Ethics And Efficiency Are Important In The Islamic Capital market

What is Ethics?

From Wikipedia, the free encyclopedia, Ethics is a major branch of philosophy, encompassing right conduct and good life. It is significantly broader than the common conception of analyzing right and wrong. A central aspect of ethics is “the good life”, the life worth living or life that is satisfying, which is held by many philosophers to be more important than moral conduct.

The field of ethics, also called moral philosophy, involves systematizing, defending, and recommending concepts of right and wrong behavior. Philosophers today usually divide ethical theories into three general subject areas: metaethics, normative ethics, and applied ethics. Metaethics investigates where our ethical principles come from, and what they mean. Are they merely social inventions? Do they involve more than expressions of our individual emotions? Metaethical answers to these questions focus on the issues of universal truths, the will of God, the role of reason in ethical judgments, and the meaning of ethical terms themselves. Normative ethics takes on a more practical task, which is to arrive at moral standards that regulate right and wrong conduct. This may involve articulating the good habits that we should acquire, the duties that we should follow, or the consequences of our behavior on others. Finally, applied ethics involves examining specific controversial issues, such as abortion, infanticide, animal rights, environmental concerns, homosexuality, capital punishment, or nuclear war. By using the conceptual tools of metaethics and normative ethics, discussions in applied ethics try to resolve these controversial issues. The lines of distinction between metaethics, normative ethics, and applied ethics are often blurry. For example, the issue of abortion is an applied ethical topic since it involves a specific type of controversial behavior. But it also depends on more general normative principles, such as the right of self-rule and the right to life, which are litmus tests for determining the morality of that procedure. The issue also rests on metaethical issues such as, “where do rights come from?” and “what kind of beings have rights?”

Abraham Edel in his paper “Science and The Stucture of Ethics” defined, the ethics is a reflective enterprise; moralities (frequently called ‘moral codes’) have a more overly regulative character. In Kant, from whom stem most modern claims for the autonomy of morals-that morality is not a function  of any existential situation  is unique or sui generis; that ethical  processes somehow transcend  existence and tell it what it ought to be  there is little difficulty  in discovering  an incomplete stage setting. The autonomy stress directed primarily against hedonistic views or any that make obligation a function of desires passions, sentiments. But there is one feeling Kant wishes to maintain as ethically relevan; this is awe, or respect, which he denies to be a natural sentiment. He is perfectly ready to set broad  existence conditions for morality, both  in the portrayal of man as in tension between two words and in construing his account of the categorical imperative as an exhibition of man’s rational nature. (In fact, the account is said to hold for all rational being other than man if there is be such in the universe.) The outcome is simply that Kant is setting a stage but is procluded by his own theory of knowledge from investigating it scientifically. Hence it remains incompletely presented, there remain large gaps and obscurities in his ethics.


The Importance of Ethics.

Allah Subhaanahu Wa Ta’ala said in Al Quranul Karim (QS. 68:4)

  1. and Thou (standest) on an Exalted standard of character.

In Islam we know the nearest word for ethics, and it is akhlaq, but the word akhlaq is Islam is more far complete or perfect than the word of ethics, because in the word akhlaq contains the meaning of behavor not only between human and other human (hablum minannaas) but also the behavior between all of human being personally or together ( as an ummah) and their The Only One Creator, Allah Subhaanahu Wa Ta’ala, The Real Divine Lord. And according to one hadith (tradition) of Prophet shallallahu ‘alaihi wasallam had ever said that :” Indeed that I was sent to this world for only and only to perfect (make completeness) the behavior of human being”. And so many verses in Al Quranul Karim which are their contain appreciate the the akhlaq which is the meaning including ethics and from the Hadith of our beloved Prophet Shallallahu ‘Alihi Wasallam as well. Especially about akhlaq, Allah, the Divine Lord not so such a particularly give a special praising through His verse or ayat in Al Quran about a good face or about the cleverness of the Prophet PBUH, but for the Prophet good akhlaq Allah has sent down His Ayat (QS. 68:4)  as written above.

