External Auditing of Sharia Compliance to Likely Strengthen Governance in Islamic Finance

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by Polly Jean Harrison May 30, 2021

FEED THE POOR

Feeding the poor and needy is an act that draws us closer to Allah. We earn His forgiveness, mercies and blessings through this act of charity.

“Anyone who looks after and works for a widow and a poor person is like a warrior fighting for Allah?s cause, or like a person who fasts during the day and prays all night. (Bukhari)

S&P Global Ratings said that the publication of a new auditing standard for Sharia compliance is a step forward for the Islamic finance industry.

“We consider that the recent publication of auditing standard No. 6 by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) will reinforce governance and enhance market discipline,” said S&P Global Ratings’ Head of Islamic Finance, Mohamed Damak.

“The key aspects of market discipline, in this context, are greater consistency in adhering to Sharia principles and a culture of rapid remedial action by non-compliant institutions.”

The standard specifies AAOIFI’s criteria for external audit of Sharia compliance at Islamic financial institutions (IFIs). Given the lack of standardisation that the Islamic finance industry has been facing, the first problem AAOIFI faced was, which standards should an audit exercise be performed against? In its No. 6 standard, AAOIFI addresses this by creating a hierarchy of the existing standards and regulations.

If opinions from these sources are ambiguous, the standard prioritises the approvals and clarifications of the entity’s specific Sharia board. This is the obvious choice, given that these approvals and clarifications underpin an IFI management team’s decisions and the institution’s functioning.

In our view, internal Sharia audits have not meaningfully supported enhanced transparency. Enforcing external, independent audits, however, could change the game, especially if the detailed results were published, or at least shared with the IFI’s key stakeholders.

To see the research in full click here. 

source External Auditing of Sharia Compliance to Likely Strengthen Governance in Islamic Finance | The Fintech Times

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