A top Islamic finance body plans to launch a global study on how far markets adhere to its benchmarks with a view to standardising products, reflecting industry efforts to remove a key barrier to growth.
Islamic financial markets have struggled to agree on the use of some banking practices, due to different readings of the Shariah. This can make it tough to sell products across borders but some say the diversity of opinion encourages innovation.
The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) will seek a mandate from its trustees to examine the degree of Shariah financial products' compliance with its 40 standards, its secretary-general said.
"It is to correct if there is any deviation from the appropriate practice, to provide advice and to promote homogeneity and standardisation," Mohamad Nedal Alchaar said in an interview.
"The issue of standardisation is becoming more important to banks because they want to use the same products. When you standardise you reduce the cost of discovery and tools and instruments become the same across markets and that really helps credibility, ease of marketing, ease of spread."
Bahrain-based AAOIFI sets accounting, auditing and governance standards for the $1 trillion (Dh3.6trn) Islamic finance industry and its views carry considerable weight within the industry.
In November 2007, the chairman of AAOIFI's board of scholars shocked markets when he declared that about 85 per cent of Islamic bonds did not comply with the Shariah because they included a repurchase undertaking. Some bankers say the remarks contributed to a sharp drop in issuance last year.
Alchaar said AAOIFI is gathering industry feedback on its proposed move.
"As far as the main instruments like mudaraba and murabaha (are concerned), I think we're beyond examination because everyone does the same thing. It's pretty much standardised," he said on the sidelines of an Islamic banking conference in the Malaysian capital.
"But we worry sometimes about the new instruments that can be exotic. I think we need to take another look at those instruments and make sure they adhere to sharia principles."
Derivatives and short-selling are two areas that have divided Islamic financial markets. Some Shariah scholars reject them as thinly veiled gambling instruments but others say they can help banks to hedge risks and boost market liquidity.
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