AAOIFI promotes centralized sharia boards

Earlier this month, at the annual conference of the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), participants looked at a preliminary study for centralized sharia boards in order to regulate finances in GCC nations.

Reports show AAOIFI is developing a standard for the sharia boards, which could be finished as early as next year.

The new practice may change a tradition of Islamic banks appointing their own sharia boards internally, in order to figure out which financial products are permissible, and how to make the financial world comply with Islamic law.

Officials cite “divergent practices” by Islamic banks, and the lack of a universal structure that would help clarify Islamic law on finance. Experts are also looking at conflicts of interest and how they can affect the industry.

Centralized sharia boards, proponents say, would be independent from the banks, and would thus be able to provide good guidance and arbitration.

The GCC countries of Oman and Bahrain have already established these types of sharia boards. The UAE is looking at such a measure, and other countries in the Islamic regions are considering the adoption of centralized sharia boards as well.

For more, Gulf News Journal spoke with Barish Gagrani Friday. Gagrani is an analyst at Aranca, a firm evaluating equities in the GCC.

“Centralized Sharia Boards will bring much needed uniformity where financial institutions were hiring and relying on internal sharia boards for interpreting Sharia rules for financial products,” Gagrani he told Gulf News Journal, citing volatility in the region’s financial world and the urge to make financial standards more consistent in a modernizing and data-centric world.

“Standardization and consistency in financial products will help reduce divergence in practices among Islamic banks,” Gagrani said.

Part of the issue, he believes, is a lack of clarity or consistent use of some guidelines.

“Currently, various Islamic finance rules and guidelines lend themselves open to different interpretation,” Gagrani said. “Centralized sharia boards would address this problem and lay down the foundation for the next phase of growth for sharia-compliant products.”

Also, he said, the board could be a resource for customers.

“These boards would also play a role of arbitration among querying parties and boost the attractiveness of Islamic financial products beyond its traditional base of customers,” Gagrani said.

The adoption of sharia-compliant financial principles is not limited to the Middle East, or even to majority Muslim countries. Reports from the U.K. show that Britain will likely start issuing sharia-compliant bonds and building aspects of Islamic finance into products offered by its banks and financial institutions.

What makes Islamic finance different?

One of the biggest principles is that money should be part of some functional agreement between a borrower and a lender, and not just leveraged for interest. An “explainer” page on Islamic finance at The Conversation puts it this way: “Under Islamic law, money must not be allowed to create more money.”

This and other differences drive a growing industry focused on how to make money management more friendly to a major religious and cultural group the world over. New sharia boards could boost the capability of GCC countries to offer compliant services.