DUBAI, (Reuters) – A police investigation into irregularities at Dubai Islamic Bank and a probe into the bank’s affiliate Deyaar, have led to calls for better compliance and transparency in banks in the region.

Police in Dubai, a regional trade hub and financial centre, have detained seven people, two of whom were former employees of Dubai Islamic Bank, as part of an embezzlement investigation, according to police and public prosecution records.

The high-profile case has triggered an avalanche of local media coverage in the booming oil-exporting states of the Gulf and threatens to mar the image of the nascent Islamic finance sector, which follows the dictates of Sharia law.

“All these latest issues suggest that there should potentially be better compliance. We need better communication and visibility when these situations arise,” Raj Madha, director of equity research at Cairo-based EFG-Hermes, told Reuters.

Islamic finance has grown rapidly in the past few years due to high demand for investments and financial services that comply with Islamic law — which includes a ban on the receipt of interest.

“There should be better supervision over these things,” said Mohammed Yasin, managing director at Shuaa Securities.

Authorities in the United Arab Emirates have responded with several high-profile detentions that have captured the attention of the local media.

The two detainees who used to work for Dubai Islamic Bank are Rifat Usmani, former vice-president, and Omair Mooraj, managing director and head of Islamic banking in the region at JP Morgan Chase, formerly the managing director at a subsidiary of Dubai Islamic.

Lawyers for both Usmani and Mooraj denied any wrongdoing on behalf of their clients when contacted by Reuters.

ISLAMIC BANKS

Dubai has become the defacto financial centre for the Gulf and strives to build a reputation for clear regulations, transparency and low taxes.

“There is a new drive in the UAE which I have seen over the last three to four years, that no one is above the law,” said Essam Al Tamimi, founder and senior partner of Al Tamimi & Company, one of the largest law firms in the Middle East.

“The authorities have the power to investigate whoever breaks the law, whether they be local, British, whoever they are.”

DIB stock has fallen more than 13 percent in the past three months compared to an average 9 percent increase by rival banks in the UAE, according to Reuters data.

The clouds gathering over the Gulf’s third-largest Islamic-compliant bank risks affecting the Islamic finance sector on the whole.

Islamic finance is enjoying rapid growth due to Muslim interest and because some non-Muslim investors view it as ethical investing because of its ban on companies involved in pornography, for example, or alcohol.

“It may have some negative spillover into the Islamic banking brand in general,” Madha said, adding it is “far from clear what is going on”.

“If this is a case of usury, then customers might well ask what the difference is between Islamic and conventional banks,” he said.

Other investors say the impact could spread beyond the Islamic sector and into the quickly growing financial sector in the Gulf overall.

“Being Islamic or non-Islamic has nothing to do with embezzlement. What really matters is that it is a big financial institution which has a lot of presence in Dubai,” said Yasin.

Dubai Islamic assured its shareholders in a statement that the investigation would have no impact on the financial position of the bank.