By Matthew Amlôt, CPI Financial
Shari’ah compliant accounting standards are vital for Islamic finance growth, and AAOIFI Accounting standards reflect concept and essence of Islamic finance transactions and can enchance confidence of users of Islamic finance products and promote growth of demand. This was the conclusion at the debates on accounting standards for Islamic finance that took place during the AAOIFI World Bank Annual Conference on Islamic Banking and Finance which was held on the 18 and 19 of November 2013 in Manama.
The conference also discussed venture capital from an Islamic finance point of view, proposing a model based on a Musharaka/partnership arrangement in which true risk-return sharing is typical. Within this framework, and contrary to most Islamic banking products, venture capital was viewed as Shari’ah compatible in spirit though it would require some adjustment to the structure. The paper argued that venture capital is best undertaken in a non-banking structure, with Islamic banks, pension funds, Takaful companies and Awqaf being better positioned to provide long-term institutional risk capital.
Another presentation shed light on the role of traditional Islamic non-profit organizations as strategic long-term partners of Islamic insurance operators, recommending alignment and cooperation between the Takaful industry and its natural allies such as Waqfs, orphanages, mosques, and others. It also called on traditional Islamic philanthropic bodies to support the Takaful industry by making their locked-up assets available to the Takaful industry and presenting themselves as alternative distribution channels taking into account the Shari’ah based values of Takaful.
On a similar note, cooperative insurance was addressed by a study proposing an innovative cooperative insurance model in which the accounts of shareholders and policy holders can be separated by stipulating that the insurance firm takes on all insurance operations in its capacity as an operator on behalf of, and to the benefit of, the insured. The model also advised that a 5 per cent estimated compensation relative to the total amount of premiums goes to the insurance company at the time of contracting. This initially known percentage would be deducted from the net surplus at year end. Furthermore, the study elaborated in more details on the mechanism of surplus treatment and a proposed modus operandi of the entire model.
The conference also discussed, in another study, a risk framework to assess and grade operational risk exposure of banks taking into account requirements of Shari’ah. The framework revolves around an index to use domain-specific risk scores and relate the same to indicators of sustenance of Islamic financial institutions using logistics regression.
Mitigation of Islamic banks’ risks was handled by another working paper that outlined the main types of risks faced by Islamic financial institutions such as non-compliance risks, operational risks, financial risks, and so on. The study proposed a host of factors that Islamic banks can consider in their quest for risk mitigation, including innovating new sources of funds and revenue and diversification thereof. It also highlighted the importance of Islamic banking operations supervision by relevant authorities, and stressed the need for human resources development through proper training. In a separate presentation on the legal nomination of Islamic financial products, it was concluded that the complications of nomination, if not addressed properly, might bring about devastating consequences such as the loss of rights, stricter tax treatment, invalidity of contracts, non-compliance with Shari’ah, and violation of banking or financial regulations, among others.
The conference wrapped up by presenting some guidelines about how AAOIFI standards can be promoted in countries that follow international accounting standards or IFRS. The way forward for standards promotion and standardization, a study on “FAS by AAOIFI vs. IFRS” found out, is manifested by compelling need for specific accounting standards for Islamic finance, and also with mutual recognition and co-existence of AAOIFI and conventional international standards.