ISLAMIC BANKING FINANCING TERRORISM OR MEETING ECONOMIC DEMAND.

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Department of Finance & Banking
Jahangirnagar University
Savar, Dhaka-1342

Course: Islamic Banking & Investment

Course Code: FNB305

A Report On:
ISLAMIC BANKING FINANCING TERRORISM OR MEETING ECONOMIC DEMAND

Submitted to:
Debashis Saha
Assistant Professor
Department of Finance & Banking
Jahangirnagar University
Submitted By:

Name ID
Tufayel Ahmed(Co-coordinator) 1354
Jannatul Tania Sultana 1332
Kulsum Akter 1345
Mohan Datta 1364
Amrito Kumar Halder 1375
Tarak Chandra Saha 1381
Sonia Sultana 1388
Farhana Khan 1914
Department of Finance & Banking
BBA Program (6th Batch)
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Submission Date: September 17, 2017
September 17, 2017

Debashis Saha
Assistant Professor
Department Of Finance & Banking
Jahanginagar University
Savar, Dhaka 1342.

Subject: Submission of report.

Dear Sir,
Its our pleasure to submit the report on Islamic Banking financing terrorism or meeting
economic demand. The report is study of Islamic financing in terrorism or economy.
The report is prepared as part of our course Islamic Banking & Investment FNB -305 in the 5th
Semester of our BBA program.
We are grateful to you for providing such a interesting topic with the opportunity to have such
an excellence experience and we sincerely hope that our effort succeed to your satisfaction.

Sincerely yours,

Tufayel Ahmed (Co-coordinator)

On behalf of the Group 4
Department of Finance & Banking (6th Batch)
Jahangirnagar University, Savar, Dhaka-1342

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 Acknowledgement
We would like to extent sincere appreciation to our honorable teacher Debashis saha for all of
his guidance and inspiration. We owe to debt of gratitude to the faculty and staff of the Islamic
bank Finance department for their unwavering support during the endeavor. We must also
recognize our department for giving us the opportunity to further advance our education. We
would like to thank all the person who help us to complete this report efficiently.

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 Executive Summary

Islamic banking consistent with Sharia laws, which is against the collection of payment or taxes.
According to Islam, interest leads to inflation, and accumulation of interest leads to increase the
divide amongst the rich and poor. In an Islamic mortgage transaction, instead of loaning the buyer
money to purchase the items, a bank might buy the item itself from the seller and re-sell it to the
buyer at a profit, while allowing the buyer to pay the bank in installment.
The goal of Islamic banking and finance to bring greater justice and strive to achieve
socioeconomic development. The fundamental objectives of Islamic banking is not necessarily
the elimination of riba alone, but also established socio-economic justice and growth. Islamic
bank have popularized zakah as a social moment. Muslim who possess minimum net worth above
his basic needs to pay zakah. The Riba based has failed to achieve that particular objective.
Rather, it has led to misallocation of scarce resources of the developing Muslim world.
The concept of the Islamic economic system as described in all its aspect focuses on the worship
on the creator, which include mans duty to develop live in earth, thus securing a decent standard
of living for the individual. Islam stresses that men is the principals agent developing life on earth,
hence the development of man is a required for the development of society.
In spite of the cases of certain Islamic banking being involved in some way in financing terrorist
activity, there is little proof that the Islamic banking industry connected to terrorism any more
than are conventional banks. The recent surge in the Islamic financial sector is due to the growth
in petroleum- related wealth, a Muslim piety, and portfolio diversification. This does not mean,
however, that there are not aspect of the industry that should be monitored.
A synergy that has developed between the rising Islamic capitalists in the Muslim world and the
ulama could grow into one that is capable of persuading Muslim to turn their backs on the
extremist theories of jihad. One could argue that Islamic banking is a means of enfranchisement
for the previously disenfranchise Muslim who may have been attracted to more radical from a
Islamism as an out let for his economic, if not political grievances. Islamic financials may be taking
the first step toward building the civil societies necessary for building democratic institution in
authoritarian state
Islamic bank could assist in curbing this system by offering low-cost wire transfer that are
competitive with hawala. With Islamic finance being relatively new to the world of modern
finance, there are many areas that could be leveraged to the benefits of United States and Islamic
banks, advancing into developing regions free region islamist agenda.

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Table of Contents
Course: Islamic Banking & Investment ................................................................................. 2
1. Introduction .............................................................................................................................................. 7
2. The Evolution Of Islamic Bank................................................................................................................... 7
2.1 Foundation of Islamic finance: ............................................................................................................ 8
2.2 Beginning of Islamic financial system: ................................................................................................ 9
2.3 The creation of Islamic financial Institutions: ..................................................................................... 9
2.4 Islamic financial instruments .............................................................................................................. 9
3. The Contribution of Islamic Banking to Economic Development ........................................................... 10
3.1 Role of Islamic Banking in Economic Development 0f Bangladesh: ................................................. 12
3.2 Overall Banking Context of Bangladesh ............................................................................................ 14
4. Sharia Banks That Fund Terrorism .......................................................................................................... 16
5. Logical Discussion.................................................................................................................................... 20
6. Conclusion ............................................................................................................................................... 21
7. References .............................................................................................................................................. 23

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 1. Introduction

Islamic banking operates under a cloud of suspicion, from being accused of knowingly financing terrorist
operations to questions of its inherent structural susceptibility for such use. Once viewed as a specialized
financial oddity due to its prohibition of interest, Islamic finance is now over a $400 billion industry that
is projected to grow between 10 to 15 percent a year. Islamic banks have been tied to terrorist
organizations through various Islamic charities, feeding the fear that the raison detre of Islamic banking
is the financing of Islamic terrorism. This brings the following question: Is the Islamic banking industry
growing to finance Islamic terrorist organizations or are factors such as an increase in oil revenues in the
Persian Gulf States and a religious reawakening in the Muslim world creating a demand for sharia-
compliant banking and investment opportunities? In attempting to answer this question, a review of the
current literature relating Islamic banking to terrorism was conducted. This was followed by an analysis
of the current banking operations, taking into consideration the historical foundations and regional
differences, looking for inherent weaknesses and opportunities for exploitation by nefarious elements.
Conclusions were based on the liabilities and opportunities associated with Islamic banking discovered
during the process.

