January 20, 2010 / 2:33 PM / 10 years ago

Bahrain accounting body aims to harmonise sharia finance

* New rules include leasing transactions

* Publishes new governance standards

LONDON, Jan 20 (Reuters) - An influential Middle-Eastern accounting body published on Wednesday new standards aimed at establishing best practice on key aspects of Islamic finance, such as the widely used leasing concept, ijara.

The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) launched 11 standards including guidelines on the risky transactions forbidden under sharia law, on arbitration, and on the concept of ijara, often used to structure Islamic bonds, or sukuk.

AAOIFI, whose standards are not compulsory but carry weight in the Muslim world, is attempting to create a common framework to encourage growth in the Islamic finance industry, thus far hampered by divergent regional opinions among the scholars whose sanction is necessary for each product.

It has already introduced standards on issues such as accounting standards at Islamic banks and other financial institutions and is setting up a committee to establish common guidelines on financial products and assess those products in the market. [ID:nLF706136]

The new standards address the zakat annual charity tax paid by Muslims, contingent obligations, credit facilities, online financial transactions, investment accounts and profit distribution as well as Islamic reinsurance, seen by some as the key for the development of Islamic insurance or takaful and eventually Islamic pension products.

Accounting, auditing, ethics and governance are also tackled.

A practitioner, who declined to be named, acknowledged fragmentation is something the Islamic financial market must tackle.

“Harmonisation of the market practice is definitely something good, if adopted by everyone. Many institutions apply AAOIFI but some others do not. But AAOIFI is definitely trying to do a good job in developing this market,” said the practitioner.

Islamic finance rules — including a ban on derivatives use — helped sharia banks and institutions steer clear of the problems which so affected leveraged western banks during the credit crisis. However, sharia stipulations that transactions are underpinned by tangible assets has given the industry huge exposure to a fragile property sector. (Reporting by Cecilia Valente, Editing by Sharon Lindores)

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