Do Islamic banks gain from corruption and money laundering (ML)?
| DOI | https://doi.org/10.1108/JMLC-09-2021-0094 |
| Published date | 18 October 2021 |
| Date | 18 October 2021 |
| Pages | 909-929 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
| Author | Kinza Aish,M. Kabir Hassan,Qamar Uz Zaman,Sadaf Ehsan,Khurram Abbas,Ijaz Hussain Shah |
Do Islamic banks gain from
corruption and money
laundering (ML)?
Kinza Aish
Department of Management Sciences, COMSATS University Islamabad,
Sahiwal Campus, Sahiwal, Pakistan
M. Kabir Hassan
Department of Economics and Finance, University of New Orleans,
New Orleans, Louisiana, USA
Qamar Uz Zaman
Department of Management Sciences, COMSATS University Islamabad,
Sahiwal Campus, Sahiwal, Pakistan
Sadaf Ehsan
Department of Management Sciences, COMSATS University Islamabad,
Lahore Campus, Lahore, Pakistan
Khurram Abbas
Department of Management Sciences, COMSATS University Islamabad,
Sahiwal Campus, Sahiwal, Pakistan, and
Ijaz Hussain Shah
Department of Management Sciences, Superior University Lahore,
Lahore, Pakistan
Abstract
Purpose –This paper aims to examine the impact of corruption and money laundering (ML) on the
profitabilityand stability of Islamic banks.
Design/methodology/approach –This study used the data of 53 conventionaland 19 Islamic banks of
Pakistan and Malaysia to have comparative insights. The empirical methods include the fixed effect and
random effectregression and generalized methods of moment for robust results.
Findings –The results indicatethat Islamic banks gain from corruption andML. Corruption and ML affect
bank profitability and stability positively in a less corrupt environment, i.e. Malaysia; however, corruption
JEL classification –C33, G2, G21, G28
These data were derived from the following resources available in the public domain:
www.sbp.org.pk/departments/stats/FSA-2006-09(F).pdf
www.sbp.org.pk/departments/stats/fsa-2008-12%20.pdf
www.sbp.org.pk/departments/stats/FSA-2012-16.pdf
https://baselgovernance.org/sites/default/files/2019-02/basel_aml_index_10_09_2018.pdf
www.transparency.org/en/cpi/2018
http://bursa.listedcompany.com/ar.html
and from individual bank website as per requirement.
Corruption and
money
laundering
909
Journalof Money Laundering
Control
Vol.25 No. 4, 2022
pp. 909-929
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-09-2021-0094
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1368-5201.htm
hurts Islamic banks’performance, and ML favours Islamic banking profitability and stability in a more
corruptenvironment, i.e. Pakistan.
Originality/value –The present study pioneers the debate on corruption and ML related to Islamic
banking profitabilityand stability. This study provides importantinsights to regulators and Shariah advisors
to build a real modelof Islamic banking.
Keywords Money laundering, Islamic banking, Banking stability, Corruption,
Banking profitability
Paper type Research paper
Introduction
Corruption is not a new phenomenonin today’s world. It is old as humankind itself (Shabbir
and Anwar, 2007). Both corruptionand money laundering (ML) are financial crimes existing
simultaneously with the presenceof one reinforcing the other. The spread of corruptionand
ML has been recognized as one of the criticalchallenges and the darker side of globalization
(Park, 2003). According to the World Bank, Transparency International and Basel Institute
on Governance, both advanced and developing countries experience the harmful effects of
corruption and ML and continuous improvements to fight against corruption and ML.
Corruption can be defined as “the misuse of public power for private benefits”(Bhargava,
2005), while “ML is the process of illegallyobtained money and given an appearance to have
originated from lawful sources”(Nobanee and Ellili, 2018). Corruption is a significant
impediment to efficient resource allocation, resulting in poverty and slower economic
growth. Corruption can also reduce sustainable economic growth through the aggravation
of problems with thebanking sector (Park, 2012).
The effect of corruption and ML on economic growth, financial stability, political
development and bankingperformance has been widely explored (Aluko and Bagheri, 2012;
Bolarinwa and Soetan, 2019;d’Agostino et al.,2016;Nobanee and Ellili, 2018). However,
Islamic banking’s performance in terms of corruption and money laundering has received
comparatively lessattention. There are apparent ambiguities between Islamicteachings and
the financial intermediation system (Bougatef, 2015). Apart from the conventional banking
sector, Islamic banking is governed based on theIslamic Shariah ruling, which is meant to
be free of corrupt practices, fair and transparent. In particular, interest (riba) is the crucial
component of conventionalbanking practices. On the contrary, Islamic Shariahconsiders an
additional amount added to the principal (Riba), exploitative and haram. Therefore, Islam
encourages differenttypes of investments, based on trading and equity(Usmani, 2006).
Islamic banks follow Islamic economic ideology, considering ML and corruption as
heinous sins (Bougatef, 2015). Corruption and ML obstruct Islamic banking to allocate
resources in the required manner (Bougatef, 2015;Arshad and Rizvi, 2013). Thereby, it is
necessary to understand the problems regarding corruption and ML and their effect on the
financial stability and profitability of Islamic banks. However, Islamic banking is meant to
be governed by Shariah rulings, required to take and provide funds from legitimate and
halal economic activities. Corruption and money laundering are essential determinants of
bank stability and profitability (Mohammad et al., 2019;Yin, 2019). In this context, the
literature suggests that corruptionhas positive influence on the banking performance in the
least corrupt environment but states mixed results in the highly corrupt environment
(Bougatef, 2015;Nobaneeand Ellili, 2018;Bolarinwa and Soetan, 2019). There are views that
high asset-basedIslamic banking practices may be more susceptible to ML (El-Gamal,2020).
Besides, there is a lack of depositscreening criteria to avoid dirty money infiltration into the
Islamic banking system. Islamic banking practices are expected to be ethical and
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