2. The Evolution Of Islamic Bank

The modern Islamic finance industry is young ;its timeline beings only a few decades ago. But Islamic
finance is evolving rapidly. The core concepts of Islamic finance date back to the birth of Islam in the 6th
century. The modern Islamic finance industry emerged only in the 1970s, in large part because of efforts
by early 20th-century Muslim economists who envisioned alternatives to conventional Western
economics.

Here are some key points in the short history of Islamic Bank:

*In 1963, the MIt Ghamr Savings Bank in Egypt was opened, becoming the first modern Islamic bank on
record.

*Also in 1963 ,the pilgrims saving corporation of Malaysia although not a bank began to incorporate
basic Islamic banking concepts.

*in 1975 the Islamic development bank opened in Saudi Arabia and gave the Islamic finance industry an
international presence . it recruited member countries and then offered them financial products to
promote economic and community development .

*in 1979 the first Islamic insurance company of Sudan was established .

*in 1986 the Amana income fund ,the worlds first Islamic mutual fund was created in India .

*in 1990 the accounting and auditing organization for Islamic financial institutions was created to establish
industry accounting and auditing standards.

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*also in 1990 the Islamic bond marketing emerged when the first tradablesukuk the Islamic alternative
to conventional bonds were issued by shell MDS in Malaysia .

* in 1996 city bank began to offer Islamic banking services when it established the city Islamic investment
bank and Bahrain .

* in 1999 the DOW Jones Islamic market index was established becoming the first successful bench mark
for the performance of Islamic investment funds .

*in 2002 the Malaysia based Islamic financial services board was established as an international standard
setting body fr Islamic financial institutions .

*in 2004 the Islamic bank of Britain become the first Islamic commercial bank established outside Muslim
world. In total ,more then 500 Islamic financial institutions have been established world wide since the
1970s,incluing about 300 Islamic banks. In the past two decades ,the Islamic finance industry has averaged
growth of 14 percent per year, and its assets are estimated to be worth &1teillion.

Now Islamic financial institutions are operating in 75 Muslim and non-Muslim countries.

For knowing about the evolution of Islamic bank we can consider these points:

1. Foundation of Islamic bank

2. Beginning of an Islamic financial system
3. The creation of Islamic financial system
4. Islamic financial instruments

2.1 Foundation of Islamic finance:

The emergence of Islamic finance as a system of thought and practice is timely in the mildest of world
crises. After barely a half a century of experience, Islamic banking has become established as a niche
industry across the world, offering new and sophisticated financial products designed to be compliant
with Islamic legal principles and common law. This comprehensive book explores the theory, principles
and practices underpinning this rapidly expanding sector of baking.

Expert contributions-including eminent scholars and senior practitioners in the field-examine the roots of
the principles of ethical Islamic financial transactions, which have evolved over several millennia, on issues
including usury, interest rates, and financial contracting for funding enterprises, mortgages, leasing and
other tractions. Regulatory and governance issues are discussed, and the practice and operation of Islamic
financial institutions are explained via three distinct case studies.

This rich and wide-ranging guide to the foundations and fundamental principles of this new form of ethics-
based financial practice will prove a fascinating and illuminating read foe regulators and scholars in the
fields of economics, finance, money and banking.

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 2.2 Beginning of Islamic financial system:

The origin of Islamic banking dates back to the very beginning of Islam in the seventh century .The prophet
Muhammads first wife, Khadija, was a merchant, and he acted as an agent for her business, using many
of the same principles used in contemporary Islamic banking. In the Middle ages , trade business activity
in the Muslim world relied on Islamic banking principles, and these ideas spread throughout Spain, the
Mediterranean and the Baltic states, arguably providing some of the basis foe western banking principles.
In the 1960s to the 1970s, Islamic banking resurfaced in the modern world.

2.3 The creation of Islamic financial Institutions:

The modern Islamic finance industry is young; its timeline begins only a few decades ago. But Islamic
finance is evolving rapidly and continues to expand to serve a growing population of Muslims as well as
conventional, non- Muslim investors.

The first Islamic banking refers to a banking activity or a system of banking that is in consonance with the
basic principles of Islamic sharia. The first model of Islamic banking system came into picture in 1963 in
Egypt. By the end of 1970,several Islamic banking systems have been established throughout the Muslim
world, including the first private commercial bank in Dubai(1975),the Bahrain Islamic bank(1979) and the
Faisal Islamic bank of Sudan(1977).

2.4 Islamic financial instruments

Some of the more popular instruments in Islamic financial markets are

Trade with markup or cost-plus sale (murabaha). One of the most widely used instruments for short-
term financing is based on the traditional notion of purchase finance. The investor undertakes to supply
specific goods or commodities, incorporating a mutually agreed contract for resale to the client and a
mutually negotiated margin. Around 75 percent of Islamic financial transactions are cost-plus sales.

Leasing (ijara). Another popular instrument, accounting for about 10 percent of Islamic financial
transactions, is leasing. Leasing is designed for financing vehicles, machinery, equipment, and aircraft.
Different forms of leasing are permissible, including leases where a portion of the installment payment
goes toward the final purchase (with the transfer of ownership to the lessee).

