A global body for Islamic finance will prioritize wider adoption of its standards by engaging national regulators in key markets, aiming to tackle divergent practices that risk stunting the industry’s growth.
Islamic finance has grown fast across the Middle East and Southeast Asia in part due to self-regulation, but the approach is now viewed as a barrier to develop transactions that are cheap, quick to design and accepted across borders.
Standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) are used widely in the $2 trillion industry, but they are not mandatory except for a handful of countries such as Bahrain and Oman.
AAOIFI wants to change this by working with regulators in Malaysia, Turkey, Qatar, Saudi Arabia, Kuwait, Indonesia and the United Arab Emirates, which represent the bulk of industry assets, secretary-general Hamed Hassan Merah told Reuters.
“An increase in adoption has a direct link to the qualitative growth of the industry,” said Merah.
In the past month, AAOIFI has signed Borsa Istanbul and the Saudi Arabian Monetary Agency as institutional members.
AAOIFI is in discussions with Borsa Istanbul on their plans to develop a sharia-compliant gold trading platform, while the Saudi regulator is studying adopting several of its standards, Merah said.
The Bahrain-based body will also work with the International Shari‘ah Research Academy for Islamic Finance to explore convergence of AAOIFI standards with Malaysia’s local rules.
Malaysia could be crucial to AAOIFI efforts as it is home to a thriving market for Islamic bonds, or sukuk.
“The initial focus of this study will be to explore how to enhance convergence. This could be one of the most important developments in terms of adoption,” Merah added.
AAOIFI standards typically address financial products offered by Islamic banks and insurers, covering areas such as sharia compliance, accounting, auditing and governance.
Convergence could be difficult because some industry practices are regarded as liberal by some scholars, such as the sale and trading of debt contracts. Islamic banks could also be wary of additional reporting requirements.
But there is growing support to strengthen governance and increase the consumer appeal of Islamic financial products.
An AAOIFI survey of 213 scholars and industry professionals from across 41 countries found 78 percent of respondents favor making AAOIFI sharia standards mandatory.
Even if AAOIFI standards are not mandatory by a national regulator, 82 percent of respondents said Islamic finance institutions should adopt them on a voluntary basis.
