S&P Global Ratings Says AAIOFI's Recommendations For Central Sharia Boards Are A Step In The Right Direction
- We believe AAOIFI's latest proposal regarding centralized Sharia boards is a step in the right direction and could act as a catalyst for greater standardization in Sharia interpretations of Islamic financial instruments.
- 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.
- We think the proposals could benefit from recommendations to promote interaction among national boards.
DUBAI (S&P Global Ratings) Feb. 13, 2017: The proposal by the Accounting and Auditing Organization for Islamic Financial Institutions for centralized Sharia boards, if implemented in countries active in Islamic finance, will help the industry move toward greater standardization and harmonization in Sharia interpretations, S&P Global Ratings said today.
'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 today, 'AAOIFI Proposes Recommendations For Central Sharia Boards: A Step In The Right Direction.'
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.
'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 Sharia compliance as part of its ratings, we think that 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. 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.
The article published today represents S&P Global Ratings' response to a draft standard by the Accounting and Auditing Organization for Islamic Financial Institutions, Governance Standard No. 8 for centralized Sharia boards, issued on Feb. 7, 2017. The views expressed in this response represent those of S&P Global Ratings and do not address, nor do we intend them to address, the views of any other affiliate or division of Standard & Poor's Financial Services LLC. We intend our comments to address the analytical needs and expectations of our credit analysts, as well as the questions we receive from investors. Our comments on the consultative document do not affect our ratings criteria.
RELATED RESEARCH
- Is Sukuk Issuance Suffering From The Liquidity Drop In Gulf Countries? Feb. 6, 2017
- Will Sukuk Issuance Volumes Beat The Forecasts This Year? Jan. 9, 2017
- Sharia Governance For Islamic Finance: Are We There Yet? Nov. 15, 2016
- Islamic Finance In 2017: Modest Growth Amid Oil-Price Woes, Sept. 4, 2016
Only a rating committee may determine a rating action and this report does not constitute a rating action.
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