Profit-sharing agreement (mudaraba). This is identical to an investment fund in which managers handle
a pool of funds. The agent-manager has relatively limited liability while having sufficient incentives to

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perform. The capital is invested in broadly defined activities, and the terms of profit and risk sharing are
customized for each investment. The maturity structure ranges from short to medium term and is more
suitable for trade activities.

Equity participation (musharaka). This is analogous to a classical joint venture. Both entrepreneur and
investor contribute to the capital (assets, technical and managerial expertise, working capital, etc.) of the
operation in varying degrees and agree to share the returns (as well as the risks) in proportions agreed to
in advance. Traditionally, this form of transaction has been used for financing fixed assets and working
capital of medium- and long-term duration.

Sales contracts. Deferred-payment sale (bay muajjal) and deferred-delivery sale (baysalam) contracts,
in addition to spot sales, are used for conducting credit sales. In a deferred-payment sale, delivery of the
product is taken on the spot but delivery of the payment is delayed for an agreed period. Payment can be
made in a lump sum or in installments, provided there is no extra charge for the delay. A deferred-delivery
sale is similar to a forward contract where delivery of the product is in the future in exchange for payment
on the spot market.

3. The Contribution of Islamic Banking to Economic Development

The goal of Islamic banking and finance is to bring greater justice and strive to achieve socio-economic
development. Islamic financial system can serve as a tool to foster economic growth and human well-
being. Promoting risk-sharing instead of debt-financing, reduces poverty and inequalities which are the
necessary objectives of that need to be addressed by economic development policy makers. Islamic banks
handle fund from sever to investors through Islamic modes of finance.

Islamic modes of finance are designed to facilitate financing by the principles in Islamic Sharia, such as
Murabaha, Musharaka, Ijarah, Istisna and Salam. In addition financial intermediation is an important
indicator of economic development as well as economic growth. The objective of this study is to
determine the relationship between Islamic modes of finance and Islamic financial intermediation, and its
relation to financial stability in Islamic banks. So that to choose the most successful mode that should be
encouraged to apply in Islamic economy. After international financial crisis most of the works in Islamic
finance field focuses on the financial risk and financial stability of the Islamic banks, therefore to avoid
mistakes which was took by conventional financial system. However the main goal of Islamic bank to
enhance social justice and human being of the Muslim through successful financial intermediation that
can lead to economic development, poverty alleviation, wealth distribution.

This study tries to investigate causal relation between Islamic modes of finance and economic growth,
financial stability at the same time. Hence to choose which of Islamic modes of finance should be
encouraged by supervisors and policy makers to apply in Islamic financial system.

With global markets suffering from extreme turbulence in the wake of the credit crunch and subsequent
banking crisis, it is the time to examine the merits of an alternative banking model which adopts a different
attitude to risk and finance, based on the principles of Shariah1 . Islamic Banking had grown substantially
in the decade. The recent financial shocks and volatility will provide a good opportunity for the sector as

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Non-Muslim bank customers opt for the relative safety of institutions based on the principles of Islam.
Islamic banking and finance is well and truly established as one of the worlds fastest-growing economic
sectors. Islamic banks provide a variety of products, including: Murabaha, Ijara, Mudaraba, Musharaka, Al
Salam and Istitsna'a, restricted and unrestricted investment accounts, syndications and other structures.
Islamic finance essentially promotes financial transactions with links to the real economy and abstains
from financing activities that are detrimental to society. It supports financial inclusion by offering
instruments suited to different socioeconomic groups. Apart from Islamic banking that meets the normal
retail needs of consumers (e.g. mortgage and automobile financing, savings accounts), it also serves small
and medium-sized enterprises. Moreover, there are institutions that help improve the livelihoods of low-
income groups by offering Shariah-compliant microfinance products based on profit-sharing. Islamic
finance is ultimately founded on the principle of partnership and cooperation, which calls for a system of
equity participation and risk-sharing. Such a system should promote equal distribution of risk and
cooperation between the providers of funds (investors) and the users of funds (entrepreneurs). Islamic
finance is community-oriented and entrepreneur-friendly, emphasizing productivity and the physical
expansion of economic production and services. Hence, it shifts the overall focus from financial collateral
or the financial worth of a borrower (the current predominant practice) to the entrepreneurs
trustworthiness and the projects viability and usefulness. This feature has important implications for the
distribution of credit risk as well as systemic stability. Islamic finance, therefore, falls under ethical finance.
Both are concerned with the impact of financial decisions on society and attract ethically-sensitive
investors. The 2008 financial crisis led to difficulties in many conventional banks across the globe. Islamic
banks, in contrast, were largely insulated from the crisis their highly regulated operational environment
guided by Shariah principles prohibited investment in the type of instruments which adversely affected
conventional banks and which prompted the crisis. The impressive growth rate of Islamic finance and its
1The Path, term of Islamic law consists of Islamic instructions based on the Holy Quran and Sunnah.
Journal of Applied Economics and Business 53 stability during financial crisis attracts the attention of many
policy makers and financial experts worldwide. Islamic finance will grow with rapid pace in the year 2014
and its volume will pass through US $ 2 trillion where Islamic banking keeps 78%, Sukuk 16%, Takaful 1%,
Islamic Funds 4% and Islamic Microfinance has 1% share in the Islamic Finance industry. In 2014, Dubai
and London will be in competition to be the global hub of Islamic Banking and Finance, while Kuala Lumpur
will also attempt to be in this contest but the Islamic finance industry can be grown more through
synergizing approach and alliance with industry stakeholders rather than setting any competition. These
views were expressed by Islamic Finance expert, Mr. Muhammad Zubair Mughal, CEO - Al-Huda Centre of
Islamic Banking and Economics (CIBE) during an analysis on Islamic finance industry in the beginning of
2014. He said that the Islamic finance industry growth will go on double digit in 2014, which will turn the
US $ 1.6 FIG:ISLAMIC FINANCE ASSETS,2000-2011

