Dr. Khaled Al Fakih, Secretary General and CEO, Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) said that the standards related to liquidity management give guidance on Shari’a-compliant mechanisms for Islamic financial institutions to mobilise liquidity, defined in the context of the standard as cash and cash equivalent. It also gives explanation on Islamic finance contracts including those relating to Mudaraba or investment management, Musharaka or partnership, Wakala or investment agency, and Sukuk or certificates of ownership.
“These Islamic finance mechanisms can be used by Islamic financial institutions to obtain liquidity from their investment account holders and depositors, including current account holders, and to mobilise such liquidity for financing and investment,” he added.
In his speech at the opening of three-day 14th AAOIFI–World Bank Annual Conference on Islamic Banking and Finance which opened in Manama on Monday he said that AAOIFI had so far issued 88 shari’ah standards for Islamic banks and financial institutions.
Rasheed Al Maraj, Governor, Central Bank of Bahrain and Abayomi Alwode, from the World Bank also addressed the opening session of the annual conference.
Fazeel Najeeb, Governor, Maldives Monetary Authority were among the senior officials who attended the conference.
“This Conference forms a major part of AAOIFI’s consultative programme with the international Islamic finance industry, to facilitate our effort on standards development and review, as well as to address challenges related to adoption and implementation of the standards,” Dr. Khaled, said.
“Over the past few months, AAOIFI has issued 7 new Shari’a standards covering the topics of Financial rights and disposal of those rights; Bankruptcy; Liquidity management relating to sources and uses of liquidity;
Capital and investments protection and Investment agency.
“The rules based for determination and calculation of profit from investment instruments and Amanah options, covering rights relating to options for termination of legal contracts due to bad faith.
“AAOIFI has also issued a new accounting standard on investments in real estate as well as preliminary exposure draft and consultation note for the proposed revised accounting standards relating to investment accounts.
“The first new Shari’a standard covers the area of financial rights and disposal of those rights. This standard gives guidance on rights that are embedded in terms and conditions of financial transactions. These rights include those relating to financial assets such as receivables from financings, tangible assets such as real estate property, and intangible assets such as intellectual property and copyright.
The standard explains how those financial rights can be used as basis of financial transactions between contracting parties.
The second new Shari’a standard covers the area of bankruptcy. This standard outlines Shari’a rules and principles relating to bankruptcy. It covers circumstances where Islamic financial institutions, or their individual customers or institutional customers, have entered into bankruptcy. Amongst others, the standard gives guidance on definition of bankruptcy, declaration of bankruptcy, and stages of bankruptcy. It also explains how a solvent party can deal with a party that is in bankruptcy.
The third new standards cater for the need of the liquidity.
The fourth new Shari’a standard covers the area of capital and investment protection.
This standard gives guidance on the Shari’a permissibility on tools and measures that may be applied in protecting investment capital. It also outlines tools and measures to mitigate investment risks, including those relating to rate of returns, inflation, and foreign currency risks.
The fifth new Shari’a standard covers the area of investment agency.
The standard relates to transactions where investment account holders place their funds with Islamic financial institutions based on investment agency, or fiduciary contract.
The standard gives guidance on the operations of investment agency contract including on rights and obligations of both investment account holders and investment agents. It also gives guidance on fees and charges that can be levied by investment agents, duration of investments, warranty or Dhaman, and rules regarding the investment capital and returns.
The sixth new Shari’a standard covers the area of rules on bases for determination and calculation of profit from investment instruments.
Purpose of this standard is to promote proper and transparent calculation of profit for financial transactions – so as to remove misunderstanding, enhance confidence, and ensure robustness of such transactions. The standard gives guidance, amongst others, on methods of calculation and distribution of profit, and their application in Islamic financial institutions’ financing or investment transactions. Depending on the nature of Islamic finance transactions, profit rate may be determined at the onset of the transactions for some cases. In some other cases, an expected profit rate is given as a non-binding indication. The standard also gives guidance on profit relating to Murabaha or deferred sales transactions, and to Mudaraba or investment management arrangement, including distribution of profit upon achieving certain agreed-upon benchmark.
The seventh new Shari’a standard is on the area of “Amanah” options, covering rights relating to options for termination of legal contracts due to bad faith.
The standard gives guidance, amongst others, on circumstances to allow termination of legal contracts. Parties that have entered into a financial contract are allowed to terminate such contract if it contains elements of misrepresentation, or if the contract is deemed to be unjust, or if the contract contains elements of fraud.
“AAOIFI has also issued a new accounting standard on investments in real estate as well as preliminary exposure draft and consultation note for the proposed revised accounting standards relating to investment accounts,” he said.
“The new accounting standard on investments in real estate sets out the principles for (1) recognition, (2) measurement, (3) presentation and (4) disclosure of investment in real estate that is acquired for the purpose of earning periodical income, or held for future capital appreciation, or both.
The new accounting standard on investments in real estate was issued to replace the previous accounting standard on investments, which used to deal with all forms of investments. Given the significant diversity in the accounting requirements of investment in financial instruments and real estate, there was a need for separation of the accounting standards for these investments.
“The new accounting standard on investments in real estate is to complement the new accounting standard on investments in Sukuk, shares and similar instruments, issued in 2011.
The preliminary exposure draft and consultation note, for the proposed revised accounting standards relating to investment accounts, were issued as a result of the on-going review of existing accounting standards on disclosure of bases of profit allocation between owners’ equity and investment account holders, and on equity of investment account holders and their equivalent.
Furthermore, the proposed revised accounting standards relating to investment accounts are to also reflect changes that have been introduced in AAOIFI’s updated new standard on conceptual framework for financial reporting by Islamic financial institutions, issued in 2010.
“In the coming months, we are aiming to finalise the issuance of the revised accounting standards relating to investment accounts. At the same time, we are also currently working on the revision of 4 existing accounting standards on Takaful. In addition, our other on-going work includes revision of existing accounting standards on Mudaraba and Ijarah, and development of a new accounting standard on issuance of Sukuk.
“We are also continuing our work on the development of a new governance standard on Shari’a Supervisory Boards in Islamic financial institutions, and revision of existing auditing standards.
In addition to the standards development and review programs, AAOIFI is also carrying out efforts to improve the Certified Shari’a Adviser and Auditor as well as Certified Islamic Professional Accountant programs.
“As you would note, discussions at this Conference relate to the standards development and review program for the various standards on investment accounts, Takaful, Murabaha, Ijarah and Sukuk.
We have also organised the accounting standards workshop, which will take place this Wednesday, immediately after this Conference, to specifically focus on accounting standards for Investment in real estate,
Investment accounts, Ijarah, Murabaha, and issuance of Sukuk.
Through discussions at this Conference and the workshop, we hope to gather feedback from participants on the standards that we are reviewing and developing.
“In carrying out the standards review and development work, we will also continue to engage and consult central banks, regulatory and supervisory authorities, Islamic financial institutions, and other participants of the international Islamic finance industry, so as to ensure that the standards can contribute towards building a robust framework for industry growth.
“Currently the total number of AAOIFI standards for Islamic finance stands at 88, with 48 Shari’a standards, 26 accounting standards, 5 auditing standards, 7 governance, and 2 codes of ethics.