Islamic finance standardisation making headway

Ijlal Ahmed Alvi says standardisation will help Islamic financial market reach its full potential. (SUPPLIED)

Efforts to standardise global investment practices that conform to Shariah have made significant progress over the past years and more developments are expected soon as industry players recognise the need to move in a common direction, a watchdog official said. 

Ijlal Ahmed Alvi, Chief Executive Officer of the International Islamic Financial Market (IIFM), admitted that the process of creating and finalising regulations had been rather slow to take off because of the in-depth consultation that standard-setting bodies need to have with various units including banks, regulators, Islamic scholars and legal experts. 

But over the past four years the Bahrain-based IIFM, which is the worldwide agency responsible for standardising Islamic products and documentation, has managed to set three global frameworks that help regulate the industry’s capital and money market segment, Alvi said. 

In 2008, IIFM launched the Murabaha inter-document standards or the Master Agreement for Treasury Placement that is used for over-the-counter commodity transactions. Murabaha is considered both interest-free and transparent as sellers openly declare to the buyers the cost and profit on the commodity being traded. 

Coordinating closely with the International Swaps and Derivatives Association (Isda), the IIFM launched in 2010 the Tahawwut (Hedging) Master Agreement – a landmark framework that highlights the importance of hedging instruments in mitigating risks, especially considering the current economic climate.

And most recently, Isda and IIFM released a standard contract template for Islamic profit rate swaps (PRS), which works in the same way as interest rate swaps in conventional financial markets, except that it does not use interest rates as per Shariah laws. 

“There has [undoubtedly] been progress over the years and from our side, there are also a few more standards coming up as we move forward. We are working on standards [for] Wakala, cross-currency swaps, sukuk and collaterised [debt obligations],” he said. 

A sector that has been buoyant even despite the onslaught of recent market challenges, Islamic finance is expected to have global assets amounting to between $1.1 trillion and $1.3trn (Dh4trn and Dh4.8trn) by end-2012. 

Industry observers, however, believe that stronger regulatory framework and clearer guidelines could see the industry’s wealth increasing further as banks and investment firms will be able to expand beyond their home markets. 

Collaboration key to industry growth

In Islamic finance, no man is an island, according to Alvi as he acknowledged the fact that addressing standardisation issues involves the collaborative efforts among all standard-setting bodies. 

“We coordinate with [global bodies] to ensure that we develop standards in a cohesive manner. For instance with regard to hedging, we coordinate with the IFSB [Islamic Financial Services Board] in terms of looking at the regulatory capital fee for banks and its impact [on the industry] because that is their area [of expertise]. Similarly, we work with AAOIFI [Accounting and Auditing Organization for Islamic Financial Institutions] on the accounting aspect of documentation products for the capital market,” he explained. 

Working together also makes more sense as Islamic finance has dramatically grown and diversified its product offerings and services to become a significant sector in the global financial landscape, the IIFM CEO added. 

Alvi believes that there is a massive room for innovation in Islamic finance because unlike its conventional counterpart, it has yet to develop its full potential. 

“The development of innovation in conventional [finance], in my view is [now] limited because they have already gone through that phase, which the Islamic industry [has just started treading]. So over a period of time, [Islamic finance] will see more innovative solutions especially for risk mitigation and liquidity management. The industry will eventually be more interlinked with the global system [while at the same time staying] independent in many ways,” he said. 

Implementation remains an issue

While it has made significant strides in less than a decade, Islamic finance is technically still in the early stages of addressing all the relevant regulatory aspects of the industry. However for standards that are already in existence, the sector faces a new challenge in as far as implementation is concerned, IIFM’s chief executive said. 

“[We do not yet have] the standards for everything because we’ve just started [working on them]. But for the standards that we do have, implementation is an issue. It’s a challenge that banks, regulators and everyone in the industry have to play a role in order to [create] a clear direction [for Islamic finance],” he said.

The IIFM, Alvi noted, can only recommend to institutions and regulators to adopt standards. In practice, it does not impose any penalties for non-compliance to industry standards.

“[These standards] are voluntary. We cannot enforce them [because] we understand that the market wants flexibility. What we are doing [however] is for the betterment of the industry and we [hope] that the regulators, banks and users in general will adopt these standards because the benefits [of moving in a common direction] are far much greater than working in isolation,” he said. 

http://english.alrroya.com/content/islamic-finance-standardisation-making-headway

AAOIFI plans reform of takaful standards

Khaled Al Fakih, the new secretary-general of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, outlined plans for a sweeping review of its guidelines in an interview with Reuters.

