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Content
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The concept of wealth & seeking of wealth in Islam History of maximization of wealth The concept and practice of maximization of wealth Maximization of shareholders wealth: arising issues Islamic perspective of maximizing shareholders wealth Solution
Definition of wealth
Wealth is whatever mankind possess Wealth is things that can be
acquired and possessed /reserved whether in the form of corporeal (ayn) or usufruct (manfaah) have some value the benefit of which is permitted by law
Wealth should be avoided. They took all verses & hadith on the bad influences of wealth They ignore the authorities on the importance of wealth Thus, they viewed that Muslims in general should avoid the seek of wealth.
The Prophet said "If the son of Adam (the human being) had two valley of money, he would wish for a third, for nothing can fill the belly of Adam's son except dust, and Allah forgives him who repents to Him. (Sahih Bukhari Vol.8, Book 76, No.444) This hadith shows that man will never be satisfied with wealth that he gained, he would want to acquire more. The Prophet S.A.W. said: "I don't fear poverty for you, but rather I fear that you will compete with one another (to see who has more possessions). (reported by al-Hakim) This hadith shows how great is the fitnah of wealth that this was the main fear of the Prophet S.A.W "The Day of Judgement has come close, and mankind will only increase their desire for this world, and they will only go farther and farther away from Allah. There is a direct relationship between a love of this world and loss and loss of devotion to Allah; the more a person loves this world, the less he loves Allah, and viceversa.Thus, one's love for money will harm him in this world, and in the Hereafter as well.
All of theses authorities show that wealth could give a bad influence and negative impact on human being. However this is not due to the wealth itself but to the attitude of men towards wealth. This is because men were created with the nature to love wealth. Wealth & children are an adornment of the life of the world(alKahf:46) People are naturally tempted by the lure of women, children, treasures of gold and silver, horses of mark, cattle and plantation (Aali Imraan:14) However this love to wealth should be put in line with his greater responsibility towards Allah, as a khalifah (vicegerent) on the earth. Wealth should be the tools and means for men to achieve the main aim in achieving Allahs blessings . It should not be the other way to be their main aims.
Verses & Hadith on the positive of wealth & encouragement to seek for it
Islam, through some Quranic verses, has encouraged the believers to seek wealth and spent it fi sabilillah
Believers, when the call for prayer is made on Friday, hasten to the remembrance of Allah and give up all trading. That is better for you if you only knew. When the prayer is ended, disperse in the land and seek Allahs bounty, and remember Allah much so that you may prosper (alJumuah:9&10)
In these verses, the believers were instructed to leave their transactions when it was prayer time. This shows that their transactions in dealing with wealth & property are allowed. Moreover, Allah instructed them, after they finished their prayer, to continue in pursuing the wealth. This is an encouragement to the believers to seek wealth for the sake
Narated By Abu Huraira : The Prophet pbuh said, "By Him in Whose Hand my life is, it is better for anyone of you to take a rope and cut the wood (from the forest) and carry it over his back and sell it (as a means of earning his living) rather than to ask a person for something and that person may give him or not. (Sahih Bukhari: The book of obligatory charity:No.1493)
"The Prophet pbuh said that a woman may be married for her wealth, her beauty, her lineage or her religious commitment, and he (p.b.u.h) encouraged marrying the one who is religiously-committed. Abu Said Al-Khudri reported: We were travelling with the Prophet, pbuh when a rider came and began to look right and left. He said, He who has an extra wealth should give that to one who has no wealth, and he who has surplus provisions should give them to he who has no provisions, and he mentioned so many kinds of wealth until we thought that none of us has a right to a surplus.(Sahih Muslim, Book 18, No. 4290) The Prophet peace be upon him said, Allah has said, Spend (on charity) O son of Adam, and I shall spend on you.(Sahih Al-Bukhari and Muslim)
All the above hadiths show the importance of wealth as means & tools to discharge our duties & responsibilities as khalifahs in this
Therefore, Islam is not against the seeking of wealth, since it is considered a part of worship (ibadah) to Allah. Islam encourages Muslims to excel in the world and also the hereafter. However, with regards to the maximization of shareholders wealth, Islam puts some limitation to it. The concept as perceived by conventional view should not be absolute.
However, the seeking of wealth has been utilized by the conventional system to be primary objective. In the conventional economics, the primary objective of the firm is shareholders wealth maximization and also profit maximization. Thus we need to look at and understand the conventional maximization first, before we will discuss it from Islamic perspective.
Conclusion
The conventional maximization postulate hinges on the worldly material needs, a position totally different from the Islamic philosophy Islam sees human beings as having both material and spiritual needs. Their true happiness depends on a balanced satisfaction of both needs in this world and in the hereafter
In 1999, The Organization for Economic Cooperation and Development (OECD) issued a document;
Emphasizes that corporations should run, first and foremost, in the interest of shareholders.
RETAIN
REINVEST
In 1960s and 1970s, The principle of retain and reinvest running into problem because of; i) the growth of corporation ii) the rise of new competitors
Thus, corporations grew too big with too many divisions in too many different type of businesses. Lead to agency theory.
Under new regime, top managers downsize the corporation they control,
DOWNSIZE
by cutting the size of labor forces they employ,
DISTRIBUTE
Hence : Incidence of job loss; bluecollar & white-collar workers
WEALTH MAXIMIZATION?
