Islamic Financial Institutions and Terrorism Financing : A Perceptional Study

Islamic Financial Institutions and Terrorism Financing : A Perceptional Study Normah Omar Rashidah Abdul Rahman Masetah Tarmizi Accounting Research Institute, Universiti Teknologi MARA ABSTRACT 1 Since the September 11, 2001 attacks on the United States, an explicit objective of the war against terrorism has been the disruption of financial networks of terrorist organizations. Millions of dollars have been seized, charities supporting terrorist organizations have been closed, and assets frozen, but it is still difficult to judge whether the war on terrorism financing is being won. This paper recognizes that terrorist financing and illegal funds intended for terrorist activity has affected the image of islamic financial institutions, which include banks and zakat organisations. In documenting global perception, this study reviews a compilation of news from selected business and research magazines globally that published write ups on Islamic finance, covering a twelve-year period between 1999 to 2010. Negative perceptions on Islamic finance were most visible during the first five years after the 9/11 tragedy. In Malaysia, the introduction of the Anti-Money Laundering and Anti-Terrorism Financing Act (AMLATFA) in 2001 and the establishment of the AML/CFT regime by financial institutions have contributed greatly to a much better perceptions towards Islamic Finance. Visibly, the public perception of islamic financial institutions has been corrected through awareness campaign to reposition the shariah complaint finance and alleviate misconceptions in order to sustain its potential growth. Keywords: terrorism, terrorism financing, islamic banking, public perception of islamic finance, misconception. 1 The authors thank and acknowledge the assistance rendered by Mr Mohd Fuad Arshad from Bank Negara Malaysia and ASP Mohd Noor Firdauz Abdullah of the Royal Malaysian Police to facilitate completion of the research project. 1

Introduction Globally, the growth of the Islamic finance industry over the last three decades has been remarkable. In the early 1980s, the total global market capitalisation of the industry only stood at a meagre USD10 billion. Today, the industry has almost surpassed the three-trillion dollar marks. Despite significant growth over the past decade achieving a significant milestone of USD3 trillion, Islamic Finance industry is virtually insignificant compared to conventional financial industry standards. According to Standard & Poor s report titled Islamic Finance Outlook (2010), a conventional bank with total assets of USD800 billion would rank around 30 th in the list of largest banks in the world, implying that there is no competition in real term between conventional finance and Islamic Finance industry. Hence, there are a lot of potentials for the industry to grow. Although the industry has successfully attracted many investors beyond the Muslim world, the Islamic financial services industry faces some unique challenges. One of the major consequences of the of tragic events of September 11th, 2001 has led to a climate in which anything connected with Islam may be viewed with suspicion. As cited by Ali (2010), a national survey conducted by the Media and Society Research Group at Cornell University in 2004 revealed that 44 percent of Americans believed the American government should suspend some civil rights and use surveillance techniques to spy on Muslim Americans. Two other surveys conducted after the Bali and London bombings in 2005 revealed similar findings. The 2006 ABC News/Washington Post poll for example, revealed that 46 percent of Americans expressed an unfavourable opinion of Islam, nearly double what it was in early 2002. Many Americans believed Islam is prone to violent extremism, and respondents have openly admitted to having prejudicial feelings against Muslims. Another survey conducted by the Pew Forum on Religion and Public Life in 2006 2

