Keeping Clean: How Islamic Banks Fight Money Laundering?

Main competitive pitch of Islamic banking is in Sharia compliant and interest free. But the real business of Islamic banking is producing profit.

Anti-money laundering programs can help to combat terrorism. Terrorists may receive money from legal or illicit sources. Before they buy an airline ticket or spend money on terrorist activities, the money has to be funneled into accounts that look legitimate. If Osama Bin Laden's bank account had been used to buy an airline ticket or purchase excessive amounts of fertilizer, it would have been flagged. If an account owned by Sallie Jones buys fertilizer for ABC Greenhouse, it appears less

We must make sure that organised crime cannot launder its funds through the banking system or the gambling sector… Our banks should never function as laundromats for mafia money, or enable the funding of terrorists”.

Over the decades, IMF (International Monetary Fund) has provided governments across the world with practical assistance to tackle money laundering. As a result, many countries around the world have reformulated laws governing central banking, commercial banking, and foreign exchange with the intention to prevent money laundering (Quirk, 1997, p.8). Furthermore, the cooperation between IMF and FATF (Financial Action Task Force) has also played an important role on combating money laundering (Schneider & Windischbauer, 2008).

The banking system including the shadow banking system has been very instrumental in the driving of the economy, Wen 2012. Banking system consists of the structural network of institutions that offer financial servises within an economy or country,Cihak 2007. Howeve there has been great inovations and developments in this industry which can positively contribute to financial instability of an economy. Schaeck 2010, opined that the the growing increase in competition in the the banking sector between the traditional banks and the shadow banking system greatly increases the systematic risk the banking sysyem faces.The banking system always faces a systematic risk that if one bank happens to experience a problem the same will

The primary model of Islamic managing an account framework came into picture in 1963 in Egypt. Ahmed al Najjar was the boss originator of this bank and the key peculiarities are

Islamic Banking is quite similar to a conventional bank. Only here the essential feature is that it is Interest Free i.e. it purely follows the Islamic law – Sharia’h (Rules) and guided by the Islamic Economics that forbids the both the payment and the receipt of Riba (Interest). The two main principles are basically Banks will share the Profit & Loss (enabling risk sharing) and disallow Interest in any form.

In addition, Islamic bonds are still far superior as compared to conventional binds, underpinned by the following factors: • Fairness and transparency. The financier and customer share the risks and rewards based on an agreed profit-sharing ratio. The roles and responsibilities of the parties to a contract are also explicitly disclosed and transparent. Asset-backed transactions. Islamic financial transactions must be backed by an underlying tangible asset or legitimate productive activity. This discourages over-exposure of the financing facility beyond the value of the underlying asset, and hence provides continuous security to the investors Ethical investment. Islamic finance prohibits the charging or paying of interest, and imposes restrictions on unethical and speculative financial activities

People in the modern world keep their funds stored in some type of financial institution, whether it’s a small local bank that only operates in a small town or a large multinational bank that has offices in every major city around the world and caters to millions of people. With the responsibility of handling the assets of millions of people banks are sometimes accused for activities that may be illegal, such as money laundering: the method of concealing illegally acquired money or invasion of a client’s account. Unlike small banks, Multinational banks are the most susceptible to these accusations. Multinational banks have to abide to the laws of multiple countries and any action they do could cause controversy, whether it's considered good in the bank’s eyes or if it’s genuinely bad. While fiscal government policies that affect revenue collection and expenditure set the limits for multinational banks, ultimately multinational banks should be held to a higher international set of regulations. Their actions may be legal in some countries while illegal in others, causing various problems that could lead to the closure of offices in one country due to an action in another. Therefore, an international governing body should be created to regulate t multinational banks and keep from getting in trouble with national governments who have unique restrictions.

In order to build an effective system in the fight against money laundering it is essential for banks and financial institutions to take strict measures and procedures represented by controlling them, and for that Simwayi and Wang (2011) found that commercial banks in Zambia have gen-erally complied with the Bank of Zambia AML directives of 2004 and they have taken AML laws and

Offshore banking is the action of having a bank account outside of the country of residence. Typically it offers many advantages like greater privacy, low or no taxation, easy access to deposits and protection against local, political, or financial instability, but has also been popular for its use of illegal practices like money laundering and tax evasion. Those against offshore banking view its illegal reputation and predict that it will only cause further damage like providing fund for terrorism or holding underground economies. However other experts believe that offshore banking is a safe haven for depositors and has had a substantial impact on the international economy in today’s world.

The banks are governed by some regulations and policies, yet it does have a scope for the well-equipped sophisticated fraudsters to function with seeming impunity. Besides, the complexity that governs these frauds is even more baffling. A bank fraud can cause notable damage at an unprecedented scale, be it to an individual customer or the complete organization. Over and above, today a bank fraud cannot be claimed as furtiveness and anonymity are apparent rewards of choosing Internet as the base platform. Every niche of our socio-economic environment is technology dependent which proportionately increases the vulnerability of the entire plot to frauds. Threat such as breach of certitude necessitates constant awareness and diligence for mitigating and preventing unseen frauds. Definitely we cannot suppress these frauds but their

In another study, 5 Islamic banks of MENA state were used. Their financial statement of 1993-2002 revealed that there is a rise in liquidity risk, reason being the hasty withdrawal by the account holder due to a disparity between the

The gale of economic liberalization currently sweeping across the globe provides another reason for looking into the efficiency of Islamic banks since it poses a further competitive challenge to the Islamic banking institutions. It is expected that by the year 2007, trade liberalization will require Malaysian domestic banks to compete with other global players on an equal playing field. Such a change implies that local Islamic banking institutions will have to be efficient, innovative, competitive and resilient players in the market. This is particularly important since foreign banks that are arguably more efficient may also offer Islamic banking products to take advantage of brisk demand for Islamic banking products.

The paper will analyse and measure the performance of Islamic banks in comparison to conventional banks. The performances will be measured over a 5-year period from 2009 to 2015. In comparing Islamic and conventional banks, profitability and liquidity will be examined.