An exclusive interview with the Secretary-General of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

For the first part of the Q&A, click here

LONDON: Over the past few years, key Islamic finance markets, most notably the UAE, are adopting and implementing AAOIFI standards. As a result, more stakeholders like sukuk issuers and investors are having to understand AAOIFI’s position towards acceptable sukuk structures as well as seeking clarity on the use of certain instruments.

Salaam Gateway spoke to Omar Mustafa Ansari, Secretary General of Bahrain-based AAOIFI on a range of key industry issues.

In the second part of a two part Q&A, Ansari revealed new standards that AAOIFI is working on as well as the industry body's stance on cryptocurrencies and NFTs. He also touched on AAOIFI's position on the role of women in the Islamic finance industry.

SG: How much take-up has there been of mandatory compliance with AAOIFI standards by countries?

OMA: The level of adoption may not be ideal, but it is quite encouraging. I strongly believe that AAOIFI standards provide much-needed guidance to the Islamic finance industry globally, even if the current level of adoption does not evidently show that. This is because this level of adoption shows the acceptance by the regulatory and supervisory authorities (RSAs) only. However, when it comes to the individual IFIs, the impact and influence of AAOIFI standards is much larger. The level of compliance may vary as we need to have better systems of compliance, improved governance, compliance ratings and other initiatives to ensure the overall adoptability is made easy and accessible. The RSAs need to make sure that AAOIFI standards are implemented effectively through their controls and inspections .

For instance, in countries where AAOIFI accounting standards are not legally adopted, one can still observe that their financial statements reflect AAOIFI standards. This means that a lot of accounting treatments, disclosures etc. of Islamic financial institutions comply with AAOIFI standards, both in Muslim and non-Muslim majority countries. This is even when the RSAs have not adopted them officially, but individual banks’ management and their Shariah boards self-adopt them on a voluntary basis. The same is true for other AAOIFI Shariah, governance and ethics standards. Considering these factors, the level of adoption of AAOIFI standards is very encouraging and we hope that it will continue to improve in future, In sha Allah.

SG: In May 2020, AAOIFI partnered with the Dubai Islamic Economy Development Centre (DIEDC) and the Islamic Development Bank to develop a code for a global legislative framework for the Islamic finance industry. The code was supposed to be ready by the second quarter of 2021, however the dissolution of the DIEDC in April 2021 may have delayed progress. Are there any details about Islamic finance legal framework AAOIFI is working on with IsDB and DIEDC?

OMA: We have a strategy to work with international standards-setting bodies, other infrastructure bodies and multilateral institutions, mainly in Islamic finance, but also with the conventional ones in their initiatives to improve and benefit the Islamic finance industry.

AAOIFI has been coordinating with DIEDC and have signed an MoU with them for co-operation in multiple areas, including development of a legal framework for Islamic finance, particularly for the benefit of the new entrants in the market. The scope of the framework has been slightly revised to include the terms and Islamic finance codes. AAOIFI had this project in the agenda but when it was known that DIEDC is working on that, Islamic Development Bank requested to be a part of that initiative. Therefore, AAOIFI joined the effort and provided our inputs. With the recent decision to dissolve and restructure DIEDC to become part of Dubai Economy, we have received a communication from them that this project will continue and we await further update on its current status. We hope that the project will pick up pace. 

SG: AAOIFI recently launched a new crowdfunding standard. What other standards are AAOIFI working on such as Islamic derivative contracts?

OMA: On the Shariah side, we have just completed and issued a standard on payment cards, our earlier standard and improves certain aspects related to cards. The Shariah board is working on a sukuk standard that will be very comprehensive and detailed,keeping pace with recent developments and will replace our earlier standard on sukuk. This standard is part of our sukuk project, which includes five standards, three on accounting and one on governance. The sukuk governance standard has already been issued.

On the accounting side, AAOIFI Accounting Board (AAB) has issued two standards: one on financial reporting for sukuk holders (FAS 34) and the other on investment in sukuk shares and similar instruments (FAS 33) which is a revision of the earlier FAS 25. The third standard, FAS 29, is finalized, but we are waiting for it to be mapped with the final Shariah standard on sukuk. Overall, this comprehensive sukuk project is expected to bring significant changes to the market and improvements from the Shariah compliance perspective, as well as from the perspective of corporate governance in guarding the interest of stakeholders. These will help build a robust and resilient sukuk market around the globe.