"We would like to see insightful debate ... that can help us develop standards that can benefit the industry," Fakih told Reuters, ahead of AAOIFI's annual meeting on 7 and 8 May.

His organisation plans to start consultations on reforming the operations of sharia boards, the groups of Islamic scholars which rule on whether financial institutions' activities and products are religiously acceptable, by the middle of this year.

A final draft of the reforms is not expected to be ready before the end of next year at the earliest.

AAOIFI will also work on a new framework for disclosing financial data, and will look at revising standards for takaful (sharia compliant insurance), investment accounts and other products, Insurance Insightunderstands.

Fakih, who took the helm in February, said basic elements of Islamic finance such as murabaha, mudaraba and ijara - structures designed to permit investment while obeying religious bans on paying interest and pure monetary speculation - would be reviewed next year.

But the growth has exposed weaknesses in Islamic finance. One is the lack of a clear consensus on what products and procedures are permissible. The sharia boards of individual banks and investment firms can issue conflicting rulings.

The board may also attempt to address the accusations of conflict of interest that are often levelled at the sharia board system because scholars are paid handsomely by the firms whose behaviour they are supervising.

AAOIFI plans to improve the operations of shariah boards by strengthening the certification process for scholars, Fakih said. The organisation currently offers scholars two professional credentials, but they have been criticised as not sufficiently rigorous and too easy to obtain.

In addition, AAOIFI is developing new guidance on the relationship between Islamic financial firms and their shariah boards, "similar to international best practices in terms of reference for financial institutions' board of directors".

http://www.insuranceinsight.eu/

Standarization of Islamic industry sought Standarization of Islamic industry sought

Economic brotherhood: Indonesian President Susilo Bambang Yudhoyono (center with black cap) joins other Islamic leaders at the opening of the fifth World Islamic Economic Forum (WIEF) in Jakarta on Monday. The other leaders are (from left to right) WIEF chairman Tun Musa Hitam, United Arab Emirates Crown Prince Sheik Saud bin Saqr Al Qasimi, Moroccan Prime Minister Abbas El Fassi, (Yudhoyono), Malaysian Prime Minister Abdullah Ahmad Badawi, Qatar Deputy Prime Minister Abdullah Bin Hamad Al Attiyah, Organization of Islamic (OIC) Secretary-General Ekmeleddin Ihsanoglu and the fifth WIEF organizing committee chairman Sofyan Djalil. JP/R. Berto Wedhatama

As the Fifth World Islamic Economic Forum (WIEF) officially opened Monday, participating nations geared up to promote their lagging Islamic finance system amid the ongoing crisis in the “conventional” system.

Malaysia Prime Minister Abdullah Ahmad Badawi said as the conventional financing system continued to collapse, having a serious impact on the global economy, it was high time for the Muslim world to turn the “adversity into an opportunity”.

“The world is beginning to appreciate the need for alternative arrangements to the current international financial system. At the same time, Islamic finance is gaining credibility as an alternative,” he said.

Badawi said he believed Islamic finance had a bright future but that banking and finance standards needing harmonizing and Islamic financial products really required greater innovation.

“As long as our markets remain divided by different jurisdictions and interpretations of sharia standards, Islamic finance is unlikely ever to grow beyond the shore of Muslim countries.

He said the Islamic Development Bank (IDB) could play a pivotal role in attracting young and bright practitioners to develop the Islamic finance industry.

Indonesia, as the most populated Muslim country in the world, will play a major role in developing Islamic finance, President Susilo Bambang Yudhoyono said.

“Islamic banking should now be able to take a leading position in the banking world. Islamic banks have been much less affected by the financial meltdown than conventional banks — for the obvious reason that sharia banks do not indulge in investing toxic assets and leveraged funds. They are geared to supporting the real economy,” said Yudhoyono.

He however stopped short of mentioning concrete efforts the country would take to bolster the development of Islamic finance.

In moves to boost trade within the participating nations, four memorandums of agreement (MoA) worth more than US$3 billion were signed at the WIEF.

The country’s Islamic financing industry remains relatively small compared to the overall financing industry, but having last year enacted the Islamic Financing and Islamic Bond Laws, the government is upbeat about the industry outlook.

