Islamic Banks Face Uneven Impact From Correspondent Banking Decline -Industry Group

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An industry body for Islamic banks has warned of uneven impact from a decline in correspondent banking, reinforcing concerns that small lenders in developing economies will be most affected from “de-risking” by international lenders.

The Bahrain-based General Council for Islamic Banks and Financial Institutions (CIBAFI) raised the issue in a letter to the Financial Stability Board, which coordinates financial regulation for the Group of 20 countries (G20).

Last month, the FSB said the decline in correspondent banking remains a source of concern with potentially adverse consequences for global trade, financial inclusion and financial stability.

In correspondent banking, a global bank with no branch or network in a given country will typically channel payments there through a local bank that acts on its behalf.

Heightened money laundering enforcement has pushed global banks to cut those relationships in some regions, a policy known as “de-risking”.

Islamic banks in Africa and South Asia were among those most severely affected, with banks in the Gulf and Europe relatively unscathed, CIBAFI said in the letter seen by Reuters.

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