Do Islamic banks gain from corruption and money laundering (ML)?

Abstract

PurposeThis paper aims to examine the impact of corruption and money laundering (ML) on the profitability and stability of Islamic banks.Design/methodology/approachThis study used the data of 53 conventional and 19 Islamic banks of Pakistan and Malaysia to have comparative insights. The empirical methods include the fixed effect and random effect regression and generalized methods of moment for robust results.FindingsThe results indicate that Islamic banks gain from corruption and ML. Corruption and ML affect bank profitability and stability positively in a less corrupt environment, i.e. Malaysia; however, corruption hurts Islamic banks’ performance, and ML favours Islamic banking profitability and stability in a more corrupt environment, i.e. Pakistan.Originality/valueThe present study pioneers the debate on corruption and ML related to Islamic banking profitability and stability. This study provides important insights to regulators and Shariah advisors to build a real model of Islamic banking.