The amount of financing provided by the country’s Islamic banking institutions has grown from a mere Rp 5.5 trillion ($458 million) in 2003 to Rp 28 trillion in 2007 and Rp 38.2 trillion in 2008, despite the 2008 figure constituting less than 3 percent of the total national bank financing

http://www.thejakartapost.com

Two industry figures call for standardisation in Sukuk issuance

r. Ahmad Rufai Muhammad Head of Shari’ah, and Ijlal Ahmed Alvi, CEO of International Islamic Financial Market say that as Islamic finance has grown, differences in rulings on whether or not products are Shari’ah-compliant have surfaced. Rufai and Alvi opined, “Although Shari’ah interpretations and applications are similar, this does not always translate into unified documentation and unified application. Conformity amongst the Shari’ah supervisory boards of Islamic financial institutions is needed. We believe that standardisation of certain structures and contracts is necessary in order to avoid inconsistencies between different Fatwa rulings and their application by Islamic financial institutions regionally and globally. “The existence of a unified Shari’ah board through a council representing different Islamic schools of thought worldwide is necessary as this would facilitate the conformity of certain existing wider market product structures such as Sukuk. Sukuk are a vital mechanism for raising money in the financial markets. Hence, continuous improvement of the functions of Shari’ah boards to achieve a global standard for Sukuk is essential because lack of standardisation in the Sukuk area is a contributory factor to low issuance levels. Moreover, the present financial crisis has raised a number of structural issues in Sukuk such as transfer of ownership and the Sukuk holder's ability to have direct control over the assets in case of default. “The present market conditions have clearly identified the urgent need to revisit the issue of asset based versus asset backed Ijarah Sukuk. The issue has legal and documentation implications but must be studied by Shari’ah scholars in order to safeguard the rights that holders have perceived at the time of issuance of the Sukuk as well as issues such concerning fair risk and reward in the case of Musharaka and Mudaraba Sukuk (refer Sheikh Taqi Usmani's ruling), needs to be looked at from a convergence point of view. These issues have global significance and universal convergence is absolutely essential. “In our view the establishment of a Shari’ah Board at a global level will be helpful and can play a major role in convergence as well as in facilitating the development of a robust and unified Islamic financial services Industry. This can be achieved if Shari’ah scholars from around the globe contribute towards a greater understanding at national and international level of convergence. Such convergence and harmonisation can only happen with greater engagement among regulators, practitioners, Shari’ah scholars and other stakeholders in the Islamic finance industry. “We believe that collective efforts through cooperation and collaboration between major Islamic financial standard-setting and development bodies such as the International Islamic  Financial Market, the Accounting and Auditing Organisation for Islamic Financial Institutions, Islamic Financial Services Board and central banks is important in strengthening the fabric of Islamic finance.” haveeru.com.mv

AAOIFI issues new accounting standards

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the international standard-setting organisation for Islamic finance, has issued two new accounting standards and one new accounting guidance note. Issuance of the new accounting standards and guidance note was approved by AAOIFI Accounting and Auditing Standards Board in its meeting held last week on 22 July 2010 in Dubai, United Arab Emirates.The meeting was hosted by Dubai Financial Services Authority, the regulatory authority for financial services in Dubai International Financial Centre.

The new accounting standards are on Conceptual Framework for Financial Reporting by Islamic Financial Institutions and Investments in Sukuk, Shares and Similar Instruments while the new accounting guidance note is on First Time Adoption of AAOIFI Accounting Standards.

Apart from laying down principles of financial reporting for Islamic financial institutions and providing the basis for AAOIFI accounting standards, the new Conceptual Framework also gives updated guidance on accounting treatment for investment accounts. It introduces the concept of authority over investment decisions to guide financial reporting for investment accounts, which are funds received by Islamic financial institutions from their investors on Mudaraba or investment management arrangement.

Under the new accounting standard on Investments in Sukuk, Shares and Similar Instruments, Islamic financial institutions are required to segregate their investments between debt-type and equity-type instruments. The segregation depends on characteristics of the investment instruments and purposes of the investments. Accounting treatments and disclosures that Islamic financial institutions have to carry out are to be based on this segregation.

The new accounting guidance note on First Time Adoption of AAOIFI Accounting Standards provides Islamic financial institutions with the starting point for preparing financial accounting records and reports based on AAOIFI standards. Islamic financial institutions that are adopting AAOIFI accounting standards for the first time are required to follow rules set out in the guidance note.

Dr. Mohamad Nedal Alchaar, Secretary General of AAOIFI, said that the new accounting standards and guidance note were developed in consultation with over 200 AAOIFI institutional members from over 45 counties as well as other key industry stakeholders. He also added, "AAOIFI accounting standards ensure that Islamic financial institutions are transparent with their financial performances and consequently enhance the credibility of the international Islamic finance industry".

