AAOIFI to start Islamic finance screening in H2

MANAMA (Reuters) - The Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions, which helps sets standards in the sector, said on Tuesday that it plans to start screening Islamic finance products in the second half of this year to ensure they are sharia compliant.

"It will be a gradual process, it will not be widespread. It will be product by product," Mohamad Nedal Alchaar, secretary general of the AAOIFI, told Reuters Islamic Banking and Finance Summit in Bahrain.

The organization would set up a committee by June to conduct screening, he said.

Last year AAOIFI -- one of the bodies involved in setting standards to ensure Islamic finance products and structures comply with sharia, or Islamic law -- said it would start to screen products. That marks a major shift in its role from being just a provider of standards to actively approaching banks and urging them to work on products that it does not consider to be sharia-compliant.

Alchaar said AAOIFI would seek to strike a balance between its efforts to harmonize banks' interpretation of sharia and their commercial interests, he said.

"We want to be very sensitive to market needs, to reputational issues, to the market presence of institutions," he said.

Around eight people would sit on the screening committee, including Islamic scholars, auditors, bankers and lawyers.

The Islamic finance industry is governed by a patchwork of national regulators, standard-setting bodies such as AAOIFI and scholars interpreting Islamic law.

Critics have said that some of its products are mere copycats of conventional products, and a debate during 2008 and 2009 on the sharia-compliance of some structures of Islamic bonds, or sukuk, hit issuance.

AAOIFI's standards are mandatory in at least eight countries, mostly in the Middle East and South East Asia. Alchaar said that Russia and Luxembourg are both considering making AAOIFI's standards mandatory as well.

(Reporting by Frederik Richter and Dinesh Nair; Editing by Susan Fenton)