has also reported similar findings, where 46 percent of Americans believed Islam was more likely to encourage violence than other religions, an almost twofold increase from the 25 percent it had been in 2002. Within the backdrop of wide potential markets for the Islamic finance industry to grow, its growth has been somewhat thwarted by the 9/11 incidents, hence resulting in many negative perceptions from the public at large. In this study, we attempt to develop a measure to (i) assess the perceptions of the business community to the Islamic finance industry over the 12- year period, (ii) examine the trend of these perceptions and evaluate if the perceptions are marred by any terrorism-related news globally. To fulfil these objectives, this study randomly evaluates a total of 120 research and business articles published by the LexisNexis Corporation, a global database company that pioneered the electronic accessibility of legal and journalistic documents. The top ten articles listed for each of the respective 12-year periods were chosen as sample for the study. This study constitutes a preliminary data collection phase for a much wider study that follows. Premised on the notion that business perceptions of the Islamic Finance industry may be influenced by the 9/11 tragedy, our assessments include articles published within a twelve-year period, between 1999 to 2010. Within these time frames, three other smaller terrorist attacks had taken place in Bali, London and New Delhi. This paper mainly explains the preliminary data collection and discusses research findings obtained from the evaluation of 120 business and research papers published globally between the years 1999 to 2010. 3

Islamic banking growth and challenges in overcoming the terrorism stigma Islamic finance historically has been concentrated in the Gulf countries and Malaysia, but today, it has expanded globally and now active in more than 75 countries worldwide. The great desire by Muslims everywhere to conduct their financial dealings in accordance with Islamic teachings by using banks that do not pay or charge interest, and thus avoiding riba or usury which is forbidden to them has propelled financiers to adjust and adapt Western-style services. Through international and domestic regulatory bodies, there has been effort to standardize regulations in Islamic finance across different countries and financial institutions, although challenges remain. Critics of Islamic finance express concerns about possible ties between Islamic finance and political agendas or terrorist financing and the use of Islamic finance to fund islamic extremist groups. The term terrorism financing came into limelight immediately after the 9/11 event. Following the tragedy, there were several other legislations and standards being passed by the US to mitigate terrorism financing globally. These could possibly aggrevate the situation and further tainted the image of the Islamic finance industry. The first legislation being introduced after 9/11 was USA PATRIOT Act, which was passed by the United States in 2001. It s an acronymn for Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism. Among the immediate reasons for the passing of the Act were firstly to strengthen USA s domestic security; secondly to broaden the powers of law-enforcement agencies with regards to identifying and stopping terrorists; thirdly to mandate financial institutions to adopt measures to counter the financing of terrorism (CFT) and to promote anti-money laundering (AML). Later, the Act included extra-territorial impact by requiring non-us banks who have 4

correspondents banking accounts with US banks to upgrade their AML/CFT governance, failing which may result in possible business or economic sanctions by the US. There have also been attempts by the United States to implicate other various Islamic financial bodies and institutions (e.g. Zakat and wakaf organisations) with involvement in terrorism, either knowingly or unknowingly. These charges have been vehemently and categorically denied. The Financial Action Task Force (FATF) on money laundering was first established during the G-7 2 Summit in 1989. Originally tasked to combat money laundering, the responsibility was later added (following 9/11) to include monitoring terrorism financing of member countries. Today FATF has 36 member countries plus six FATF-style 3 regional bodies. The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. In carrying out its monitoring function, the FATF conducts a five-yearly Mutual Evaluation assessment, which is based on country s compliance of the 40 + 9 Recommendations standard. Indeed, despite such attempts to thwart its development, the Islamic finance industry has continued to grow at a speed that has forced many to study and analyze what is a relatively new phenomena. The reality is that millions of people all over the world are seeking to make money in ways that do not run counter to Islamic teachings and in so doing, Islamic banking has been born and has added a religious element to conventional financial services. By the end of 2012, the global Islamic finance industry stood at an impressive three-trillion US dollar in term of market capitalisation (IFN, 2012). 2 The G-7 is a group of finance ministers formed in 1976 and includes the United States, Japan, Germany, Britain, France, Canada, and Italy. 3 The six FATF regions are Asia / Pacific Group on Money Laundering (APG); Carribean Financial Action Task Force (CFATF); Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL); Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) and South America Financial Action Task Force (GAFISUD) 5

