US Shuts Pakistan’s Habib Bank Over Terror Financing Concerns, Highlights Sharia Banking Risks

US banking regulators ordered Pakistan’s Habib Bank to shutter its New York office after nearly 40 years, for repeatedly failing to heed concerns over possible terrorist financing and money laundering, officials said Thursday.

Habib, Pakistan’s largest private bank, neglected to watch for compliance problems and red flags on transactions that potentially could have promoted terrorism, money laundering or other illicit ends, New York banking officials said.

The state’s Department of Financial Services, which regulates foreign banks, also slapped a $225 million fine on the bank, although that is much smaller than the $629.6 million penalty initially proposed. Habib has operated in the United States since 1978, and in 2006 was ordered to tighten its oversight of potentially illegal transactions but failed to comply.

New York regulators said Habib facilitated billions of dollars of transactions with Saudi private bank, Al Rajhi Bank, which reportedly has links to al Qaeda, and failed to do enough to ensure that the funds were not laundered or used for terrorism.

“DFS will not tolerate inadequate risk and compliance functions that open the door to the financing of terrorist activities that pose a grave threat to the people of this State and the financial system as a whole,” DFS Superintendent Maria Vullo said in a news release.

“The bank has repeatedly been given more than sufficient opportunity to correct its glaring deficiencies, yet it has failed to do so.” Habib permitted at least 13,000 transactions that were not sufficiently screened to ensure they did not involve sanctioned countries, the agency said.

And the bank improperly used a “good guy” list to rubber stamp at least $250 million in transactions, including those by an identified terrorist and an international arms dealer, regulators said.

In an August letter to the Pakistan Stock Exchange, Habib company secretary Nausheen Ahmad called the proposed fine of $629.6 million “outrageous” and “capricious” and said the bank had decided to close its New York operations “in an orderly manner.”

But DFS said Habib will have to surrender its license after it meets the agency’s requirements.” DFS will not stand by and let Habib Bank sneak out of the United States,” Vullo said.

(Source: http://timesofindia.indiatimes.com/business/international-business/us-ousts-pakistani-bank-amid-money-laundering-concerns/articleshow/60420888.cms)

This move by US authorities again highlights the risks associated with allowing any global Islamic bank to operate in a non-Muslim country.

Cheerleaders for Sharia-Banking in Bharat

There has been a steady drumbeat of support for sharia-compliant interest-free Islamic banking in Bharat since late 2008 when a committee on Financial Sector Reforms, headed by former RBI governor Raghuram Rajan, had stressed on the need for a closer look at the issue of interest-free banking in the country ‘to promote financial inclusion of Muslims’.  This recommendation came after an RBI-appointed working group in 2007, under then executive director Anand Sinha, blocked sharia banking as existing regulations in Bharat do not permit Islamic banks to operate in the country.

Then in 2012, the state-appointed National Minorities Commission led by  Wajahat Habibullah lobbied Bharat’s finance ministry to allow Islamic banking. Considerable pressure was applied on RBI to restructure or amend existing laws “so that they are in conformity with Islamic banking”. In Dec 2015, an RBI committee tasked to study financial inclusion in Bharat recommended that commercial banks may be enabled to open specialised interest-free windows with simple products being offered initially. In 2016, the RBI, under Governor Raghuram Rajan, proposed opening of “Islamic window” in conventional banks for “gradual” introduction of Sharia-compliant or interest-free banking in the country.

Hidden & Creeping Dangers of Islamic Banking

While Islamic banking comes gift-wrapped as ‘ethical banking,’ there are enough examples from round the world which show that sharia supporters usually start with a small window of opportunity, before slowly baring their fangs as they get more established.

A HuffingtonPost article ‘Why India Should Have No Room For Islamic Banking‘ by an Indian-American Muslim writer lists two key problems with sharia-compliant banking –

  •  In order to make the Islamic banking system to work, the bank will find other loopholes to earn a profit from customers while technically not charging interest on a loan. Muhammad Saleem, former CEO of Park Avenue Bank in New York, wrote a book entitled Islamic Banking—A $300 Billion Deception, in which he emphasizes that this kind of banking involves charging interest in an “Islamic garb”. He calls this practice dishonest.
  • Another major flaw of the banking system is the fact that they could deny or fund businesses as they please, based on how they interpret the Qur’an. Those who are not Muslim are subject to unfair business and banking tactics, such as higher costs of sale transactions. By controlling how people spend and manage their money, Islamic banks have an opportunity of spreading radical worldviews amongst others.

The writer concludes by saying “People should be on their guard against Sharia law as a whole and not allow it to creep into the daily facets of their lives.”

In fact, there is another name for ‘interest free’ loans – venture capital. Any entrepreneur today has ample opportunity to approach venture capitalists or private equity investors to raise required capital in exchange for a share in their company. The domain expertise for venture capital is different from that of banking – why mix the two? As it is, Jan Dhan accounts and Aadhar-linked DBT (Direct Benefit Transfer) has done more to achieve financial inclusion in last few years in Bharat than Islamic banking has done since its inception in the Muslim world.

Rather than create a new parallel banking system governed by religious law (shariah), we should educate those Muslims of Bharat who are wary of conventional banks due to religious ignorance.

Modi’s agreement with Saudi Arabia based IDB

In April 2016, during a trip to Saudi Arabia PM Modi’s delegation signed extensive agreements with Jeddah-based Islamic Development Bank (IDB), with key highlights being

  • IDB will establish its first Bharatiya branch in the Gujarat city of Ahmedabad and go on to open more branches in Bharat in the future.
  • It was also agreed that Bharat’s state-owned Exim Bank would extend a US$100 million line of credit to facilitate exports to IDB member countries.

The Islamic Development Bank (IDB) is a multilateral development financing institution located in Jeddah, Saudi Arabia. It was founded in 1973 by the Finance Ministers at the first Organisation of Islamic Cooperation (OIC) meeting. There are 57 shareholding member states, i.e. all the member states of OIC. Saudi Arabia holds roughly a quarter of the bank’s shares and Pakistan is its eight biggest shareholder.

OIC’s stated goal is to “safeguard and protect the interests of the Muslim world.” The stated purpose of IDB is “The purpose of the Bank is to foster the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of Shari’ah i.e., Islamic Law.”

IDB has been directly involved in making payments to families of Palestinian suicide bombers. A 2003 report by MEMRI showed how Saudi royal family funds originating in IDB reached the families of Palestinian ‘martyrs’. The IDB has also channeled UN funds to terror organization Hamas, as documented by bank records discovered in the West Bank and Gaza. IDB founded the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) in 1990, which consists of member entities like Al Rajhi Bank, Kuwait Finance House that were implicated in funding al Qaeda and other Muslim Brotherhood offshoots.

The same IDB is now foraying into a non-member country by announcing setting up of a non-banking financial company (NBFC) in Bharat through its 100% subsidiary Islamic Corporation for the Development of the private sector (ICD).  ICD will operate through a registered office in Mumbai, with prominent businessman & Modi supporter from Gujarat, Zafar Sareshwala, heading its Bharat operations as director.

In April this year, an RTI query revealed that RBI has thankfully not taken any step to introduce Islamic window in banks, nor is there any deadline set for this. One hopes that this better sense prevails and a dodgy, Islamist entity like IDB is prohibited from setting up shop in Bharat.


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