How money laundering (ML) affects the loan portfolio quality of Islamic banks?
| DOI | https://doi.org/10.1108/JMLC-11-2021-0130 |
| Published date | 20 April 2022 |
| Date | 20 April 2022 |
| Pages | 309-323 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
| Author | Ijaz Hussain Shah,Kinza Aish,Islam Kashif |
How money laundering (ML)
affects the loan portfolio
quality of Islamic banks?
Ijaz Hussain Shah
Department of Management Sciences, Superior University, Lahore, Pakistan
Kinza Aish
Department of Management Sciences, COMSATS University Islamabad,
Sahiwal, Pakistan, and
Islam Kashif
Department of Management Sciences, Superior University, Lahore, Pakistan
Abstract
Purpose –This researchaims to examine the impact of money laundering (ML) and corruptionon the asset
qualityof conventionaland Islamic banks.
Design/methodology/approach –The current study used the data of conventional and Islamic banks
of Pakistan from2012 to 2018. In this study, we used fully modified ordinary least squares,dynamic ordinary
least squaresand pooled ordinary least square methods toanalyze the data.
Findings –The results found that corruption and ML positively affect the conventional banking non-
performingloans (NPLs). In contrast, corruption and ML harm the Islamic bank’s loan portfolioquality.
Originality/value –To the best of the authors’knowledge, the relationshipbetween corruption, ML and
NPLs in conventionaland Islamic banks of Pakistan are examined for the first time.
Practical Implications –According to the study’sfindings, bank authorities should establish an effective
method for monitoring loan activities and developing new and innovative products in Islamic banks. Additionally,
the Pakistani government needs to improve anti-corruption and anti-ML policies to earn investors’trust.
Keywords Corruption, Money laundering, Non-performing loans, Islamic banks,
Conventional banks
Paper type Research paper
Introduction
Corruption is defined as “the use of public or corporate position for private benefit”(Bhargava,
2005). Corruption can directly or indirectly affect the financial system (Swaleheen, 2008;
Houston, Lin and Ma, 2011;Weill, 2011;Park, 2012;Borg Barthet, 2020). Numerous economists
believe that corruption has a detrimental effect on the financial industry and the economy
(Mauro, 1995;Jahanshahi et al., 2011;Clark and Kundu, 2021). The linkage between corruption
and money laundering (ML) argues that the legislation governing both crimes should be more
effective (Chaikin, 2008). ML is a global phenomenon that has impacted every facet of global
financial culture. According to Nobanee and Ellili (2018),MLis“the process of earning money
through the illegal process and giving the illusion of having originated from law ful or legal
JEL classification –C33, D73, G2, G21, G28, G32
Money
laundering
309
Journalof Money Laundering
Control
Vol.26 No. 2, 2023
pp. 309-323
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-11-2021-0130
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