Bahraini Islamic financial services benefit from adopting international financial standards

Bahrain is home to four international Islamic finance governing bodies, including the Accounting and Auditing Organisation for Islamic Financial Institutions ( AAOIFI). The kingdom is pushing for greater international standardisation in the sector, which is taking place as more and more countries adhere to AAOIFI guidelines; these in turn are being expanded and updated to reflect the growing sophistication of the sharia-compliant financial services market.

Across the Board 

Khalid Hamad, director of banking supervision at the Central Bank of Bahrain, told media at the World Islamic Banking Conference in December 2018 that there was a need for further standardisation of the Islamic finance sector worldwide. He said this was necessary to allow Islamic banks to compete properly, as well as for the segment to develop into a global industry. Hamad believes this could be achieved in part through a greater push by national regulators for the adoption of standards from international industry bodies such as the AAOIFI. Bahrain already adopts rules from the AAOFI by default, though it can issue regulations to override them if necessary.

Standard Setter

Such a trend towards international standardisation appears to be under way in the segment, as a growing number of countries adopt AAOIFI standards. Omar Mustafa Ansari, deputy secretary-general of the AAOIFI, told OBG that some 19 countries and jurisdictions had fully or partially done so by September 2018, while seven more refer to AAOIFI standards as guidelines or have based regulations of their own on AAOFI standards. The UAE, Iraq, Libya and Afghanistan have recently adopted the body’s rules, and although many countries have yet to do this at the national level, Ansari said that most banks in remaining countries do so voluntarily on an individual basis.

New Rules

The AAOIFI had issued 58 standards by September 2018, including four sharia standards in the past two years. These focus on issues including investment manager guarantees, gold and buyback transactions. The organisation is also currently working on an update of its sharia standard on the sale or transfer of debt, which Ansari said could have a significant impact on the segment, given the issue’s importance.

In 2018 the body also issued a standard on external sharia audits – something Bahrain introduced the previous year as part of its new sharia governance module for the sector (see overview). “External sharia audits provide assurance to stakeholders that an Islamic institution is sticking to its requirements,” Ansari told OBG. He noted that the scope and reporting requirements of the AAOIFI standard and Bahraini regulations differ slightly from each other, with the AAOIFI allowing both accounting firms with sharia expertise and specialised sharia auditing firms to conduct audits, while in Bahrain only auditing firms are permitted to do so.

In addition to issuing standards of its own, Ansari told OBG that the AAOIFI is working with other Islamic finance standard-setting bodies to establish common ground rules, including the identification of respective areas of focus, in order to avoid duplication of efforts. One area of interest is setting standards for the Islamic financial technology segment (see analysis). Here the AAOIFI offers certification to software vendors for the suitability of core banking software and other banking solutions, and was in the process of completing its first such certification in September 2018.

Tiered Oversight

A recent trend in Islamic finance has been to establish national sharia boards in addition to individual boards covering each institution. Ansari said he welcomed this development, but warned that central boards were not a replacement for oversight at other levels. “At the AAOIFI we feel that there should be a three-level combination of boards, namely a global board – the AAOIFI itself – a central sharia board in each country and institutional sharia supervisory boards,” he told OBG. “Some industry players have argued for just one centralised sharia board for each country, but in our view, these are not sufficient by themselves.”