AAOIFI is currently developing revised accounting standards on investments in real estate, equity of investment accounholders, and Takaful or Islamic insurance. In addition, it is also formulating a new standard on governance for Shari'a Supervisory Board that will regulate the conduct of Shari'a scholars serving on Islamic financial institutions' Shari'a Supervisory Boards.

The new governance standard will address concerns including on the number of Shari'a Supervisory Boards that a Shari'a scholar can effectively serve, whether Shari'a scholars can have shareholdings in Islamic financial institutions that they serve, and potential governance issues relating to Shari'a advisory services given to Islamic financial institutions by commercial entities that are owned by Shari'a scholars'.


ameinfo.com

Islamic industry board sets new financial standards

The Islamic Financial Services Board, which sets standards for the sharia finance industry, has adopted new guidelines to enhance the sector's stability.

The guidelines relate to the Islamic insurance industry, the conduct of Islamic financial institutions and the sharia governance system, the board said in a statement.

The full guidelines are available on the board's website at www.ifsb.org.

Compliance with the Kuala Lumpur-based board's standards is voluntary. Islamic banks are governed by the regulatory authorities in their respective jurisdictions.

Link: http://in.reuters.com/article/fundsNews/idINKLR47993620091124

Islamic finance standardisation needs to be tackled carefully

Standardisation, a long-standing issue in Islamic finance, should be addressed properly to avoid damage to consumer confidence in the retail sector and confusion in the corporate sector.

According to Islamic finance analysts, while Islamic business is growing by the day, its growth is hurdled by the lack of standardisation and homogeneity.

As there is no single interpretation of Islamic law, each financial institution has a board of religious scholars who determine which products are Islamic. So what one bank considers Shariah-compliant may be unacceptable to another.

Industry players, speaking to Emirates Business, said some standards already exist, but due to the nature of Islamic finance, establishing a body to set global standards is not only difficult to attain, but also almost impossible to achieve.

They said an Islamic accounting standard has already been established and is recognised by the world's multinational institutions such as World Bank and International Monetary Fund. It is called Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Rather, what is needed today is a more consistent application of the standards promulgated by AAOIFI, said Omar Shaikh, Executive Board Member at Islamic Financial Council UK. "We do have a degree of consistency on Shariah standards. I think we need more consistency on the application of the AAOIFI standards," he said.

Dr Mohamad Akram Laldin, CEO and Executive Director of International Shariah Research Academy for Islamic Finance, said there is still a "long way to go" as far as implementation is concerned. "We have a Shariah parameter and that's the AAOIFI, but not many jurisdictions are subscribing to it. Only certain countries are subscribing, but in other jurisdictions. The case is they may adopt or they may not adopt."

Shaikh said standardisation has not been much of an issue in the corporate world, which has been endowed with more sophisticated investors. The problem is that conflicting views of scholars have at times affected retail investors and individuals.

"Quite frankly the Muslim world today is not governed by a structure – like the Vatican where you have a Pope structure – so you will always have conflicting views," he said.

"Some scholars say it is healthy as it gives you more options. But retail investors get confused when one scholar says this is Islamic and the other say this is not Islamic. That is a challenge that needs to be addressed because consumer confidence gets hit significantly with different opinions," he said.

Although Islamic instruments have in the past gained rapid popularity thanks to abundant sukuk issuance, corporate players are also facing the challenge of distinguishing the Islamic from the non-Islamic transaction.

"It has to be made clear what constitutes a sukuk and what a non-sukuk," said Jan Willem Plantagie, Managing Director of S&P Middle East, adding lack of clarity has caused confusion in the business community.

Regulators are also in need of more guidance and clarity.

Paul M Koster, Chief Executive of Dubai Financial Services Authority, told the Sixth IFSB Summit that standards setting, including regulatory, accounting and market standards, constitutes a "challenge" in the Islamic finance realm.

"As non-Islamic regulators around the world come to deal with Islamic finance, they will not simply tear up their rulebooks, based on the standards of Basel, or Iosco or Iasb; they will seek to adapt them, and they look for standards that are as well thought out as those they are used to. If they cannot find them, they will either ignore Islamic finance or press the conventional standards setters to address the issues," he said.

With regards to Shariah infrastructure, Koster said while Shariah advice is critical to the proper conduct of Islamic finance, there are also many areas in which there is not full consensus, and that Shariah governance imposes material costs.

