The Islamic finance industry continues to grow in different parts of the world both in terms of its size, as well as through regulatory and policy developments. More and more countries are introducing Islamic finance in their economies and are enhancing their regulatory ecosystem to cater for this important industry. Some of these emerging Islamic finance economies have taken a conscious decision to follow up best practices by adopting the standards developed by global standard-setting bodies. It is expected that other jurisdictions will adopt similar practices and implement internationally benchmarked standards, which is vital for the long-term sustainable growth and development of the industry.
Review of 2022
As the world has largely moved away from the COVID-19 pandemic-related restrictions, there remain countries that still have these restrictions in place. However, 2022 was the first year where mostly things have returned to some form of normalcy. This is true for the standard-setting bodies including AAOIFI, IFSB and International Islamic Financial Markets where the normal course of activities has resumed including physical meetings of technical boards, capacity-building initiatives, as well as advocacy and awareness programs.
Standardization in Islamic banking and finance is a topic that has been discussed since the establishment of AAOIFI in 1991 as the proponents and opponents of the industry continues to deliberate on the never-ending debate. Through this article, I wish to highlight some of the practical, strategic and operational challenges in the adoption and implementation of internationally benchmarked standards.
However, the interesting part is that some of these may be where standard-setting organizations can and currently play an important role to overcome them. It is important to emphasize that these infrastructure institutions are complementing the work of each other and actively work together where possible.
Some of the strategic challenges include a lack of commitment from key decision-makers to undertake actions to prioritize Islamic finance, ie lack of political will. There are others who see little difference between conventional banking and Islamic banking while others are not convinced with standardization and its benefits and at times state that international standards are incompatible with the official school of thought (Madhab) of the jurisdiction.
This is particularly true for some of the emerging Islamic finance markets where decisions by the boards are based on different schools of thoughts within one country, which creates confusion within the country and in turn hampers growth.
Other issues include a lack of infrastructure in terms of a regulatory framework compatible with standards and a lack of Islamic finance experts with respect to supervision. Additionally, from AAOIFI’s perspective on the accounting side, the framework of a country may not allow the adoption of AAOIFI Financial Accounting Standards (FASs). Some operational challenges include financial considerations of the implementation of standards, the language barrier, technical assistance and gaps in standards.
In my opinion, the aforementioned challenges are a starting point as a number of them are perception-based and far from reality while others are general concerns and not necessarily related to standards issued by these infrastructure institutions. For example, the difference between conventional and Islamic financial services is an established phenomenon, as such it is accepted by multilateral organizations including the IMF, World Bank, BIS and such.
With regards to the compatibility with any Madhab, this is relevant to AAOIFI; a standard is not issued by any one particular school of thought but rather, it is a collective effort and Ijma of all the scholars from different schools of thought involved.
Similarly, when it comes to the adoption of AAOIFI FASs, the strategy at AAOIFI is simple and this is adopting the conventional best practices issued by the International Financial Reporting Standards and US GAAP on the accounting side. Similarly, on the governance standards, AAOIFI and IFSB follow the best practices issued by the International Organization of Securities Commissions on the governance side.
As such, standards in these areas are only issued where there is a direct conflict with the Shariah principles or something that the conventional rules do not address completely and/or adequately. A prime example is the Shariah governance framework as an additional layer over the conventional corporate governance framework.
With regards to capacity-building and technical assistance in the adoption and implementation of standards, all three infrastructure organizations have globally recognized initiatives. These include internationally benchmarked qualifications offered by AAOIFI and technical support in the form of bespoke and general workshops by all three institutions.
We believe these initiatives enhance the understanding and awareness of AAOIFI standards, as well as increase the existing knowledge base which assists in the adoption and implementation of the standards.
To further enhance the understanding and reach of standards, infrastructure institutions have exerted efforts in making standards available in English and Arabic in particular. While AAOIFI Shariah standards are available in more languages including Turkish, Russian, Urdu and French, translation into the Bangla language has been finalized and efforts are in place to translate into Bahasa Indonesia and Mandarin.
More recently, infrastructure institutions are placing more effort in terms of enhancing their relationship with regulatory institutions around the world through various initiatives. These include formal meetings, engagements with regulators through workshops and roundtables, working with banking associations to bridge the gap (this is particularly true in Muslim-minority countries), as well as actively partnering with international conferences and events and enhancing the understanding of the institutions and its standards.
From AAOIFI’s perspective, the response of this effort has been positive and has resulted in the gradual increase in the adoption of AAOIFI standards. As such, AAOIFI standards are at present adopted at various levels by more than 45 countries and more than 50 regulatory jurisdictions as reported in the AAOIFI Footprint Report 2022.
Preview of 2023
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 2023. 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.
Conclusion
As new markets are opening to Islamic finance, they are making the right decision of not reinventing the wheel by developing standards and regulations from scratch; rather they are adopting best practices issued by global standard-setting bodies. These countries include Iraq, Afghanistan, Somalia and Libya.
We believe this is a strategy that should be replicated by other countries and jurisdictions in order to ensure there is no duplication of effort and the industry is benchmarked to international standards.
As such, there is a need for more capacity-building in these countries as policymakers and practitioners continue to exert efforts in enhancing their understanding of standards issued by these infrastructure institutions.
At the same time, the three standard-setting organizations (AAOIFI, IFSB and International Islamic Financial Markets) are increasingly working together for the collective benefit of the industry through standards development, capacity-building and awareness and advocacy programs, which is expected to continue in the year 2023.
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 rmalik@aaoifi.com.
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.