Sherif Mustafa – Islamic Banking and Finance

Tag: Sharia

Money Laundering in Shariah From Quran and Sunnah

Money laundering refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money. Through the definition of money laundering, it is indicated that it is an act violating the ethics and human values that call for the Halal earning of money in non-compliance with the Holy Book of Allah “Qur’an” and the traditions of his Prophet-Peace be upon him. Therefore, it is deemed as a legal crime represented in the trial of making Haram “illegitimate” money as Halal “legitimate” money. There are many evidences from the Holy Qur’an and Sunna for the prohibition of this type of financial crimes.

There is no doubt that the money laundering negatively affects the economy and development and opens the door for the Haram money that is significantly related to illegal activities such as the drug trade, prostitution, arms trade, smuggling of goods, terrorist activities, counterfeiting or money stealing.

Money Laundering In the Holy Qur’an

(1) Suart al Baqarah – verse 188 “And do not consume one another’s wealth unjustly or send it [in bribery] to the rulers in order that [they might aid] you [to] consume a portion of the wealth of the people in sin, while you know [it is unlawful].” The verse stated expressly the prohibition of illegal earning of money such as bribery and theft.

(2) Suart Al Maidah – verse 2 “And cooperate in righteousness and piety, but do not cooperate in sin and aggression”. This verse refers to the prevention of cooperation with any individual trying to affect the society.

(3)  Suart Al Araf – verse 157 “who enjoins upon them what is right and forbids them what is wrong and makes lawful for them the good things and prohibits for them the evil and relieves them of their burden and the shackles which were upon them”. This verse indicates that the money laundering is deemed as a prohibited earning of money.

(4) Suart Al Nisa – verse 29 “O you who have believed, do not consume one another’s wealth unjustly but only in lawful business by mutual consent”. The verse includes a general legislation prohibiting invalid treatment and the circumvention of people’s money through the injustice and monument.

Money Laundering in the Sunna:

(1) The prophet Mohammed (PBUH) has stated in his last sermon “Verily your blood, your property are as sacred and inviolable as the sacredness of this day of yours, in this month of yours, in this town of yours”. The Hadith refers to the preservation of Muslim’s money and the prohibition of illegal earning of which. In general, it includes all of financial and economic crimes, including the money laundering. (Reference : Sahih Muslim 1218)

(2) Reference to Sahih Al Bukhari No. 2059 – The prophet Mohammed (PBUH) said “A time will come when one will not care how one gains one’s money, legally or illegally”. The Hadith expects the future of corruption of consciences and immorality. Therefore, people became indifferent to the source of money, whether it is Halal or Haram.

Conclusion:

The money laundering is deemed as a legal crime and contrary to the Shariah. It is prohibited earning and all efforts should be unified for the prevention of such crime for its social, economic and political risks.

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Shariah Compliance Challenges in Islamic Banking Windows

The considerable growth of Islamic Finance in the emerging markets as legitimate alternative to conventional products has triggered the interest of most of conventional financial institutions to adopt a dual-banking system and undertake Islamic financial activities to meet the demands of its clients seeking Shariah compliant products/services under the form of Islamic Windows.

Islamic Windows are operating under conventional banking umbrella and they offer Shariah compliant products and services. A typical Islamic-window “Islamic Windows” approach is a form of operating structure in a conventional bank which offers Islamic banking products and services through its conventional branches by dedicated team equipped with sufficient knowledge of Shariah aspects.

The framework of operational activities should be in-line with the rules and principles of Shariah as stated by the Shariah Supervisory Board. Such approach requires full segregation of accounts and operations, funds collected from depositors must be invested in Shariah-compliant transactions, liquidity management policy of funds should comply with Shariah law and staff employed under the Islamic-window should adhere to Islamic code of ethical conduct and should refrain from performing any roles towards conventional banking operations.

Taking into consideration that strict adherence to SSB guidelines and the standards of other regulatory bodies such as Accounting and Auditing Organization for Islamic Financial Institutions “AAOIFI” and Islamic Financial Services Board “IFSB” have a significant impact on how clients approach banking, the inadequate segregation of operations/accounts of conventional and Islamic activities, absence of Standard Operating Procedures from Shariah perspective and lack of Shariah trained staff to execute Islamic transactions create the following challenges for Islamic windows:

  • Lack of clients confidence that their funds may be co-mingled with funds in the conventional interest based transaction books
  • Efforts made for the innovation of investment products that meets desire of Muslims’ clients towards diversification of investments are always below expectations compared to wide-range of conventional products.
  • Non-disclosure of earnings from interest-based activities and its subsequent treatment in the financial statements.
  • Increase in the outstanding amount of the financed product/service against postponement of installment or rescheduling of outstanding debts.
  • Cross-selling of alternative conventional products in-case of shortfall in the sale of the Islamic products.
  • Utilization of conventional accounts which are subject to pre-determined interest charges as a recovery accounts of installment of Islamic finance products.
  • Auto-payment option on conventional credit cards for recovery of Takaful Premium and Zakat payment.
  • Acceptance of conventional insurance policies in Murabaha and Ijarah instead of Takaful policies.

From Muslim client’s perspective, failure to comply with Shariah principles is a deliberate violation of the Divine law as revealed in the Quranic injunctions and Sunnah. Thus, clients may feel guilty and sinful due to non-compliance to obligations towards the creator (Allah SWT) and subsequently ends-up the relationship with the bank. That’s why many customers do not believe in Islamic windows.

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