Islamic banks to charge from the defaulter the rate

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Islamic banks to charge from the defaulter the rate realized by them on their Murabaha portfolio during a specific period. They also recommend that the financial condition of the client be taken into account. Q10. There is a perception in the West and the USA that Islamic banks finance terrorists. What is the true situation? Ans. In the post –9/11 global scenario anti money laundering measures by regulatory authorities of banking and finance have gained extraordinary importance. It is pertinent to indicate in this regard that Islamic banks, by their nature, are less likely to engage in money laundering and other illegal activities. They cannot undertake activities which are detrimental to society and its moral values and have to go
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through an exhaustive test of Shariah compliance. They are not allowed to invest in narcotics, casinos, nightclubs, breweries etc. This requires that the clients of Islamic banking must have business which should be socially beneficial for the society, creating real wealth and adding value to the economy rather than making paper transactions. Therefore, a stringent ‘Know Your Customer’ (KYC) policy is an inbuilt requirement for an Islamic bank. The Governor, State Bank of Pakistan while addressing an international seminar on “The Financial War on Terrorism and the Role of Islamic Banking” held in London on April 7, 8 2003, observed that Islamic modes of financing and deposit-taking discourage questionable/undisclosed means of wealth which form the basis of money-laundering operations. The Islamic banks disclosure standards are stringent because they require the customers to divulge the origins of their funds in order to ensure that they are not derived from un- Islamic means. Islamic financing modes are used to finance specific physical assets like machinery, inventory, and equipment. Further, the role of Islamic banks is not limited to a passive financier concerned only with timely interest payments and loan recovery. Islamic bank is a partner in trade and has to concern itself with the nature of business and profitability position of its clients. To avoid the loss and reputational risk, the Islamic banks have to be extra vigilant about their clientele. As such, Islamic banks are less likely to engage in illegal activities such as money laundering and financing of terrorism than conventional banks. However, the existence of rogue elements cannot be ruled out in any type of organization. Keeping this in view, Pakistan has adopted a strategy by adopting uniform international standards to ensure fair play by all kinds of banks and financial institutions also including Islamic banks. After reviewing its existing systems and procedures, it has developed a multiple-track strategy in its financial war on terrorism and money laundering. It has also put in place stringent regulations in order to effectively curb money laundering. The ‘Know Your Customer’ (KYC) regulation has been sharpened to provide more detailed guidelines to banks/DFI’s for due diligence in respect of customers. All banks are required to properly investigate transactions which are out of character with the normal operation of the account involving heavy deposits/withdrawals/transfers.
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Islamic banks to charge from the defaulter the rate...

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