trillion volume of Islamic finance industry in December 2013 to US $ 2 trillion by the end of 2014 including
North African countries (Tunisia, Libya, Morocco, Senegal and Mauritania etc.), rising trends of Islamic
finance in Europe and UK, also the rising and substantial share of international market of Sukuk shall
contribute to it. It is anticipated that India and China may step towards the Islamic finance in 2014 where
more than 200 million Muslim populations are in search of a compatible financial system with their
religious beliefs and thoughts. He said there is no doubt that international financial crisis will not hit the
Islamic finance industry but due to the Arab Spring, Islamic finance industry has faced recession in some
countries of MENA but there are chances of their revival in 2014 (Zawya report, 2014). FIG.1 ISLAMIC
FINANCE ASSETS, 2000-2011 (Deutsche Bank, 2011) Mosab I. Tabash, Raj S. Dhankar Islamic Banking and

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Economic Growth: An Empirical Evidence from Qatar 54 JOURNAL OF APPLIED ECONOMICS AND
BUSINESS, VOL.2, ISSUE 1 MARCH, 2014, PP. 51-67 Despite the financial crisis, which has plagued the
economies of both industrialized and developing nations, the Islamic finance industry has been
flourishing, and has enjoyed 29% growth in assets to reach more than US $ 600 billion in 2008 (Figure 1).
Despite there are many studies examining the relationship between conventional finance and economic
growth, the studies that examine the relationship between Islamic finance and economic growth are not
too many.

3.1 Role of Islamic Banking in Economic Development 0f Bangladesh:

Islam contains comprehensive disclosure on the various aspect of development. The fundamental of Islam
such as aqidah (belief and faith), ibadah (worship and zakah) and akhluk (morality and ethics), muamalaat
(transactions and contracts) and husn-e-muasharat (manner and etiquette) being Islamic legal code are
not subject to change, their manifestation in secondary areas like economics, business and other worldly
activities would require flexibility and development according to time and space . This is embodied in
Islamic shariah which is central to overview of Islam. Islam encompasses a broader meaning embracing
the taqwa (God consciousness) dimension.

The Islamic Shariah attempts to maximize the social welfare. Banking efforts will continue to maximize
the welfare of the stakeholders and society. Banking sector introduced social responsible approach
instead of profit maximizing one, which create wealth and job opportunities for the nation. Islamic
banking calls for high standards and ethical behavior by both lenders and borrowers. Those who are
wedded to western banking may take lessons regarding welfare from the Islamic banking system.

Economic development is a development of social structure; upward movement of the entire society.
Economic development is the process of creating wealth through the mobilization of human financial
capital, physical and natural resources to generate marketable goods and services.- American Economic
Development Council (1984)

Islamic banking is a financial system whose aim is to fulfill the teachings of the Holy Quran, operate on
principles of Shariah strictly avoiding interest including profit and loss sharing and directly involved with
core values and social justice.Islamic bank is a financial institution whose statutes, rules and procedures
expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and
payment of interest on any of its operations OIC

The Third World developing country like Bangladesh faces a lot of challenges including poverty,
overpopulation and vulnerability to climate change. Bangladesh has also been decreased its dependency
on foreign grants. On the other hand, Bangladesh could attracts foreign direct investment.it is noted by
the international community for its progress on Human Development index. Bangladesh is identified as a
Next Eleven economy after BRICS by Goldman Sachs.

Poverty, unemployment, hunger, malnutrition, illiteracy, gender discrimination and diseases are the
major concerns in Bangladesh. It is a densely populated country, and therefore, it is hard for the
government to provide adequate food, clothes, shelter, health, and education for its citizens.

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Banking in the modern world has adopted many, innovations but very recent and most remarkable
innovation has been the system of Islamic banking. A bank is a financial institution where people secure
their money and use this institution as a source of possible finance. Banking in the form in which it exists
now-a-days is comparatively of recent origin. Before the advent of modern banking, direct finance, where
the owner of capital deals directly with the user of capital, was the customary mode of transference of
funds from savers to investors. Nowadays, banks are organizations engaged in various functions i.e.,
receiving, collecting, transferring, paying, lending, investing, dealing, exchanging, and servicing money and
claims to money both locally and internationally.

Bangladesh is a country suffering from immense social, political, economic and environmental issues and
these issues need to be addressed for the overall development of this country. However, the economic
development is one of the prime factors, which can resolve many of its current problems. Bangladesh has
been facing severe economic problems; this country has a per capita income of only US$923 (Bangladesh
ministry of finance 2013) feeding 160 million people with a piece of land measuring 147570 square
kilometers is really challenging having an annual budget of US$28.52 billion.

This country is struggling to meet the basic needs for its citizens. The growth of business sectors and open
market economy has created a great opportunity for Bangladesh for its development. The contribution
of the banking sector is playing significant role in the development of this country. However, the
emergence of Islamic banking in Bangladesh has added a new height in the banking sector. The role of
Islamic banking seems to be magnificently surpassed among all the Banks in Bangladesh during last three
decades.

It is often argued by some western scholars that the Islamic worldview supports a mentality and value
system which attributes little importance to individual performance and responsibility, effectiveness and
efficiency or material well being. Muslim are more concerned with the life in the hereafter. They belief in
a kind of predetermination and all this components lead in total to a fatalistic attitude which seriously
obstructs economic development. (Volker Nienhaus: 2006)

Islamic banking are become the fastest growing segments in the international financial system. Islamic
banks showed stronger resilience during the global financial crisis due to their anchoring in the real
economy and barring from investing in financial derivatives. Global financial crisis-causes of greed,
interest, gambling, speculation and corruption. Role of speculation is the formation of the crisis. Moral
failure is the one and only origin of the crisis. Interest is the root of all exploitation.