A process that increases the current net value of business or shareholder capital gains, with the objective of bringing in the highest possible return.
It considers
Concept of justice Miskawayh (1968), justice dictates one not to be greedy in lawful earning
The criterion of profit maximization ignores the time value factor for the profits of a project.
Wealth maximization concept fully considers the time value factor of cash inflows.
GOAL
Profit maximization
OBJECTIVE
Large profits
ADVANTAGES
Easy to calculate profits. Easy to determine the link between financial decisions and profits.
DISADVANTAGES
Emphasizes the short-term. Ignores risk or uncertainty. Ignores the timing of returns. Requires immediate resources.
GOAL Stock holder wealth maximization OBJECTIVE Highest share price of common stock ADVANTAGES Emphasizes the long term. Recognizes risk or uncertainty. Recognizes the timing of returns. Considers stockholders return. DISADVANTAGES Offers no clear relationship between financial decisions and stock price. Can lead to management anxiety and frustration. Can promote aggressive and creative accounting practices.
PROFIT
PROFIT
PROPONENTS = Advantages
OPPONENTS= Disadvantages
Directors and Management owe fiduciary duty towards shareholders and hence have to discharge their responsibilities diligently.
Portfolio of the corporation and its risk assessment can be improved and eventually generate long-term wealth.
Cont.
Stakeholders (investors) are only interested in maximizing their return on investment.
Might use their influence to put their personal interest ahead of the economic interests.
The NEED for the profitmaximization of Shareholders value or wealth
Cont.
There is one and only one social responsibility of business to increase its profits so long as it stays within the rules of the game, which is to say , engages in open and free competition without deception or fraud
Its the ends of corporate decision making that is able to determine the means. best interests of the corporation are advanced when managers act exclusively in the economic interests of shareholders
REALITY: Stakeholders interests will distract the executives from their duty to maximize shareholders wealth
Cont..
Received many criticisms as it has negative impact on social, ethical and economic aspects
Cont..
1. Disregarding corporate social responsibility
It has different motivation & interest and thus, diverts from the maximization goal.
Cont.
3. Unethical practices
Driven to do manipulation on companys stock price in order to boost the executive pay. Morality of business would decline.
Cont.
5. Attention to the expectation markets and not on the real market performance
Stock market is the avenue for the corporation to determine how it is likely to perform in the future. It can lead to create illadvised incentives and generate inauthenticity in executives.
Solution
Chapra (1996)
Islamic banks should not be solely profit oriented rather it must aim at promoting Islamic norms and values as well as protecting the needs of Islamic society as a whole without undermining its commercial viability Wahbah Al-Zuhayli (Al-Fiqh Al-Islami wa- Adillatuh) The primary goal of Islamic financial institutions is not profitmaking, but the endorsement of social goals of socioeconomic development and the alleviation of poverty.
Ismail (2002)
The objective of Islamic banks should be towards maximizing profit. The bank is only responsible towards the shareholders and depositors; while the government is responsible towards social welfare. The profitability and the viability of the bank would be affected if banks use the shareholders fund or depositors money for social purposes Among the defects of this model are:(1) profit-centered model; (2) unequal distribution of wealth; and (3) disregarding social welfare responsibility
Necessities comprise all activities and goods that are essential to the preservation of the five foundations of good individual and collective life, according to Islam, namely: religion (al-din), life (al-nafs), mind (al-aql), offspring (alnasl) wealth (al-mal).
Conveniences comprise all activities and goods that are not vital to the preservation of the five foundations, but are needed to relieve or remove impediments and difficulties in life.
Refinements include activities and goods that go beyond the limit of conveniences, they serve to brighten, complement or adorn life.
Khan (2007)
claimed that Islamic financial institutions should aim at maximizing social welfare function apart from profit maximization as the objective of the institution as practiced in conventional.
Asutay (2007)
added that community banking, responsible and ethical finance and corporate social responsibility (CSR) projects can be practiced to achieve the goal of social welfare by IFIs
Solution
Balancing Ethical Responsibility among Multiple Organizational Stakeholders
Islam acknowledges that owners (shareholders) of firms have the right to make profit and gain wealth, but not to the extent of exploiting other stakeholders right. Contrary to the westerns view about stakeholders right, Islam does not view all the stakeholders equally the same. Owners or financiers and employees (management) are the first group of priority, followed by the suppliers and customers and finally the last group consists of all external parties (society at general). Of course, for this stakeholder model to function properly, principles of justice and balance, trust and benevolence must be strengthened.
Pyramid of maslahah
Al-Qaradawi (1998; 2001) a renowned contemporary shariah scholar explains the concept of maslahah in the event of conflict of various categories of interest as follows: When there is a conflict between two interests (small & big), the smaller would be sacrificed to protect the bigger interest. When there is a conflict between two interests (private & public), the private interest would be sacrificed to shield the public interest. When there is a conflict between realization of benefit and prevention of harm, the main priority goes to the prevention of harm. (Both benefit and harm in terms of size, effect and duration need to be evaluate precisely). The maslahah concept in preventing harm indeed is an ample guidance for managers to make decisions for the firm when they encounter conflicting interests that involves trade-offs.
References
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