AAIOFI’s proposals for Central Sharia Boards a positive step: S&P

The proposal by the Accounting and Auditing Organization for Islamic Financial Institutions for centralised Sharia boards, if implemented in countries active in Islamic finance, will help the industry move toward greater standardisation and harmonisation in Sharia interpretations, according to S&P Global Ratings.

“In our opinion, the lack of such standardisation has prevented the industry from achieving a greater degree of global integration, and accounts for its current fragmentation,” said Dr Mohamed Damak, Global Head of Islamic Finance at S&P Global Ratings, in the report published recently.

The lack of standardisation has also created an additional layer of complexity for Islamic financial market instruments, particularly sukuk, and has deterred some potential issuers from tapping the market, the report said, noting that AAOIFI’s proposals represent a step in the right direction.

“As a further step, we believe the industry could benefit from additional recommendations about how national boards could interact and cooperate, accelerating global standardisation,” said Dr Damak.

While S&P Global Ratings does not comment on Sharia compliance as part of its ratings, the risks related to a perception of Sharia noncompliance could have a significant negative impact on the stability of the industry or on rated issuers, it said.

For example, a bank that is perceived as non-Sharia-compliant could lose some of its deposits, especially from corporate and retail clients that are sensitive to Sharia in their business dealings. This, in turn, could significantly pressure the bank’s funding and liquidity.

“At the level of an individual sukuk issue, the risks of an instrument being perceived as non-Sharia-compliant could result in repayment difficulties and pose a risk of default. While we do not assess this risk as such, we do incorporate it into our analysis of funding and liquidity of a financial institution or a corporate that issues sukuk,” it added.