According to a 2010 study by International Financial Services London (IFSL), an independent organization representing Britain's financial services industry, Islamic finance will emerge largely unscathed from the current global crisis, largely because its structures make little or no use of many of the complicated instruments blamed for the current problems in conventional finance, such as derivatives and short-selling. One main hurdle for Islamic finance even in Islamic countries is the perception that Islamic finance is seen as part of a wider agenda by political Islamists, which could threaten and undermine the state itself. Although most Arab governments have been prepared to tolerate Islamic banking, but apart from Sudan, there has been no attempt to convert the conventional banking system to Islamic financing methods through the enactment of relevant legislations prohibiting usury. For example, both the Egyptian and Saudi Arabian governments have been reactive rather than proactive towards Islamic finance, with much indecision as to how best to respond to these experiments in applying Sharia law to modern finance. Another obstacle facing Islamic banking is that although the burgeoning industry enjoys a huge potential, a paucity of regulations and scarce long-term investments along with their relatively small size are all slowing its progress. Economists say Islamic banking is growing but the services offered by these institutions lack Shariah-compatible structured instruments to absorb liquidity. These banks and financial institutions need to establish a global, internationally accepted regulatory system to help ensure continued growth. Countries where these banks are located have also been advised to set up flexible rules and regulations, as well as instruments that can be traded according to Shariah to allow the industry to benefit their economies. 6

Misconsceptions of Shariah finance: The perception s dilemma According to World-Check (the leading global provider of highly structured risk intelligence) analysts, there is probably nothing which can damage the reputation of a financial institution more than the suggestion that it has been used as a conduit to provide funds which have been used to finance a terrorist act. Even if the institution is an innocent participant, the very link of its name to death and carnage can be damaging. So the institution needs as much help as possible to identify and exclude known terrorists from their business but also to stand some chance of clarifying its financial transactions. Although key Western governments (USA, Germany and UK) had some form of antiterrorism legislation already, the terrorist attacks in New York and Washington in 2001 provided the incentive for more robust and wide ranging laws to counter the financing of terrorism (CFT). National legislation and international cooperation is needed to target those who finance terrorist networks, be they charities, businesses, individuals or even states which provide finance and sanctuary to terrorists. Islamic finance has been accused of being a hidden financial flow used by terrorists (Malkin and Elizur, 2002; Goede, 2003; Waszak, 2004). This has brought the issue of Zakat and donation funds, one of the things that distinguishes Islamic terrorists from earlier groups including the Irish Republican Army and Basque separatists is their use of significant funds from legitimate (as opposed to criminal) sources. Much of the money for the September 11th attacks were said to have come from charities and wealthy individuals in the Persian Gulf region, especially Saudi Arabia. While the Saudis have passed a number of laws to crack down on regulation of charities since then, enforcement is uneven. America's Treasury has frozen the assets of 41 aid organizations globally for alleged links to terror groups. But Islam's obligation of zakat, or giving a portion of one's income to the poor, means that law 7

enforcement's efforts have ruffled feathers among governments in Muslim-dominated countries. Another controversial area of focus for counter-terror experts is the global network of informal money-transfer systems (known in some countries as hawalas), which have long been popular with overseas workers sending home remittances. They have come under particular scrutiny since September 11th, but have not been banned in most countries. Experts say hawalas are extremely hard to regulate and still offer one of the cheapest ways for poor people to send money abroad. Nikos Passas (1999), an expert on financial crime at Northeastern University in Boston, says hawalas 4 have had too much attention, given the wide range of fund-raising and transfer methods used by terrorists. A Perception study analysis of selected 120 articles Sample and Criteria This study investigates perceptions of the public and business community towards the Islamic finance industry and explores the impacts of events involving terrorism activities on these perceptions. Using three keywords of Islamic Finance, Terrorism Financing and Perception, the study selected top ten business or research articles for each respective year. The main inclusion criteria being the paper must be at least 2-page in length and it must be written in English. Each article is then assessed based on four-item criteria: (i) Title; (ii) Abstract/Highlights; (iii) Discussions and (iv) Conclusion. Since all the item carry equal weightage, the assessment is then divided into three main categories namely Favourable, Nuetral and Unfavourable. A favourable perception on Islamic finance articles implicates approval and the use of positive words such as advantageous, encouraging, or 4 Hawala is an informal value transfer system based on the performance and honor of a huge network of money brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa, and the Indian subcontinent 8