In the time of Prophet PBUH, he (prophet) had ever forbidden someone who tried to make a cheeting by pretending to purchase something, but actually just only playing a drama or theatrical troupe in order to earn some finacial benefit by cheeting others  with this play, and in Islamic terminology we call bay najasy. In Islamic Economic we know as manipulating demand, and in fiancial market for those who want to earn capital gain by doing short selling, and they also have a big amount of money to influence the market by making a peudo-demand of the stock.

Amartya Sen in his book “On Ethics and Economics” said that he had tried to argue that the distancing of economics from ethics  has impoverihed welfare economics, and also weakened the basis of good deal of descriptive and pedictive economics. So ethics is so important in all of aspects of life, including the behavior of every kind or every level of person who interacts in the capital market especially in Islamic capital market.

The Importance of Ethics in Financial Reporting

Under present accounting rules, lessees frequently structure contracts for leased assets, in situations where they enjoy benefits similar to outright ownership, in a way that keeps both the leased assets and related liabilities of their books. This method of accounting creates off-balance sheet financing and is called operating lease accounting. There is a debate of the ethicality of intentionally structuring lease contracts to avoid disclosing leased asset and liability amounts and describes the ‘‘slippery slope’’ of rule-based accounting for synthetic leases and special purpose entities, that, in the author’s opinion, led to the accounting debacles at Enron and other companies. The ethical intent that is implicit in the Securities and Exchange Commission and Financial Accounting Standards Board regulations is discussed and suggestions for improving the ethicality of financial reporting are provided.

Thomas J. Frecka in his paper, “The Ethical Issues in Financial Reporting” discusses lease accounting as an example of how one can structure a discussion of ethical issues related to financial reporting choices. The importance of this topic relates to the complexity of issues surrounding lease accounting, the slippery slope that violating the intent of lease accounting rules leads to, and the generally ‘‘gray’’ conclusions that result from attempting to answer the question, Is intentional structuring of lease contracts to avoid capitalization unethical? A second intention of his paper is to illustrate how the question of ethics can be used to help students understand and appreciate the effects of technical financial reporting rules. After an introduction that provides background concerning how one accounts for leases, the other part of his paper is organized as follows. Part two of that paper discusses the ethical ideals of financial reporting as summarized by terms such ‘‘fair and full disclosure’’ and ‘‘transparency.’’  The paper of Frecka is not the only one paper that contain of the issue of ethics but still many others of papers like this written by other scholars who try to think and try to discuss how important the ethics in making financial reporting.

Because so many cases just like Enron, WorldCom, Xerox, Halliburton, Qwest System, Nicor Energy, Adelphia Communication, AOL TIME Warner, Bristol Myers Squibb, and so many other frauds in making finacial reporting  reminded us about the importance of  ethics in making Financial Reporting.

What is Efficient Markets Hypothesis?

Markets in term of EMH (Efficient Markets Hypothesis):

Whenever there are valuable commodities to be traded, there are incentives to develop a social arrangement that allows buyers and sellers to discover information and carry out a voluntary exchange more efficiently, i.e. develop a market. The largest and best organised markets in the world tend to be the securities markets.

Efficiency in Economics:

The concept of efficiency in economics is a general term for the value assigned to a situation by some measure designed to capture the amount of waste or “friction” or other undesirable economic features present.

Within this context, it has several quite distinct meanings. For example, /allocative efficiency/ is concerned with the optimal distribution of scarce resources among individuals in the economy. An efficient portfolio is one with the highest expected return for a given level of risk. An efficient market  is one in which information is rapidly disseminated and reflected in prices.

The Importance of Efficient Markets Hypothesis

The EMH has been the central proposition of finance since the early 1970s and is one of the most contoversial and well-studied propositions in all the social sciences.


The history of the EMH is covered in detail by Bachelier (1900) and Samuelson (1965) being the most important papers.


The term ‘efficient market’ was first introduced into the economics literature by Fama /et al./ in 1969.


The term ‘efficient market’ was initially applied to the stock market, but the concept was soon generalised to other asset markets.

