Correspondent Banking’s Decline Disproportionately Impacts Islamic Banking

A new report by the General Council for Islamic Banks and Financial Institutions (CIBAFI) said the decline of correspondent banking relationships disproportionately impacts Islamic financial institutions (FIs).

Reports in Reuters on Monday (April 16) said CIBAFI’s analysis reinforces concerns that the decline in correspondent banking activity around the world will have a negative impact on small lenders in developing economies. The industry body sent a letter to the G20’s Financial Stability Board, highlighting its findings that Islamic banks in Africa and South Asia are among the most severely affected from the global trend.

Financial institutions have limited their correspondent banking relationships as part of broader de-risking efforts, reports explained. Lower profits, anti-money laundering rules, other regulations and industry consolidation have also contributed to the shrinkage of correspondent banking activity.

“Correspondent banking is an issue of particular importance to our members, few of whom have a global reach and most of whom are in emerging or developing markets,” said CIBAFI Secretary General Abdelilah Belatik in an interview with Reuters. “Because of the countries in which they are based, some have suffered particularly from de-risking by international banks.”

The CIBAFI released a survey of 103 Islamic banks that found a third of them said they have experienced “a significant decline in correspondent banking,” reports said. The group’s analysis found that the impact of this trend on Gulf and European FIs was relatively minor.

Researchers found trade finance and international wire transfers were the services most severely limited as a result of fewer correspondent banking relationships. Islamic banks in Southeast Asia added that cash management services were most impacted for them.

The report follows separate analysis from the International Finance Corporation (IFC), part of the World Bank Group, which found last year that 27 percent of 300 global banks surveyed across 92 countries said their correspondent banking relationships have declined in number, with the decline linked to a reduction in services offered, the IFC found.