In general, Islam forbids all forms of economic activities which it perceives to be morally or socially
degrading or harmful to others. The fundamental rule of Islamic banking is the prohibition of charging
interest, speculation, contractual uncertainty and transactions that prove to be advantageous to one party
at the expense of other. According to the shariah law, one is not allowed to make money from money, to
be involved with alcohol, gambling and pornography. In short, wealth is to be generated only through
legitimate trade and investment in assets pursuing shariah principles.

At present more than 430 Islamic banks and 10,000 Branches are providing their banking services under
Islamic framework in more than 75 countries of Asia, Africa, Europe and America. In 2008 the size of the
global Islamic banking industry was estimated about $820 billion. The size of the industry crossed $1.6
trillion by 2012.

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To understand the contribution of Islamic banking in economic development of Bangladesh, it would be
appropriate to have a brief overview of the total banking context of the country vs Islamic banking. By the
end of March, 2013, there were 8 full-fledged Islamic banks and 15 conventional banks with 20 Islamic
banking branches and 25 Islamic banking windows operating in Bangladesh. Since then 23 banks have
come up with 800 Islamic banking branches with a manpower of 0.023 million, operating in quick
succession and another five Banks are in the pipe line. Despite the regulators restriction of new licenses
the industry has been growing at 20% p.a. The industry watchers feel that if this rate of growth continues
Islamic Banking in Bangladesh will be the mainstream banking by the year 2025. (Huq, M.A.-2011)

3.2 Overall Banking Context of Bangladesh

There are 8 Islamic Commercial Banks namely Islami Bank of Bangladesh Limited, Al-Arafah Islami Bank
Limited, Shahjalal Islami Bank Limited, First Security Islami Bank Limited, Export Import Bank of
Bangladesh Limited, Social Islami Bank Limited, ICB Islamic Bank, Union Bank Limited. Comparative
operating profit of conventional banks vs. Islamic for jan-june 2012-2013.

The half-yearly performance of 5(five) out of 6(six) Islamic banks have been done better by contrast
3(three) out of 12(twelve) of conventional banks have been done better than the previous session and
IBBL has been transcended beyond the expectation and this bank is continuing great performance in
banking sector.

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 Market Share of Islamic Bank
40

35
Contribution

30

25

20

15

10

0
DEPOSI INVEST REMITT INDUST COMME AGRICU REAL TRANSP
IMPORT EXPORT
T MENT ANCE RIAL RCIAL LTURAL ESTATE ORT
Series 1 18.3 21 24.7 25.5 37.3 19 23.8 3.3 20.9 13.3
Axis Title

DEPOSIT INVESTMENT IMPORT EXPORT REMITTANCE

INDUSTRIAL COMMERCIAL AGRICULTURAL REAL ESTATE TRANSPORT

Islamic banks show commendable strengths in their operation. Rate of growth of Islamic banking in
Bangladesh is remarkable by its market share in the economy. In 2011, market share of Islamic banks in
deposit, investment, import, export and remittance is recorded as 18.3%, 18.5%, 24.7%, 25.5% and
37.3%respectively.

Islamic banking contributes one fifth of the banking sector in the country. By the end of March, 2013,
Islamic banking retained more than 32.05% and 21.35% of total deposit of private commercial Banks and
scheduled Banks respectively amounting toTk.10788.99 billion and 32.83% and 21.68% of total
investment (loans and advances) of private commercial Banks and scheduled Banks respectively
amounting to Tk. 9506.47 billion with 19% in industry, 23.8% trade, 3.3% agriculture, 20.9% real estate
and 13.3% transport market share of the banking system.

Islamic banking has invested in a wide range of areas that not only reduced the risk of investment, but
also providing services to a large number of citizens in the country as well as its citizens working abroad.
The above study has portrayed a picture of Islamic bankings role in the socio-economic development of
Bangladesh. If this trend remains continued, Islamic Bankings contribution will impact upon the social

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and environmental sectors, in addition to the economic well being of the country. This can be inferred
from this study that this development of Bangladesh will benefit Bangladesh citizens and their future.

The fundamental objective of Islamic banks is not necessarily the elimination of Riba alone, but also to
establish socio-economic justice and growth. Islamic banks have popularized zakah (net transfer of wealth
from rich to poor) as a social movement. Muslim who possess minimum net worth above his basic needs
(nisab) to pay zakah (2.5 percent of the assets that have been owned over a year) The Riba based system
has failed, and measurably failed to achieve that particular objective. Rather, it has led to widening the
gap between the haves and have-nots and also it has led to misallocation of scarce resources of the
developing Muslim world.(Hamid M.A-1989)

The concept of the Islamic economic system as described in all its aspects focuses on the worship of the
creator, which includes mans duty to develop live on earth, thus securing a decent standard of living for
the individual. Islam stresses that man is the principle agent for developing life on earth, and hence the
development of man is a required condition for the development of society. (EL-Ghazali 1994)

The large number of economic ills, including poverty, social and economic injustice, inequality of income
and wealth, economic instability and inflation of monetary aspects are all in conflict with the value system
of Islam.

It is the responsibility of the money and banking system to contribute the achievement of social-economic
development and hence eliminate such economic ills. the principle goal and functions of the Islamic
banking system include economic well-being with full employment and maximum rate of economic
growth, equal distribution of income and wealth and as a result socio-economic justice and the generation
of sufficient savings and their productive mobilization and stability in the value of money.

4. Sharia Banks That Fund Terrorism

The relationship is simple. Jihadists know they can trust sharia-compliant banks to maintain their
anonymity, not ask too many questions, and facilitate high-dollar transactions on behalf of their terrorist
groups. A recent report of the US Senate Permanent Subcommittee on Investigation, a Congressional
watchdog panel, has revealed a highly disconcerting development. The report released on July 17, 2012
stated that two Bangladesh based banks, Islami Bank Bangladesh Ltd (IBBL) and Social Islami Bank Ltd
(SIBL), were involved in terror financing.