promising; giving consent. In a nuetral situation, public perception on the articles is not judgemental. Facts may be given, but no conclusion is made on the paper to implicate the author s opinion. An unfavourable perception clearly portrays the author s negative stance on the topic. In the context of this study, the articles clearly mentioned that Islamic finance is a conduit of terrorism financing. To minimise inter-rater biases, each paper is being assessed separately by two researchers. Both researchers must agree to the assessment categories of each paper for it to be included for further analysis. In cases where the two researchers disagree on the status of the assessment category, a third researcher evaluates the article. Table 1 summarizes the performance measures used in the study. Table 1: Measurement of Perceptions No Items Perception Measures Favourable Neutral Unfavourable 1 Title 2 Abstract/Highlights of paper 3 Discussions 4 Conclusions More than 2 positive measures No indication of positive or negative measures More than two negative measures Public perception is further refined to focus on four specific elements of the business and research papers: Title, abstract, discussions and conclusion. Again, measures illustrated in Table 1 are used to assess perception levels. Research Findings Prior to September 11, articles written on Islamic Finance did not portray any specific inclination. For the twenty papers included in the study, the contents were basically neutral in nature. The papers basically explain the concepts of Islamic finance and the focus was just to highlight its presence in the business community. Interestingly, most articles that appeared in business magezines in the USA, Europe and Asia during these periods were generally short and informative in nature. Since the growth of Islamic finance was comparively slower 9

(compared to that after the 9/11 event) during those years, most write ups were in the forms of updates and business news. Those that were portrayed in business magezines were at most, three pages long. Others that were published in professional journals were conceptual in nature. Figure 1 depicts that the terrorist bombings that took place both in New York and Washington DC in 2001 had an immediate effect in business and research reporting on the Islamic Finance industry. 12 10 8 6 4 Unfavourable Neutral Favourable 2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Figure 1: Overall Perceptions on IF Articles for s 1999-2010 Note that the negative perceptions on the Islamic Finance industry were most visible during the first five years of the 9/11 attacks. A Dow Jones newswire published on November 6, 2001 with a flashing title Islamic Banking Reputation Suffers in Wake of Sept. 11 was among the first few articles written immediately after the 9/11 tragedy that tried to implicate terrorism financing with the Islamic finance sector: International efforts to uncover the money trail of terrorists who carried out the Sept. 11 attacks on the U.S. have cast a pall over Islamic banking. The heightened scrutiny come as Islamic banking is already suffering from its investments in sagging technology and media shares and threatens to severely cripple the sector. 10

In a report prepared for the Security Council of the United Nation titled TERRORISM FINANCING: Roots and trends of Saudi terrorism financing, Brisard (2002) propagates that Islamist group such as the al-qaida uses the Islamic banking sector for terrorism financing: Al-Qaida defies the common understandings of traditional terrorism by being able to hide terror behind a visible, mostly legitimate, business cover, using and abusing tools and methods that constitute the basis of Islamic banking, religious donations and modern economic globalization to move and raise money, recruit and train operatives, buy arms and entertain local operational cells able to carry out terrorist attacks around the world. Most write ups during these periods provided detail analysis on possible terrorism financing by Islamic non-profit organizations (NPOs). A research monograph on Terrorist Financing by Roth et. al. (2004) for example named at least three Islamic NPOs in the USA. The report provided detailed case studies on Al-Barakat, Illinois Charities and Al Haramain and how they were linked and financed by the Al-Qaeda group. Another report by Steven Emerson (2002) also gave details on Fund-Raising Methods and Procedures for International Terrorist Organizations. Activities by Islamic organizations such as International Islamic Relief Organization (IIRO) and Muslim World League (MWL) were linked to the infamous Osama Ben Laden. Tables 2 to 5 illustrates public opinions on the Islamic Finance articles as analysed by the four perception measures of title, abstract, discussion and conclusion. In general, titles of Islamic finance articles are perceived more favourably comapred to other elements of the articles. Whilst titles are viewed more favourably at 47.5%, Abstracts are unfavourable at 45%; discussions at 62.4% and conclusions at 49.2%. 11

