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AAOIFI's milestones in 2023: Shaping the future of Islamic finance

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In 2023, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) emerged as a formidable force in advancing and standardising the Islamic finance industry. Headquartered in the Kingdom of Bahrain, AAOIFI played a pivotal role in shaping the landscape of Islamic finance through various groundbreaking initiatives, standards development, capacity-building programmes, advocacy efforts, and strategic collaborations.
Standards Development: Paving The Way For Regulatory Excellence
A Milestone In Sukuk Regulation: The year 2023 marked a significant stride for AAOIFI’s Shariah Board, which released the exposure draft standard on Sukuk during its 87th meeting held from September 28th to 30th. This draft is the result of an extensive process involving 20 eminent scholars from 14 countries, representing various Islamic jurisprudential schools. The meticulous drafting process spanned over four years, with more than 200 hours of collaborative work in face-to-face and virtual sessions. Public hearings in key jurisdictions, including Bahrain, Saudi Arabia, the UAE, and Malaysia, have been organised to gather diverse perspectives and refine the standard further.To ensure transparency and inclusivity, AAOIFI invites written comments on the draft standard until December 31, 2023, fostering a collaborative approach in shaping regulatory frameworks.
Addressing Unique Challenges: The AAOIFI Accounting Board (AAB) also made substantial strides in 2023. The exposure draft of the Financial Accounting Standard (FAS) titled ‘Financial Reporting for Institutions Operating in Hyperinflationary Economies’ was approved. This draft aims to provide clear guidelines for financial institutions operating in economies experiencing hyperinflation, enhancing transparency and comparability in financial statements.
Additionally, AAOIFI issued the exposure draft of its FAS on ‘Participatory Ventures’ to establish principles of accounting and financial reporting for such ventures. The revised FAS will supersede existing standards, reflecting the organization’s commitment to evolving with industry needs.
The AAB Translation Committee finalised and approved the Arabic version of FAS 31 ‘Investment Agency (Al-Wakala Bi Al-Istithmar)’ and issued FAS 36 ‘First Time Adoption of AAOIFI Financial Accounting Standards’ in Arabic. The AAB also approved the exposure draft of its FAS on ‘Promotional Gifts and Prizes’ and revised FAS 14 ‘Financial Reporting for Islamic Investment Institutions’ in principle.
The exposure draft of FAS on ‘Promotional Gifts and Prizes’ aims to prescribe accounting and financial reporting requirements applicable to gifts and prizes awarded by Islamic financial institutions to their customers. Simultaneously, the exposure draft of FAS on ‘Participatory Ventures’ is set to supersede AAOIFI FAS 3 ‘Mudaraba Financing’ and AAOIFI FAS 4 ‘Musharaka Financing’.
To accommodate unique business models, the AAB considered relevant Shariah principles and rules in developing the exposure draft of its FAS ‘Financial Reporting for Institutions Operating in Hyperinflationary Economies’. Public consultation has begun, encouraging stakeholders to provide valuable comments.
Public Interest Monitoring Consultative Committee (Pimcc): A watchful eye on responsiveness throughout 2023, the PIMCC meetings were held, aiming to advise and observe AAOIFI’s responsiveness to public interests within its standard-setting process. Focusing on accounting, auditing, governance, and ethics standards, these meetings foster a continuous feedback loop, ensuring the organisation remains attuned to the evolving needs of the Islamic finance industry.
Roundtable On Revised Fas 29: Sukuk in the Books of the Originator A Noteworthy Event in AAOIFI’s calendar was the roundtable on the [Revised ED of] FAS 29 ‘Sukuk in the Books of the Originator’. This event, conducted through video conferencing on August 30, 2023, brought together more than 80 subject-matter experts and industry practitioners from various jurisdictions. Discussions centered around Shariah compliance and the accounting aspects of Sukuk issuances, reflecting AAOIFI’s commitment to fostering collaboration and addressing complex issues in Islamic finance.