Starting Point

Regardless of whether or not one believes that markets are efficient, or even whether they /are/ efficient, the efficient market hypothesis is almost certainly the right place to start when thinking about assetprice formation. One can then consider relative efficiency.

Two informal explanations for market efficiency

If one could be sure that a price will rise tomorrow, the asset would be bought today, raising the price, so that it will not, in fact rise tomorrow. Ergo, the price is unpredictable.

The intrinsic value of an asset is implied by the cumulative impact of information we receive as news. Successive news items must be random because if an item of news were not random, that is, if it were dependent on an earlier item of news, then it wouldn’t be news at all.

After all, news — by definition — is new. If the rapidly price reflects all information (i.e. the market is efficient), then the price will fluctuate randomly.

Academics Versus Practitioners

There is little consensus between the opinions held in academia and industry. Unsurprisingly, most of the support for the EMH comes from the former.

Is it Rational?

Contrary to popular belief, the EMH does not require that all market participants are rational. Indeed, markets can be efficient even when a group of investors are irrational and correlated, so long as there are some rational traders present together with arbitrage opportunities (Shleifer, 2000).

Not Possible

Grossman and Stiglitz (1980) argued that because information is costly, prices cannot perfectly reflect the information which is available, since if it did, those who spent resources to obtain it would receive no compensation, leading to the conclusion that an informationally efficient market is impossible.

Not Refutable

The EMH, by itself, is not a well-defined and empirically refutable hypothesis.

Jensen (1978) “If the efficient markets hypothesis was a publicly traded security, its

price would be enormously volatile.”

Shleifer and Summers (1990)

“It is disarmingly simple to state, has far-reaching consequences for academic pursuits and business practice, and yet is surprisingly resilient to empirical proof or refutation.”

Lo in Lo (1997) said “Market efficiency survives the challenge from the literature on

long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market

efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.”

Fama (1998) said “What, then, can we conclude about market efficiency? Amazingly, there is still no consensus among financial economists. Despite the many advances in the statistical analysis, databases and theoretical models surrounding the efficient markets hypothesis, the main effect has been to harden the resolve of the proponents on each side of the debate.”

Muir and Schipani (2007) said in deciding cases involving stock price valuations, the Delaware courts seem more concerned than the DOL17 with the possibility that the markets may be unable to price shares fairly. The courts thus seem somewhat more skeptical of reliance on the market price, and the EMH, for the fair valuation of stock. At least one visible concern of the courts is the availability of material information in the market. The courts recognize that without full information, the market, in a particular instance, may be unable to price shares fairly.

Ethics and Efficiency, Both are Important In The Islamic Capital Market(Conclusion).

Based on the facts that how important ethics in all of aspects of our life that Allah like most for somebody who has the greatest achievement in presenting best akhlaq (including good ethics contained in it) to all over the wold and as long as the worldly life is still in existing, who is that the most noble personality? It est our Prophet PBUH (QS : 68:4). Especially in this paper I try to depict how important ethics. So many shortcomings we’ll encounter if we neglect ethics in making financial reporting just like in many cases of frauds when they (companies or corporates) made light of the ethics. In EMH we know that the real value of the firm (without any cheeting), especially which emerged through Islamic Capital Market caused by the good financial reporting. In making this good financial  reporting they must adhere the principles of ethics. It is unplausible if we do everything ethically but we neglect the principle of efficiency, so both of them are important in Islamic capital market.




  1. Best Reference: Al Quranul Karim, Translated bu Yusuf Ali and Hadith of Prophet Peace Be Upon Him.
  2. Abraham Edel, “Science and the The Structure of Ethics”
  3. Amartya, Sen. On Ethics and Economics
  4. Lo (2000) in Cootner (1964)
  5. Muir, Dana , Cindy A Schipani. The Use of EMH. Michigan Law Review. AnnArbor: Jun 2007. Vol. 105, Iss. 8; pg. 1941, 40 pgs
  6. Best Paper: Fama (1970).
  7. Best book: “The Econometrics of Financial Markets” by Campbell, Lo and Mackinlay(1997).