Table 2: Overall Perceptions on Titles of IF Articles Title of article Frequency Percent Valid Percent Cumulative Percent unfavourable 34 28.3 28.3 28.3 neutral 29 24.2 24.2 52.5 favourable 57 47.5 47.5 100.0 Total 120 100.0 100.0 Table 3: Overall Perceptions on Abstracts of IF Articles Abstract of article Frequency Percent Valid Percent Cumulative Percent unfavourable 54 45.0 45.0 45.0 neutral 25 20.8 20.8 65.8 favourable 41 34.2 34.2 100.0 Total 120 100.0 100.0 Table 4: Overall Perceptions on Discussions of IF Articles Discussions of article Frequency Percent Valid Percent Cumulative Percent unfavourable 77 64.2 64.2 64.2 neutral 15 12.5 12.5 76.7 favourable 28 23.3 23.3 100.0 Total 120 100.0 100.0 Table 5: Overall Perceptions on Conclusions of IF Articles Conclusions of the article Frequency Percent Valid Percent Cumulative Percent unfavourable 59 49.2 49.2 49.2 neutral 24 20.0 20.0 69.2 favourable 37 30.8 30.8 100.0 Total 120 100.0 100.0 12

In comparing the means scores of all four perception measures, Table 6 depicts that Title has the highest score at 2.19. This is followed closely by Abstract of articles at 1.89, Conclusions of articles at 1.82 and Discussions of articles at 1.59. Table 6: Perception Mean Scores of 4-item Variables (Descriptive Statistics) N Minimum Maximum Mean Std. Deviation Title of article 120 1 3 2.19.853 Abstract of article 120 1 3 1.89.887 Conclusions of the article 120 1 3 1.82.879 Discussions of article 120 1 3 1.59.845 Valid N (listwise) 120 Some of the unfavourable sample titles reviewed for this study include, The Obstacles to Supressing Radical Islamic Terrorist Financing Waszak (2005), American Muslim Charities: Easy Targets in the War of Terror, Combating Terrorist Financing in the First Decade of the Twenty-First Century Al-Marayati (2005). Meanwhile, examples of positive and favourable titles include, Islamic Banks and Islamic Financing, The economics of Islamic finance and securitization and Islamic Banks and Financial Stability: An Empirical Analysis. Figure 2 describes public perceptions on the Islamic finance industry when the business and research articles are analysed by the four measures namely title, abstract, discussions and conclusion. Just as the public s perceptions on the Islamic Finance sector was improving, there were at least three bombing incidents that took place within the first five years after 9/11. In 2002, the first Bali bombing had caused further damage and the term Islamiphobia was introduced by the media to instigate hatred towards Islamic Finance and Islam. Three other smaller bombings (Bali, London and New Delhi) took place in 2005 have also somewhat influenced the public perceptions on Islamic finance. 13

35 30 25 20 15 10 5 Conclusions Discussions Abstract Title 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Figure 2: Public Opinions on Articles Analysed by Perception Measures Growth of Islamic Finance Although in essence, the 9/11 tragedy has generally seen to have tarnished the image of the Islamic Finance sector, it was also the same event that had spurred the growth of Islamic Banking globally. Whilst the US was putting a lot of restrains on its financial institutions with more stringent measures to mitigate terrorism financing within its financial system, many rich Arab investors from the Gulf countries moved their oil money which was previously kept in US banks to Islamic financial institutions in Asia. As deliberated by Alam (2007), the consistent oil-money supply from the Gulf region makes Islamic finance attractive even to non-muslim countries. On the same note, McKinsey (2005) predicted that Islamic financial assets are expected to surpass $1 trillion in 2010, which compares with $750 billion estimated for 2006. As evidenced by the analysis, public perceptions on the Islamic Finance sector have improved tremendously after 2005. The two economic crisis in 2007 and 2010 had badly affected USA and European countries. In both situations, the Islamic Finance industry has gained its 14

