Meet the Global Regulators of Islamic Finance: AAOIFI and IFSB

The Ethical Approach of Islamic Finance

Islamic finance is grounded in ethical principles that aim to promote fairness and transparency. Unlike conventional banking, Islamic finance operates under Sharia law, which emphasizes justice and equity. Key principles include the prohibition of interest (riba), the sharing of risk and profit, and investments in socially responsible ventures.

The Rise of Sharia-Compliance Consultancies

In recent years, the demand for sharia-compliance consultancies has surged. These firms help Islamic banks and conventional lenders develop Sharia-compliant products and obtain necessary certifications. They employ Islamic scholars who act as external Sharia boards, offering guidance and issuing fatwas (Islamic rulings) for a fee. This growing sector reflects the increasing interest in integrating Islamic finance principles into global banking practices.

International Standards and Regulatory Bodies

On the international stage, two key bodies oversee Islamic finance standards:

1. Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI): Based in Bahrain, AAOIFI sets foundational standards for Islamic finance. While these standards are mandatory in Bahrain and the UAE, they are generally advisory in other countries.
2. Islamic Financial Services Board (IFSB): Located in Malaysia, the IFSB provides recommendations based on risk assessments. The IFSB collaborates with global institutions like the IMF and World Bank to enhance Sharia compliance worldwide.

These organizations work to promote uniform standards across the industry, but enforcement varies by country. Most nations, except Sudan and Iran, have Islamic finance operating alongside conventional banking. This creates a dual regulatory framework, where Islamic banks must adhere to both national regulations and Sharia requirements.

The Global Impact and Future of Islamic Finance

Islamic finance is no longer confined to traditional markets. Its ethical approach and growing global presence highlight its relevance and adaptability in today’s financial landscape. As more countries and institutions embrace Sharia-compliant financial practices, the industry continues to evolve and expand.