"There is much discussion of how greater consensus can be achieved in important areas, and how the number of Shariah scholars can be increased," he said. "But there is also scope to discuss how the need can be reduced, in areas where transaction forms can be standardised, and also the infrastructure of what is now becoming a profession."

Abdulla Al Awar, CEO of Dubai International Financial Centre, said standardisation is needed in contracts to better facilitate transactions. "We have worked with many initiatives in terms of standardising, for example the commodity Mudaraba transaction – we have already achieved that. From a tools and contracts perspective, there is a call for standardisation," he said.

"But there is a misconception in the market. When they talk of standardisation they also talk of standardisation of scholars' opinions, which I don't think you will ever have."

He stressed variety is also good for business because it gives the institution the opportunity to target a specific group or niche.

"However, let's not forget that Islamic finance globally constitutes one per cent of the entire financial services industry. Ratio-wise it is still small and the priority is to increase that ratio," he said.

The so-called "differences" and "divergence" are in fact only minimal, but people tend to zero in on them, said Laldin.

"Sometimes we tend to focus too much on certain differences between Malaysia and the GCC, but that is not the case," he said. "There is more convergence in the views of scholars rather than divergence, but the problem is we always think about the differences.

"If you look at Malaysia, we are very much open in a sense that we do have products subscribing by the GCC standards. Some of the instruments in Malaysia are also using interpretation that comes from the Middle East. It is a question of business strategy or targets."

Laldin said the industry is now moving away from controversial interpretation of Shariah to lesser controversial interpretation.

"The most known controversial contract, which is contractable in Malaysia and Brunei, is the Bay' Inah, a buy-back arrangement," he said. "That is allowed in Malaysia, but not in the Middle East. Another is the selling of debt. Malaysia's commission of Shariah board and the Central Bank allow selling of debt in certain conditions, which is not acceptable in the GCC."

Under Islamic principles, the sale of debt is not allowed. A loan or debt to be repaid in cash is considered as "money" hence this system does not allow it to be sold for anything other than its par value. Secondly, the concept of risk management is different. In the current system, risk is transferred – split and sold. In the alternative system, risk is shared, almost like a collective insurance scheme.

This means that instead of a sub-prime loan risk being sold until it reaches a bank in the Middle East or Asia, it will be managed by the institutions that can assess and react to any changes in circumstances.

But is standardisation indeed needed?

"Not really," said Laldin. "The issue in Shariah is that the law is not given ready-made. It does not work like this is right and this is not. If you look at the Quran and Sunnah, you'll find broad principles, which are to be applied in different areas of Islamic commercial transaction."

"In the retail product, there are different concepts such as Wadiah and Mudaraba."

Asked whether it is possible to create a global body that will decide what is acceptable and what is not, Laldin said: "You just can't have it because it is not practical."


Bay' Inah contract

Bay' Inah, meaning sale with immediate repurchase, is a contract that involves the sale and buy-back transaction of an asset by a seller.

A seller will sell the asset to a buyer on a cash basis. The seller will immediately buy back the same asset on a deferred payment basis at a price that is higher than the cash price.

It can also be applied when a seller sells the asset to a buyer on a deferred basis. The seller will later buy back the same asset on a cash basis at a price that is lower than the deferred price.

Under Islamic principles, the sale of debt is not allowed. This is because money is not considered to be a commodity, which has a price of its own. Instead it is only a medium of exchange and a measure of value.

A loan or debt to be repaid in cash is considered as "money" hence this system does not allow it to be sold for anything other than its par value.
Link: http://www.business24-7.ae/Articles/2009/10/Pages/24102009/10252009_baacb75e1a5c4893a385ccf3eeaee5e0.aspx

Sharia derivative standard out by year-end-IIFM

* First master Islamic derivative possible by end year

* Islamic scholars still divided on derivative use

By Cecilia Valente

LONDON, Sept 10 (Reuters) - The first template for over-the-counter derivatives compliant with Islamic law could be in place by year-end, allowing quicker and cheaper Islamic risk management, one of the institutions involved in its creation said.

Ijlal Alvi, CEO of the International Islamic Financial Market (IIFM), told Reuters he hoped the master-contract, originally expected earlier this year [ID:nLB438463], would be approved by its scholars panel within the next three months.

"It is happening. We are working internally and with some banks as well," Alvi said in an interview on Wednesday.

The contract -- to be known as Ta'Hawwut or hedging -- would create a standard legal framework for OTC derivatives in the Islamic market, whereas currently contracts are arranged on an ad hoc basis.