momentum with double-digit growth rates. At the same time, new Islamic Finance product, such as Sukuk was gaining popularity. The number of Islamic banking institutions have increased tremendously. Nevertheless, despite this impressive growth, the Islamic Finance sector remains relatively smaller than the conventional finance market. Hence, on the positive side, there s a lot of potential for the Islamic finance industry to grow and to tap new market globally. The global economic downturns in 2007 had somewhat changed the public perceptions on Islamic finance. A publication by the Washington Post dated 30 th October 2008 titled Islamic Banking: Steady in Shaky Times, summed it all with the following highlight: Principles based on religious law insulate industry from the worst of financial crisis. As big Western financial institutions have teetered one after the other in the crisis of recent weeks, another financial sector is gaining new confidence: Islamic Banking. Proponents of the ancient practice, which looks into shari ah law for guidance, and bans interest and trading in debts, have been promoting Islamic finance as a cure for the global financial meltdown. Table 7 summarizes some of the business and research reports published during 2008 to 2010 that implicate favourable perceptions of the public on Islamic Finance. Interestingly, some of these reports are written by non-muslim scholars. One special feature of Islamic finance being highlighted in some of these reports is the fact that it does not allow the creation of debt through the direct lending and borrowing of money or other financial assets. The debts can only be created through the sale or lease of real assets through lease-based financing schemes (such as murabaha, ijara, and sukuk). The assets which are leased or sold must be real (building, property, or any other physical infrastructure), and the transactions must be genuine (approved by government regulators, as well as religious experts comprising the Shariah board) with the full intention of giving and taking charge, and 15

the associated debt (risk) cannot be sold or transferred to someone else. Such characteristics of Islamic finance are somewhat different from the conventional banking sector that promotes derivatives and future market transactions. Table 7: Sample Reports on Islamic Finance 2008-2010 No Articles Summary 1 Čihák and Hesse (2008) The relative financial strength of Islamic banks is assessed empirically based on evidence covering individual Islamic and commercial banks in 18 banking systems with a substantial presence of Islamic banking. We find that (i) small Islamic banks tend to be financially stronger than small commercial banks; (ii) large commercial banks tend to be financially stronger than large Islamic banks; and (iii) small Islamic banks tend to be financially stronger than large Islamic banks, which may reflect challenges of credit risk management in large Islamic banks. 2 Gheeraert, L. (2008) Islamic finance is one of the most prominent phenomena over the last decade in the banking industry in the Middle-East and South-East Asia. It has recently spread in non-muslim countries, such as the UK or the US. Globally, assets on the books of Shariah-compliant commercial banks have exceeded 350 Billion USD in 2005 and grown by an average of 29% annually from 2000. After controlling for standard determinants and potential endogeneity, using religion as an instrument, we find strong and significant empirical evidence of a positive role of Islamic banking on countries financial sector development, as measured by private credit over GDP. 3 Lewis, M. K. (2010) It is found that Islamic investment funds have grown rapidly this decade: in Malaysia alone, the number of shari'a-compliant funds has grown from 17 in 2000 to 149 in 2008, and at a global level there are 650 funds in operation.the conclusion reached is that, if the Islamic investment fund industry is to provide more completely for the religious and financial aspirations of investors, it needs to go beyond the negatives and to also accentuate the positive and, drawing upon Islamic governance guidelines, actively seek out investments that have a positive impact on society and the environment and promote the welfare of the community. These issues hitherto have been largely unexplored. 4 Karwowski, E. (2009) Malaysia s structural current account surplus contributes to the overcapitalization of domestic firms. This in turn finances a financial (as opposed to an industrial), consumption led (instead of investment-led) business cycle, where banking favors destabilizing asset price inflation. Islamic banks operating interdependently with conventional ones contribute to economic destabilization channeling surplus funds from the corporate to the household sector. 5 Jobst, A. A (2009) Islamic securitisation in the form of sukuk has grown into a notable segment of global structured finance over the recent past. This paper surveys the unique structural features of the sukuk market and assesses the resilience of shari'ah compliance to the adverse effects of conflicts of interest that became apparent in the US subprime mortgage crisis and the subsequent fallout in global financial markets. This examination also considers recent regulatory changes to the definition of sukuk and current policy considerations of alternative forms of capital-market based refinancing techniques, such as covered mortgage bonds, and the way they relate to Islamic securitisation. The paper concludes with a brief outlook on future challenges and developments in the sukuk market. 16

