Some worry that the Islamic banking model is open to potential misuse by those involved in funding terrorist activities, but opinions differ on whether the financial network is directly involved in such schemes.
The dividing line for the opinions seems to come down to how one is involved in the business.
“It is true that Taliban militants receive financial support through the Islamic banking system, but there is no proof because these illegal transactions are never properly investigated,” Muhammad Aamir, a retired banker, told Central Asia Online.
But Adnan Rasool, an Islamabad-based Islamic banking specialist with a state-owned bank, said it is “totally wrong” to say that the system helps terrorism.
“In Pakistan the share of Islamic banking has risen to 10%, which shows the public confidence in the system,” Adnan said. “We have more than 1,000 dedicated Islamic banks as well as more than 700 Islamic banking counters operated in conventional banks.”
Allegations arose in early 2001 that the system aided terrorism, but authorities couldn’t prove any of them, Adnan said, adding that Islamic banking has come of age worldwide and in Pakistan, where it has financed huge projects that benefit the people.
Why Islamic banking is vulnerable to terrorist misuse
Islamic banking, which began in the early 1970s, is a financial system that involves making loans without charging interest, in accordance with Sharia law. It is worth about US $2 trllion (Rs. 197 trillion) worldwide and has posted an annual growth rate of 15%.
Terrorists have long relied on various channels to finance their activities and Islamic banking is one option that terror supporters have used in the past, Aamir said, describing an example of suspected terror funding.
A resident of Hangu District received “a hefty amount through Islamic banks from different sources in the UAE, Saudi Arabia and other Islamic countries” in 2001, he said. “He was a common man who disappeared after the 9/11 incidents in New York and Washington.”
Police briefly investigated the case, he said, but nothing came of it.
Another banker also has suspicions about the system.
Muhammad Junaid, an employee of a private bank in Peshawar, agreed with the notion that Islamic banking is key to financing terror bids in Pakistan and elsewhere but said these illegal acts aren’t easily traceable.
“For instance, I knew three account-holders in our bank who each received about Rs. 5m (US $50,829) every month from some Muslim countries,” said Junaid. “The men – pretending to be getting the money for construction of mosques and religious seminaries – seemed to be hand-in-glove with terrorists.”
That is indicative of something suspicious, he said, because “one cannot believe that simple people have such frequent financial transactions through banks. But … there are no complaints from any quarter.” But again, proof is scant and Adnan stands by his industry.
“Islam strictly forbids terrorism in all its form and therefore Islamic banking seeks to promote Islamic values,” he said. “We have an internal system in Islamic banking that prevents the illegal investments and transactions; therefore, it is impossible to send the money through this network to terrorists.”
Islamic banking system has loopholes
Islamic banking was designed to follow Islamic values, Junaid said. In accordance with Sharia law, it is expected to avoid interest-based transactions and unethical practices while it helps boost the economy.
However, loopholes make it difficult to identify illegal transactions in the system, he said.
Pakistan began implementing the system in 1978, economist Jalal Khan, at the Institute of Management Studies at the University of Peshawar, said. Early measures included doing away with interest from the operations of specialised financial institutions – including the House Building Finance Co. Ltd., Investment Corporation of Pakistan and National Investment Trust Ltd. in July 1979 – a practice that extended to commercial banks in the 1980s.
The premise of interest-free loans, even though it goes along with Islamic ideals, has not protected the system from suspicion of links to terror funding, Shah Jehan, a banker at a private financial institution, told Central Asia Online.
Hawala, an informal system that allows fund transfers without much regulatory control, also was allegedly linked to terror financing, he said.
“Despite a hue and cry by global leaders spearheading the war against jihadist groups, new legal modes of transactions [including wire transfers] that have now replaced the hawala system are part of the Islamic banking system and have been lifelines for terrorists,” Jehan said.
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