female-led businesses are treated by funders in all sectors and how COVID-19 is presenting challenges and opportunities for socially driven entrepreneurs. Recommendations are offered to entrepreneurs who are looking to form a social enterprise, and funders looking to support their endeavours.
Sally-Anne Hunter
Chapter 11. Ethical Issues in Financial Stress Testing
This chapter provides insights on ethical issues inherent in financial stress testing. A simple normative framework is developed based on a set of normative principles. The framework serves as an analytical lens for the ethical discussion of different stress-testing applications. The chapter covers portfolio stress testing on the bank level as well as stress testing for supervisory and surveillance purposes. Prior to the actual discussion the fundamentals of financial stress testing are introduced. This includes the concept of stress testing and a brief historical outline. The ethical discussion shows that several moral principles are relevant for guiding the conduct of stress testing and for regulating between good and bad behaviour. Most notably, the discussion demonstrates that bank regulation and ethics are no substitutes but rather complements that reinforce each other. In this regard, the chapter also contributes to the contemporary debate about rule-based versus principle-based regulation.
Kolja Gauer
Chapter 12. The Ethical Considerations for a New Model of Intellectual Property Protection Under Sharia Law Principles in the GCC States
This chapter discusses the ethical considerations for a new model of intellectual property protection under sharia law principles in the Gulf Cooperation Council (GCC) states. It identifies key sharia law principles and ethical issues during the foundation stage of the development of intellectual property in the (GCC) states. Due to no Quranic reference for intellectual property law, qiyas are considered relevant to Islamic justification for intellectual property protection as analogical reasoning is applied to Quranic rules on proprietary rights, contract law, international transactions and public interest to justify intellectual property rights. The chapter contributes an integrated approach to intellectual property in the GCC to inform a development stage that incorporates ethical sharia principles with western style intellectual property provisions to transform the Islamic economy beyond Islamic finance.
Nadia Naim
Ethical Discourse in Finance
Dr. Marizah Minhat
Dr. Nazam Dzolkarnaini
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