AAOIFI issues 7 standards for Islamic finance

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has introduced new guidelines for applying religious law to finance, as it prepares to launch a sweeping review of the industry.

The seven new standards, which help scholars decide whether financial activities and products conform with sharia law, address issues including financial rights, bankruptcy, capital protection, entrusting money to an agent for investment, and contract termination.

Capital protection has been widely discussed in the industry over recent months; some investment firms are keen to offer it in products, but Islamic principles do not allow companies to promise guaranteed returns.

AAOIFI's new standards also cover the ways in which financial institutions manage their liquidity, discussing the sources and uses of funds and offering rules for calculating and distributing profits from investment instruments.

How to increase liquidity has been a key concern for Islamic banks. Last month two global bodies launched a standard contract for Islamic profit rate swaps, which banks can use to manage their exposures over varying time periods.

The Bahrain-based AAOIFI announced the new standards on Sunday after several days of internal discussions among sharia scholars, its deputy secretary-general Khairul Nizam told Reuters. The standards are being issued first in Arabic and will be translated into English later.

AAOIFI, one of the top standard-setting bodies in Islamic finance globally, will over the next couple of years conduct a broad review of how the industry operates, addressing issues such as how boards of scholars work, the organisation's secretary-general Khaled Al Fakih said earlier.