OTC derivatives, or swaps, are privately negotiated deals between investors and counterparties and are commonly used to hedge against interest rate risk and default risk. The total notional amount of OTC deals outstanding was nearly $592 trillion at end-2008, according to the Bank for International Settlements.

Islamic institutions have limited access to derivative products mainly because Islamic law requires the underlying assets in any transaction to be tangible, virtually excluding most of the mainstream derivatives instruments.

Islamic scholars are split on the legitimacy of derivatives; some see them as permissible instruments to hedge risks but others as speculative transactions, which Islam forbids.

Some Islamic operators have used a contract known as Arbun to replicate call options.

"We are waiting for approval from the sharia board -- this work is now reaching finalisation. We are very hopeful it will be by the end of the year," Alvi said.

The IIFM, which was founded by the central banks and monetary agencies of some countries in the Middle and Far East as well as the Islamic Development Bank, has been working with the International Swaps and Derivatives Association (ISDA).

ISDA was not immediately available for comment. (Reporting by Cecilia Valente, Editing by )

Link: http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSL901001820090910

IFRS for merger of Islamic Accounting Standards

The proponent of the International Financial Reporting Standards (IFRS) will be in talks with Islamic finance authorities this year and will be ready to modify the existing system to accommodate Islamic finance standards.

According to Robert Garnett, board member of International Accounting Standards Board (IASB), there may be "slight differences" but they can be resolved through critical judgment.

"We have to embrace all financial products so we will need to change our standards," Garnett told Emirates Business on the sidelines of the IFRS breakfast briefing in Dubai.

"To converge with Islamic finance standards we need to have some detailed discussions with AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) so we can have a better understanding of their concerns and how we can accommodate those within a revised IFRS," he added.

Garnett, who is also the Chairman of the International Financial Reporting Interpretations Committee (IFRIC), said he plans to start the dialogue this year and looks forward to having a convergence despite some differences.

"I hope they can be converged, we all live on the same planet," he said. "Islamic financial products have been around much longer than the IASB. It's quite a daunting task but it's more than just intellectual challenge. It is important for the global markets that we bring ourselves together."

Paul Koster, Chief Executive of DFSA, said it is helpful that the two standards be converged as Islamic finance already plays a significant part in the global economy. Citing a report from Moody's and RBS, he said the Islamic finance industry is set to grow from $700bn (Dh2,571bn) to $4trn by 2013 and despite the crisis Islamic banking is still projected to grow by 15-20 per cent annually. "AAOIFI accounting standards have come about because of some unique requirements of the Islamic financial institutions," Koster said, adding there has been a limited attention given to AAOIFI at a time when convergence is taking place.

"We should remember AAOIFI standards were not intended to fully replace IFRS but merely cover those standards and transactions that IFRS does not," he said. "I think it is true to say in most cases the differences between IFRS and AAOIFI are more apparent than real. There are a few substantive differences such as when the term interest is used."

IFRS, which is currently required for all domestic listed entities in 85 jurisdictions and allowed in 113 jurisdictions, is developed by the IASB in London in collaboration with the Financial Accounting Standards Board (FASB) and other global accounting standard-setters.

As a principles-based system, IFRS can allow issuers to reflect the economic substance of transactions that may be unique to their industry, compared with a prescriptive, rules-based system such as the US' Gaap.

The IFRS and the Gaap are expected to converge in 2014 but prior to that, the IASB would first attempt to harmonise the two standards.

"We have plans to do that – the harmonisation of Gaap and IFRS before converging to a single standard – by 2011. We have started that way back in 2002. We plan to bring closer all the major aspects of IFRS and Gaap," Garnett said.

He said they are on track to meeting the 2014 convergence target and is looking at a single adoption date for all firms. "The US Securities and Exchange Commission (SEC) is going to take a decision in 2011, and part of that decision is going to be on the extent to which we have to converge our standards." 

The IASB is planning to increase the number of its board directors from 14 to 16 in 2012, and the board hopes by that time, the region will be represented. "We are increasing the board of directors and one of the reasons is to allow opportunity for regional representation on the board itself," he said.

Link: http://www.business24-7.ae/Articles/2009/4/Pages/18042009/04192009_5ae5bf647f4e46428e694dc436d437b6.aspx

'Standardisation issue is important to banks'

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.

Link: http://www.business24-7.ae/Articles/2009/4/Pages/28042009/04292009_69d3a60173ad440e8c6a5f3f25891b89.aspx