Notwithstanding these challenging times of the COVID-19 pandemic, the Islamic finance industry continued to develop through various channels, including regulatory and policy developments, practice and research. Additionally, infrastructure institutions, in particular the standard-setting organizations such as AAOIFI, IFSB and IIFM [International Islamic Financial Market] continued issuing standards and providing guidance for the development of the industry throughout the period. As the COVID-19 restrictions are easing, it is hoped that with the right implementation of benchmarked standards, vital for long-term sustainable growth, the industry will continue to steer forward in the years to come.

Review 2021
2021 marked another COVID-19 affected year, although it had limited restrictions compared with the previous year as policymakers pushed for two to three jabs of the approved vaccines. Yet the new variants from time to time continued to haunt us and kept markets and stakeholders skeptical of the industry developments.

Standardization in the Islamic banking and finance industry globally has been a topic discussed since the establishment of the first standard-setting organization, AAOIFI, in the year 1991. To date, the proponents and opponents continue to deliberate on the pros and cons of the need for standardization in the industry. Yet at the same time when it comes to conventional practices of standardization, there is a unanimous agreement that without following them the going concern of the underlying business is at stake and so is that of the industry. Some of the arguments against standardization includes a) it destroys creativity and innovation, b) one-size-fits-all does not work, c) it results in loss of national sovereignty, d) Islamic finance is still a nascent industry and e) only a particular set of standards (Shariah) are required. Of course, none of these is close to reality and remains a myth.

Additionally, all industries that concern the man on the street have and need to have some form of standardization as without it, the efficiencies and economies of scale will be hard to achieve, which is the underlying cause of Adam Smith’s ‘invisible hand’. It is understandable that standardization within any industry is beneficial for it from various perspectives including leading to better comparability for cross-border transactions; transparency and reliability of transactions and statements; and enhancing understandability and accountability. Additionally, the benefits are reaped by a wide range of stakeholders including the economy, investors and Islamic financial institutions in particular.

Within the global Islamic banking and finance industry, there are three particular institutions that are tasked with the standardization of the industry:
• AAOIFI — to develop standards related to Shariah, accounting, auditing, governance and ethics
• IFSB — to develop standards related to prudential regulations and risk management, and
• IIFM — for the standardization of documentation, mostly for the capital markets.
These three institutions complement each other rather than compete with each other. There are agreements in principle including MoUs signed among the three organizations and they have been actively working and contributing to each other’s projects as well as developing joint standards.

As such, they have issued a number of important standards and guidance notes for the industry throughout the year. With regards to AAOIFI, the Shariah standard on payment cards was issued; additionally, three standards were issued by the AAOIFI Accounting Board — these include: FAS 1 (Revised 2021) ‘General Presentation and Disclosures in the Financial Statements’, FAS 39 ‘Financial Reporting for Zakah’ and FAS 40 ‘Financial Reporting for Islamic Finance Windows’. The AAOIFI Governance and Ethics Board issued exposure drafts for Islamic crowdfunding and syndicated financing.

On the other hand, the IFSB has also issued two important standards, Core Principles for Islamic Finance Regulation (Financial Market Infrastructures) and Core Principles for Effective Islamic Deposit Insurance Systems, as well as issued an exposure draft related to solvency requirements for Takaful undertakings. The IIFM also issued a number of standards/documents and guidelines as approved by its Shariah committee and these are: IIFM Risk-Free Rate (RFR) Solutions and ISDA/IIFM IBOR Fallback Standard Documentation.

The adoption of these standards is also increasing gradually; by way of example, AAOIFI standards are adopted in various levels by 36 countries and 43 regulatory jurisdictions as reported in the AAOIFI Footprint Report 2020. These include those that adopt standards either fully or partially, use them as guidelines/reference material, supplementary reporting basis, or base their local standards/regulations on AAOIFI standards.

Since the publication of this report, we understand that more regulators have adopted AAOIFI standards and Bahrain has even made AAOIFI Shariah standards part of the law and publishes them in the official gazette.

Preview 2022
With the enhanced understanding of the standards and through active engagement with different stakeholders (including regulatory and supervisory institutions), it is expected that the implementation and adoption of standards will improve in 2022. This is beneficial for developed Islamic finance markets and the developing markets alike. For the regulators and policymakers in particular, it is important that the industry follows a set of standards that are benchmarked to the highest standards to ensure the financial stability and integrity of the industry in the long run. Additionally, the emerging markets are better off in adopting existing standards issued by these institutions to leapfrog the times rather than developing standards from scratch. The prime examples of such emerging jurisdictions include Afghanistan, Iraq and Libya which follow AAOIFI standards fully instead of developing standards bottom-up.

It is expected that these three standard-setting institutions will continue to develop market-relevant standards in the year 2022. Among them is the standard to be issued by AAOIFI and IFSB on a revised Shariah governance framework, which will replace a number of existing governance standards issued by the two institutions.

Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.

Dr Rizwan Malik is the head of standards implementation and strategic developments at the Accounting & Auditing Organization of the Islamic Financial Institutions (AAOIFI). He can be contacted at [email protected]aaoifi.com.