AAOIFI: setting standards for the industry

12 July 1996

ISLAMIC banks have long recognised the need for uniform accounting standards.

This complicated task has been given to a Bahrain-based body with an equally complicated name, the Accounting & Auditing Organisation for Islamic Financial Institutions (AAOIFI).

Set up in 1991 by Islamic banks, the AAOIFI's board includes three central bank governors. Its chairman is the undersecretary at the Bahraini Finance Ministry. Its remit was expanded and its name changed in 1995 to include auditing.

So far the organisation has looked at the basic concepts of Islamic accounting and at treatment of murabaha, musharaka and aspects of mudaraba. It is now moving on to leasing, bai salam and the role of Shana boards.

'Islamic banks appreciate such standards because they provide the necessary structure for expansion show there's nothing to hide under the carpet,' says general secretary Rifaat Ahmed Abdul-Karim an academic from Sudan.

The AAOIFI works to get its rules applied partly by getting central banks to adopt them and partly by trying to persuade Islamic institutions of their usefulness. 'One does not have the power of enforcement, but some central banks have started to implement them,' says Abdul-Karim. Sudan has done so, Bahrain is 'gradually going to' and Malaysia has been 'supportive.' 'The need for these accounting standards is becoming immensely important,' he adds. 'For example, murabaha currently has up to five accounting treatments.' In a new and evolving industry, the AAOIFI has got plenty of work to do. 'We have barely touched many of the most important issues. This is going to be an ongoing process'

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