According to the report the British banking giant HSBC supplied dollars to IBBL and SIBL despite evidence
of their links to terror financing. HSBC did not submit these two banks to enhanced monitoring for

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suspicious transactions despite recommendation by HSBCs own Financial Intelligence Group (FIG).
Moreover, SIBLs ownership stakes were held by two terrorist organizations.

The US Senate report exposed HSBC's internal governance failure to control flows of suspect funds. The
report further mentioned that Saudi Arabias Al Rajhi Bank was involved in suspicious transactions. When
IBBL wanted to open a US dollar account with the HSBCs US office, questions were raised about the Saudi
bank Al Rajhi's 37 percent ownership in IBBL.

The report pointed out that Al Rajhi Bank was associated with IBBL that provided an account to a
Bangladeshi national who had been accused in terrorist bombing. IBBL was fined three times for violating
anti money laundering requirements in connection with providing banking services to the Islamic
militants.

It further pointed out that Saudi Arabias Al Rajhi Bank provided a correspondent account to SIBL whose
largest single share holder had been the Saudi based NGO International Islamic Relief Organization (IIRO)
for many years. IIRO had been implicated in terrorist financing by the US administration and included on
the list of those prohibited to do business in the US.

A second shareholder of SIBL was the Islamic charitable society Lajnat-al-Birr-al-Islam also known as
Benevolence International Foundation (BIF) that has also been designated by the US administration as a
financier of terrorism with whom US nationals are prohibited from doing business. BIF was among the 20
main financiers of al Qaeda.

IIRO had accounts with both IBBL and SIBL, the report revealed. It said two shareholders of SIBL -- IIRO
and BIF-- had links to terrorism. IIRO has also reportedly funded al Qaeda directly as well as several of its
satellite groups. Osama bin Laden's brother-in-law Mohammad Jamal Halifa headed the Philippine branch
of the IIRO, it said.

IBBL which ranks among the top three banks in South Asia has 60% of its shares owned by Saudi
institutions and individuals. UAE, Kuwait and Qatar are also share holders of this bank which is also
inextricably associated with Al Rajhi Bank of Saudi Arabia. IBBL started functioning in Bangladesh in 1975
at the initiative of the then Saudi Ambassador to Bangladesh Al Fuyad.

Over the years IBBL has become the back bone of financial resources of the Islamic militant groups
operating in Bangladesh including Jamaat-e-Islami (JEI), widely known to be the fountainhead of Islamic
fundamentalism in the country.

The rise of Islamic fundamentalism is intricately linked to the funding received by the militants from their
financial backers, sympathizers and associates. One important aspect in this regard has been assessed to
be the role played by the fast expanding Islamic banking market.

One estimate has put the Islamic banking segment in Bangladesh as growing at almost 20%, twice the
average for the entire industry in the country. Reputed multinational banks including HSBC have evinced
keenness to participate in programs under Islamic banking segment in Bangladesh. At present IBBL
remains a customer of HSBCs two dozen affiliates.

According to a report of HSBC's Financial Intelligence Group (FIG), Shaikh Abdur Rahman, chief of
Bangladesh's terrorist outfit Jamiatul Mujahideen Bangladesh (JMB), and his deputy Siddiqul Islam alias
Bangla Bhai had accounts with IBBL.

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Earlier, Bangladesh Bank, central bank of the country, found that two branches of IBBL had been engaged
in suspicious transactions and it urged IBBL to take action against 20 bank employees for failing to report
suspicious transactions. Six top Islamic militants including JMB chief Shaikh Abdur Rahman and his deputy
Siddiqul Islam alias Bangla Bhai were executed in 2007 for killing two judges.

Earlier these two JMB militants spearheaded a movement for introduction of Allahs rules and Islamic law
in Bangladesh saying socialism and democracy were the methods of infidels and these have no place in
Muslim land.

After the synchronized country wide bombing in Bangladesh on August 17, 2005 by the militant Islamic
outfit JMB, the role of IBBL in promoting religious militancy came under the scanner. The Home Ministry
formed a committee to investigate terror financing following a Bangladesh Bank report mentioning cases
of dubious transactions in IBBL.

Subsequent to the arrest of JMB chief Shaikh Abdur Rahman and his second in command Bangla Bhai and
seizure of some banking documents, the investigation team found lapses in banking norms and suspicious
transactions with IBBL branches in Sylhet, Gazipur and Savar where violation of regulations specified in
Anti Money Laundering Act came to notice.

Subsequent to the probe, IBBL was pressurized to suspend the managers of its three branches at Sylhet,
Gazipur and Savar for their involvement in suspicious banking transactions.

Information that IBBL and SIBL have links with terror financing, assume significance as it comes from the
US Senate Committee report. Given that terrorist financing must be high on the agenda of counter
terrorism activity of any country, this comes as highly disconcerting news. Taking advantage of the weak
internal governance of the US branch of HSBC, these two banks have been routing funds to different
international network suspected to have terrorist links.

18 | P a g e
Some more information about terror financing in Bangladesh has grabbed attention. IBBL provides JEI an
opportunity to launder money from abroad and also channel un-audited funds to various militant groups
in the country and abroad. Islamic Bank Foundation (IBF), a JEI floated organization oversees all the
projects of IBBL and profits generated by it and the interest / commission accrued on foreign donations
goes to the IBBL account of IBF.

The IBF is headed by Mir Qasem Ali, JEI Executive Committee member and Country Director of the Saudi
based Islamic NGO Rabeta-al-alam-al-Islami that funds a number of projects in Bangladesh. Mir Quasem
Ali, the main brain behind JEIs finances, is now in jail facing trial on war crimes charges. He remained
Director of IBBL for a number of years since its inception in 1975.

