DUBAI — The proposal by the Accounting and Auditing Organization for Islamic Financial Institutions (AAIOFI) for centralized Shariah boards, if implemented in countries active in Islamic finance, will help the industry move toward greater standardization and harmonization in Shariah interpretations, S&P Global Ratings said.
“In our opinion, the lack of such standardization 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 Monday.
The lack of standardization 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. “We think AAOIFI’s proposals represent a step in the right direction.”
Standardization could facilitate sukuk issuance and restore the interest of numerous potential issuers. It could also foster greater integration of the Islamic finance industry at a global level.
“As a further step, we believe the industry could benefit from additional recommendations about how national boards could interact and cooperate, accelerating global standardization,” said Dr. Damak.
While S&P Global Ratings does not comment on Shariah compliance as part of its ratings, “we think that the risks related to a perception of Shariah noncompliance could have a significant negative impact on the stability of the industry or on rated issuers. For example, a bank that is perceived as non-Shariah-compliant could lose some of its deposits, especially from corporate and retail clients that are sensitive to Shariah 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-Shariah-compliant could result in repayment difficulties and pose a risk of default.
“We think the proposals could benefit from recommendations to promote interaction among national boards.”
