| March 3
March 3 Bahrain's Waqf Fund, a non-profit body
set up by the central bank, has proposed mandatory external
sharia audits for Islamic financial institutions to help
strengthen compliance and improve the image of the industry.
Regulators around the world are increasing their scrutiny of
Islamic finance, including the boards of sharia scholars who
rule on whether activities follow religious principles.
Since sharia boards tend to be paid by the institutions
whose activities they oversee, the scholars can be open to
accusations of conflicts of interest - prompting calls for
separate and independent oversight.
The Waqf Fund, established in 2006, is backed by 21
institutions such as banks and mostly focuses on educational
initiatives. Bahraini regulators do not have to accept its
proposals but since it is chaired by the central bank's
executive director of banking supervision, Khalid Hamad, its
recommendation appears likely to be adopted.
While the proposal is for Bahrain, it may have an impact on
Islamic finance globally because of Bahrain's central role in
The proposal ties in with growing pressure for reforms to
the sharia oversight system in other countries. For example,
Kuwait's central bank governor Mohammad al-Hashel suggested in a
December speech that an independent legal entity should oversee
the way in which Islamic financial institutions certify they are
following sharia principles.
The Waqf Fund will develop a framework for external sharia
audits with a team of audit firms, scholars and the
Bahrain-based Accounting and Auditing Organisation for Islamic
Financial Institutions (AAOIFI).
"An independent sharia audit should be made mandatory by
regulators in order to achieve the desired benefits," the fund
said in a statement on Sunday.
Because it suggests that sharia compliance audits be part of
the existing external auditor framework, the Bahraini fund's
proposal is more specific than Hashel's proposal in Kuwait.
The Waqf Fund also called for a revamp of AAOIFI standards
to provide more detail on sharia review and audit functions,
while making AAOIFI's sharia auditor certification mandatory for
people involved in the review process. Bahrain is one of the few
jurisdictions where AAOIFI standards are mandatory.
Many countries, including Malaysia and Pakistan, have over
the past year taken steps to overhaul their Islamic finance
rules; the reforms have included taking a more active role in
monitoring sharia scholars. In Malaysia, scholars are now
legally accountable for the financial products they approve and
liable to fines and prison time for wrongdoing.
Bahrain's central bank will release a new regulatory
framework for Islamic insurance (takaful) this quarter, in an
overhaul of standards which the regulator hopes will attract new
business in a sector it helped to pioneer.
(Editing by Andrew Torchia)