In addition, AAB is working on the revised General Presentation and Disclosures in the Financial Statements of Islamic Banks and Financial Institutions (FAS 1). This is the second part of the project which included framework revision that was revised and published in phase one. AAB is also progressing on a comprehensive takaful standards revision project, which is also in the advanced stage. There are multiple projects on the revision of our existing standards. Among these, some of them have been completed, others are in the pipeline.

AAOIFI Governance and Ethics Board (AGEB) is working on an important project which will be the first standard developed jointly by AAOIFI and the Islamic Financial Services Board (IFSB). This will be a standard on revised Shariah governance framework that will supersede some earlier issued standards of both institutions. We hope that the exposure draft of the standards will soon be available to the market. IFSB has already taken the draft to its technical committee for review and AAOIFI will soon take this standard to its governance and ethics board for review.

In addition, AGEB is working on another important project that has been initiated to develop a governance system and a model for Islamic benchmark rate. This will be a landmark project for AAOIFI, In Sha Allah. AAOIFI Shariah board is also providing its input for this project and we hope that it will bring significant changes to the market.

SG: The UN’s Principles for Responsible Banking, the framework that helps signatories align with the Sustainable Development Goals and the Paris Climate Agreement, continue to remain underrepresented at IFIs and in OIC countries. How does AAOIFI propose to integrate sustainability into its standards?

OMA: A lot of our standards consider sustainability, particularly in the governance standards setting area. We already have a very good standard on corporate social responsibility with a lot of aspects related to sustainability. More recently, we are working on a sustainable financing standard and this is already in an advanced stage. We have done the initial preliminary study and will discuss this in the working group. We are collaborating with a reputed organization that specialises in the area of sustainability and responsible finance.  

We are also working on a standard on Shariah decision-making. It’s also in the advanced stages and has been approved in principle by AGEB. As the standard has a lot of Shariah considerations, it is being reviewed by the Shariah committee. We hope to issue its exposure draft once the committee clears it. We believe that sustainability emanates from the Maqasid al Shariah (which are the higher objectives of Shariah). We have mentioned a lot of other considerations related to the sustainability and responsibility of the institution as well as the individual.

Another very important area we have worked on is the revised code of ethics. This is a very comprehensive code for Islamic finance professionals where a lot of sustainability and responsibility considerations have been incorporated.

SG: Away from traditional banking, new asset classes like cryptocurrencies and non-fungible tokens (NFTs) are growing in popularity among market participants and stakeholders. The debate around cryptocurrencies and NFTs has split Shariah scholars as to whether these new instruments are Shariah compliant or not. Does AAOIFI deem cryptocurrencies and NFTs to be halal?

OMA: Firstly, we need to understand the stance of Shariah and Shariah scholars on this and the effect of paper or fiat currencies on the Islamic economic system. This needs to be understood before understanding crypto currencies and non-fungible tokens (NFTs). We understand that crypto currencies and NFTs are based on technology. Shariah has its own considerations and definition of and creation of money.

Islamic economists and Shariah scholars have written a lot on this subject and there are significant issues and considerations related to these forms of currencies. As of now AAOIFI has adopted a concrete view on cryptocurrencies and NFTs. We initiated a debate on these by discussing them in our annual Shariah conference as a starting point. Some scholars have presented papers and some discussions have taken place. However, as of now, we believe that it is not in our immediate agenda and we have not taken a view on that. From a Shariah perspective, people have to be careful about investing or using these currencies.

Nevertheless, we have initiated various projects in line with the development in Islamic FinTech industry including Islamic crowd funding and digital banking.

SG: The OIC’s Standards and Metrology Institute for Islamic Countries on June 21 released its 10-year strategy plan. One of its KPIs is to improve the percentage of women experts involved in standards projects. What is AAOIFI’s percentage of women experts on your standards projects and what are your plans to increase the number of women participating in AAOIFI work and projects? 

OMA: AAOIFI is gender neutral. You may say we don't see enough representation in AAOIFI boards and working groups. But I would like to mention that we now have women representation in almost all boards and working groups. At AAOIFI we have nearly 50 percent or more female colleagues.

With regard to having a quota for women, we consciously decided not to keep a quota. We made it completely on a professional and merit basis. So, a lady or a female colleague is never discouraged to be a part of AAOIFI’s board or working groups. If she meets the merit criteria, she is more than welcome. On the other hand, women may not be given a preference over men just because of being a woman. If our female colleagues, friends, experts or scholars are equally good, then they are given the opportunity to be part of our respective working groups, boards, committees, secretariat or being a consultant etc. In a nutshell, we encourage women to be part of our team, our standard-setting process, our boards and committees.

For the first part of the Q&A, click here

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