Understanding the regional and transnational networks that facilitate IED use

Key sponsors and donors: Islamic banks

It has sometimes been suggested that Saudi Arabia and other Gulf states may use Islamic banks, which have a significant presence in these countries’ financial services landscape, as a way of evading international safeguards against the financing of terrorism.  However, an IMF working paper on Islamic finance and AML/CFT, published in February 2016, drew the conclusion that:

“There would appear to be no fundamental differences between ML/TF risks in Islamic and conventional finances.  FATF, FSRBs [FATF-Style Regional Bodies] and their member countries are imposing the standards and best practices similarly on conventional and Islamic finance institutions. It is clear, however, that the issue of Islamic finance ML/TF risks requires further study.”

The paper noted that there has been very little study of the potential ML/TF risks arising from Islamic Finance; international standards for the design of AML/CFT regimes make no special provision for Islamic finance; and the AML/CFT regimes of some countries with a strong Islamic finance presence are relatively weak. The limited capacity and experience in the supervision of Islamic finance, especially in jurisdictions that face higher ML/TF risk factors, represents an additional vulnerability.

Areas for further study of risk are identified as: the nature of the customer relationship in Islamic finance; the complexity of Islamic finance products; and the high volume of zakat and sadaqah (wealth tax and alms) funds collected, managed and disbursed for customers by Islamic finance institutions, often with discretion to designate beneficiaries, including non-profit organisations.

The assets of Islamic financial institutions are currently concentrated in the Middle East (mostly in Iran and member countries of the GCC, led by Saudi Arabia and the UAE) and in southeast Asia (mainly in Malaysia) and constitute a small but growing sector of the overall financial industry. The World Economic Forum published figures from Ernst&Young identifying the “top nine countries for Islamic finance” as follows:

Using slightly updated figures, Ernst&Young have shown elsewhere (see below) the penetration of the Islamic (or ‘participation’) banking industry in each of these countries’ financial sectors.  It can be seen that Islamic banking accounts for more than half of the Saudi banking sector, 45% in Kuwait, and between 20 and 30% in Bahrain, Qatar, the UAE and Malaysia.

These figures, however, exclude the Islamic Republic of Iran, which has the largest Islamic banking system in the world, with assets of $482 billion, according to Dubai government data from 2014 – more than Saudi Arabia, Malaysia and the UAE combined.  The Iranian economic daily Financial Tribune reported in October 2015 that Iranian banks accounted for 40% of global Islamic banking assets in 2014, followed by Saudi Arabia (18.5%), Malaysia (9.5%), UAE (7.3%) and Kuwait (5.9).

This post is part of the report, “Understanding the regional and transnational networks that facilitate IED use”. To see the sections of the report please go here. This research was undertaken with assistance from the NATO Counter-IED Centre of Excellence.