Conclusion Articles written about Islamic Finance can be divided into three important categories: Pre 9/11; Five years after 9/11 and Post 2007 Global Crisis. Prior to September 11 incident, Islamic Finance literature were mostly found in business magezines. The write ups were not only short, they were basically informative in nature (e.g. Ahmad, 2000; Othman and Owen, 2001). Islamic Finance was seen as one of those business knowledge that one aught know, so as to implicate one remains up-to-date with the latest news. There is a significant spike in the time period that includes 9/11 and the four years following the attacks, where the number of articles containing possible associations of Islamic finance with terrorism increases commensurately. It can thus be said that there is a sudden increase in articles about Islamic finance. The negative effect of 9/11 on selected papers s perceptions towards Islamic finance and of being linked with terrorism finance is well documented. For example Levitt (2002), wrote a paper titled The political economy of Middle East terrorism. Similarly, Schneider s article (2004) The Financial Flows of Islamic Terrorism gave detail illustration on possible financial flow in support of terrorism activities. Many papers (e.g Brisard, 2002; Wilkinson, 2005; Schneider, 2010), have expressed an unfavorable opinion of Islamic finance after the 9/11 terrorist attacks. Almost 57% were accusing islamic finance instruments such zakat, charitable donations and hawala models funnelled directly or indirectly to the terrorists to finance their terrorism-related activities. The tones of most publications during this period were to influence readers to have negative perceptions on the Islamic Finance industry. Subsequently, after two global economic crisis in 2007 and 2010, the tones of many business and research papers related to Islamic Finance have somewhat changed positively (e.g. 17

Comras, 2007; Nazim Ali, 2010; Williams, 2007). Although the Islamic bank sector is still relatively smaller compared to the conventional banking sector, there s a lot of empirical evidences being published either in the forms of business reports or journal articles implicating the its success in facing the economic crisis. In addition, Muslim scholars who are experts in the Islamic finance sector have also contributed significantly by publishing their research works in international journals (e.g El-Gamal, 2004; Mennai, 2004). Their publications have added new frontier of knowledge and have helped to shift public perceptions on the Islamic Finance industry from negative to positive. In conclusion, Islamic finance is a legitimate financial system with various instruments to meet the guiding principles. The system is not limited to Muslims only, it is open to anyone who is looking for an alternative to the interest based system. There is a huge potential market for Islamic finance to thrive, and it is believed that it will compete alongside the existing conventional system in the near future. Its success will be mainly due to the fact it is a profitable system and not so much due to its religious philosophy. Yet, Islamic finance industry is presented with a major challenge to create better awareness in the world at large of the ethical and well regulated business of Islamic finance, besides facing the continuous challenge of misconceptions and negative opinions by linking islamic finance instruments with terrorism financing. Therefore, in the present climate, Islamic banking scholars have to engage with the media to counter attack these perceptional biases. Government should implement a comprehensive strategy to be adopted by regulators, enforcers and Islamic financial institutions to mitigate those negative perceptions implicating terrorism with Islam. 18

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