Some transactions of the Kuwait based international Islamic NGO Revival of Islamic Heritage Society (RIHS)
whose bank accounts in Pakistan were seized following the al Qaeda attack on Twin Tower (September
11, 2001), came under scrutiny of the Bangladesh intelligence agencies that were tasked to investigate
terror financing in the country following country wide synchronized bomb blasts.

An account of RIHS in IBBLs Uttara branch in Dhaka was closed in 2006 after the intelligence agencies
found specific evidence of terror financing from this account. In November 2005, the RIHS had released a
sum of Tk 2 Crore from this account to facilitate the advent of suicide bombers in Bangladesh. Moreover
the Bangladesh intelligence agencies also found out in course of investigations that two RIHS officials
channelised US $ 700,000 to local and foreign terrorist groups.

SIBL, on the other hand, has been carrying out Shariah based Islamic banking in the country for quite some
time and has also in course of time developed linkages in India. Executive Vice President of SIBL, Shawkat
Ali was apprehended by Kolkata Police and he was expelled from Kolkata in August 2006 for his
involvement in undesirable and suspicious activities. SIBL is suspected to be engaged in routing funds to
reach Kolkata and from there to other destinations in India and abroad. Main patrons of SIBL are known
to be from the Middle East.

The Saudi based Islamic NGO Al Harmain Islamic Foundation which remained associated with Al Qaeda
funding and which had set up its office in Dhaka, was known to operate its bank accounts through Al
Arafah Islami Bank in Dhaka. The main source of funding of this NGO had been from the royal family of
Saudi Arabia. Following the recent bomb blasts in Saudi Arabia and dismantling of its network by the Saudi
Government, the outfit came under extensive scrutiny.

Thereafter the Saudi Government requested Bangladesh authorities to ban Al Harmain Islamic Foundation
and confiscate its bank accounts and properties. Bangladesh Bank later found that huge funds were
transferred from Al Harmains account in Al Arafa Islami Bank, Rangpur and Coxs Bazar branches, through
telephonic instructions to persons who immediately withdrew the amount.

IBBL, SIBL and other Islamic banks operating in Bangladesh have been running their operations under the
command and overall supervision of Shura Council comprising some so called Islamic clerics despite the
fact that Bangladesh Bank ordered all Islamic banks to operate under authorization of a Governing Board
to be nominated by it. In February 2006, under persistent pressure from the JEI which was then a
constituent partner of the BNP led ruling alliance, Bangladesh Bank revised its order and finalized some
guidelines for Islamic banking making the provision for Shura Council optional. Currently there are no

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separate guidelines for Islamic banking in the country. Of late, the International Monetary Fund (IMF) has
been putting pressure on the Bangladesh authorities to frame laws on Anti Money Laundering and
Combating the Financing of Terror (AML/CFT) as well as stepping up surveillance.

The preceding BNP-JEI Alliance government decided in 2006 to privatize one of the major state owned
commercial banks, Rupali Bank, estimated to be worth US $ 2 bn. The Saudi prince Bandar bin Sultan bin
Abdul Aziz al Saud was poised to take over control of Rupali Bank in exchange for investing US $ 6 bn in
Bangladesh. But, the Army backed Caretaker Government of Bangladesh that ruled the country during
2007-08 cancelled the deal with the Saudi prince in March 2008 for the latters non-compliance with the
terms of agreement over payment. With the cancellation of the deal the possibility of un-audited Saudi
funds being channelised in a more direct and unregulated manner to promote Islamic terrorism in the
Indian subcontinent has been thwarted.

5. Logical Discussion

In spite of the cases of certain Islamic banks being involved in some way in financing terrorist
activity, there is little proof that the Islamic banking industry is connected to terrorism any more
than are conventional banks. Furthermore, the recent surge in the Islamic financial sector is due
to the growth in petroleum-related wealth, a Muslim piety, and portfolio diversification. Islamist
groups, particularly the Muslim Brotherhood, have played an active role in the spread of Islamic
banking, but the industry seems to be moderating many would-be extremists and increasing the
financial opportunities for much of Islamic society. This does not mean, however, that there are
not aspects of the industry that should be monitored. Like conventional banks, Islamic banks
must be wary of and report transactions that seem out of the ordinary or are for nefarious intent.
The authoritarian states of the Middle East and North Africa tend to be more open economically
than politically. Consequently, Islamic financiers have greater access to the government and
business elites than other Islamists, enjoying a greater degree of autonomy than political parties.
While states may permit Islamic banking as a means of improving legitimacy with its Muslim
constituency, the bridging capability of Islamic financiers between the state and businesses could
help precipitate social and economic change in these illiberal countries. Islamic bankers tend to
promote a more politically neutral form of Islamism that has a greater chance of being
tolerated than the more militant forms associated with the Islamist movement.207 The Islamic
banking experience has been different for all countries, especially in the Persian Gulf. While seen
as a force of moderation, it has been used as a tool for advancing Islamism, though a socially-
focused, non-violent form. The popularity of Islamic banking with the general Muslim populace
is due to sharia-compliant business practices being more attractive than interest-driven
conventional banking.Contrary to the idea of Islamic bankings nefarious connections, Malaysia
hasused this new financial sector as a means of providing jobs to many of its Islamists who were

20 | P a g e
graduates in religious studies, turning them away from the path of revolution.209 This was also
the case in many parts of the Middle East. Although groups like the Muslim Brotherhood used
Islamic banks as a tool for advancing their Islamic agenda, there is little evidence to connect the
more socially-concerned agendas or the actual deposited funds with terrorism. Additionally, the
more salutary effects of giving the potentially-radicalized Islamists financial opportunities and
involving the traditionally disenfranchised members of society in the modern financial system
more than outweigh the anecdotal suspected involvement of Islamic banks in financing
terrorism. This being said, one must be aware that the forces of capitalism seem to be tempering
an Islamist ideology that tends to be anti-western.A synergy that has developed between the
rising Islamic capitalists in the Muslim world and the ulama could grow into one that is capable
of persuading Muslims to turn their backs on the extremist theories of jihad. While not
transforming the spirit of puriIsla Islamic banking is providing a pious alternative to devout
Muslims who may prefer to forsake politics for business. One could argue that Islamic banking
is a means of enfranchisement for the previously disenfranchised Muslim who may have been
attracted to a more radical form of Islamism as an outlet for his economic, if not political,
grievances. Islamic financiers may be taking the first step toward building the civil societies
necessary for building democratic institutions in authoritarian states. 210 The United States
should abandon its unfounded fears of Islamic banking and its supposed ties to terrorism and do
all that it can to bring this nascent financial industry into the international system. As a means of
leverage, it could alter its laws to make Islamic banking possible in the United States in return for
greater scrutiny of operations abroad. The zakat collection must be more closely monitored to
ensure that the collected funds are flowing to legitimate charities that do not support terrorism.
Additionally, although hawala is not inherent to Islamic banking, most of its operations take place
in.

6. Conclusion

In spite of the cases of certain Islamic banks being involved in some way in financing terrorist
activity, there is little proof that the Islamic banking industry is connected to terrorism any more
than are conventional banks. Furthermore, the recent surge in the Islamic financial sector is due
to the growth in petroleum-related wealth, a Muslim piety, and portfolio diversification. Islamist
groups, particularly the Muslim Brotherhood, have played an active role in the spread of Islamic
banking, but the industry seems to be moderating many would-be extremists and increasing the
financial opportunities for much of Islamic society. This does not mean, however, that there are
not aspects of the industry that should be monitored. Like conventional banks, Islamic banks
must be wary of and report transactions that seem out of the ordinary or are for nefarious intent.
The authoritarian states of the Middle East and North Africa tend to be more open economically

21 | P a g e
than politically. Consequently, Islamic financiers have greater access to the government and
business elites than other Islamists, enjoying a greater degree of autonomy than political parties.
While states may permit Islamic banking as a means of improving legitimacy with its Muslim
constituency, the bridging capability of Islamic financiers between the state and businesses could
help precipitate social and economic change in these illiberal countries. Islamic bankers tend to
promote a more politically neutral form of Islamism that has a greater chance of being
tolerated than the more militant forms associated with the Islamist movement.207 The Islamic
banking experience has been different for all countries, especially in the Persian Gulf. While seen
as a force of moderation, it has been used as a tool for advancing Islamism, though a socially-
focused, non-violent form. The popularity of Islamic banking with the general Muslim populace
is due to sharia-compliant business practices being more attractive than interest-driven
conventional banking.
Contrary to the idea of Islamic bankings nefarious connections, Malaysia has used this new
financial sector as a means of providing jobs to many of its Islamists who were graduates in
religious studies, turning them away from the path of revolution.209 This was also the case in
many parts of the Middle East. Although groups like the Muslim Brotherhood used Islamic banks
as a tool for advancing their Islamic agenda, there is little evidence to connect the more socially-
concerned agendas or the actual deposited funds with terrorism. Additionally, the more salutary
effects of giving the potentially-radicalized Islamists financial opportunities and involving the
traditionally disenfranchised members of society in the modern financial system more than
outweigh the anecdotal suspected involvement of Islamic banks in financing terrorism. This
being said, one must be aware that the forces of capitalism seem to be tempering an Islamist
ideology that tends to be anti-western. A synergy that has developed between the rising Islamic
capitalists in the Muslim world and the ulama could grow into one that is capable of persuading
Muslims to turn their backs on the extremist theories of jihad. While not transforming the spirit
of puritan Islam, Islamic banking is providing a pious alternative to devout Muslims who may
prefer to forsake politics for business. One could argue that Islamic banking is a means of
enfranchisement for the previously disenfranchised Muslim who may have been attracted to a
more radical form of Islamism as an outlet for his economic, if not political, grievances. Islamic
financiers may be taking the first step toward building the civil societies necessary for building
democratic institutions in authoritarian states. 210 The United States should abandon its
unfounded fears of Islamic banking and its supposed ties to terrorism and do all that it can to
bring this nascent financial industry into the international system. As a means of leverage, it
could alter its laws to make Islamic banking possible in the United States in return for greater
scrutiny of operations abroad. The zakat collection must be more closely monitored to ensure
that the collected funds are flowing to legitimate charities that do not support terrorism.
Additionally, although hawala is not inherent to Islamic banking, most of its operations take place
in Islamic countries. Islamic banks could assist in curbing this system by offering low-cost wire
transfers that are competitive with hawala. With Islamic finance being relatively new to the

22 | P a g e
world of modern finance, there are many areas that could be leveraged to the benefit of the
United States and Islamic banks, advancing into developing regions free of an Islamist agenda.

7. References
Banna, D. N. (2011). Islamic Finance, Money Laundering and Terrorist Financing. ACAMS TODAY, 1-12.

Hachicha, N. (2015). Islamic Banking and Economic Growth. International Journal of Islamic and Middle
Eastern Finance and Management, 52-60.

HGB, B. (2017). Impact of Islamic Modes of Finance on Economic Growth through Financial Stability.
Journal of Business & Financial Affairs, 17-88.

Saad, N. K., Vasquez, M., & Kh, C. E. (2016). Islamic Finance and Anti-Money Laundering and Combating
the Financing of Terrorism (AML/CFT). International Monetery Fund, 23-25.

Terrell, & G, R. (2012). Islamic Banking: Financing Terrorism or Meeting Economic Demand. Homeland
Security Digital Library, 12-24.

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