Upholding Ethical Standards: The AAOIFI Governance and Ethics Board (AGEB) approved GS 17, ‘Shari’ah Compliance and Fiduciary Ratings of Sukuk and Other Islamic Finance Instruments’ in its 33rd meeting. This standard, a continuation and complement to AAOIFI GS 10, sets out principle-based guidance on Shariah compliance and fiduciary ratings for Sukuk and other Islamic finance instruments.
In principle, the AGEB approved GS 16, ‘Institutional Framework for the Implementation of Ethics’. This standard specifies a framework for institutionalising ethical conduct, emphasising the responsibility of governance and management organs toward ethical behaviour. It mandates the adoption of the ‘AAOIFI Code of Ethics for Islamic Finance Professionals’ and other applicable codes of ethics.
Continuing its commitment to Shariah governance, AAOIFI concluded the work of the IFSB–AAOIFI joint working group on Shariah governance. This collaboration, guided by extensive stakeholder feedback, paved the way for separate reviews and relevant guidance on Shariah governance within the respective focuses of IFSB and AAOIFI.
Nominations For Technical Boards: Encouraging Diversity and Expertise AAOIFI opened nominations for candidates to serve on its three technical boards—AAOIFI Shariah Board, AAB, and AGEB. The four-year term, from February 2024 to February 2028, invites nominations from AAOIFI institutional members and other stakeholders in the international Islamic finance industry. This inclusive approach ensures a diverse pool of expertise, spanning central banks, regulatory authorities, financial institutions, academic institutions, and other relevant organisations.
The eligibility criteria for candidates align with international best practices, emphasising competence, experience, and a commitment to the principles of Islamic finance. The nominations process invites institutions to submit online or via email, fostering a collaborative selection process.
Capacity-Building Programs: Empowering Professionals For Excellence
Diverse Workshops And Capacity Building Week: Enriching Knowledge In 2023, AAOIFI demonstrated its commitment to enhancing the capabilities and knowledge of Islamic finance professionals through a series of comprehensive capacity-building programs. These programmes, comprising various workshops delivered both online and in-person, covered a wide array of topics. Notable workshops included those tailored for institutions such as the IsDB and the Central Bank of Iraq.
A landmark initiative was the inaugural Capacity Building Week (CBW), held in collaboration with the Bahrain Institute of Banking and Finance (BIBF). This week-long event featured 21 workshops with over 300 trainees from more than 30 countries. Regulatory and supervisory authorities (RSAs) were allocated three complementary seats in workshops of their choice, fostering engagement and knowledge-sharing.
Advocacy And Awareness Initiatives: AAOIFI’s Flagship Conferences AAOIFI’s annual flagship events, including the AAOIFI Shariah Board Conference and the AAOIFI–IsDB Islamic Banking and Finance Conference, served as powerful platforms for insightful discussions on contemporary issues and trends in Islamic finance. The latter conference witnessed participation from representatives of 23 regulatory and supervisory authorities, showcasing the organization’s global reach and influence. With a total delegate count of 1,400, including both physical and online participants, these conferences contributed significantly to the industry’s knowledge base and best practices.
Aaoifi Conference Outside Bahrain: Fostering International Collaboration in collaboration with the Securities and Exchange Commission of Pakistan, AAOIFI hosted its first Islamic Capital Markets Conference in 2023. This conference, dedicated to fostering a greater understanding and awareness of Islamic capital markets, brought together key stakeholders to explore opportunities and challenges in this rapidly evolving sector. AAOIFI plans to replicate similar conferences outside Bahrain in collaboration with respective RSAs, further expanding its global footprint.
Aaoifi Footprint Report 2022: The second issue of the AAOIFI Footprint Report in 2022 served as a valuable resource for regulatory jurisdictions and countries. This report provided a detailed reflection of the adoption levels of AAOIFI standards worldwide, categorising adoption into different levels such as full adoption, partial adoption, and the existence of local standards based on AAOIFI standards. Regulators and industry stakeholders could download the report for a comprehensive overview of the implementation of AAOIFI standards.
Journal Of Islamic Finance Accountancy: A Hub for Research and Innovation In 2023, AAOIFI released the eighth edition of the Journal of Islamic Finance Accountancy. This publication showcased peer-reviewed research papers and technical articles contributed by experts in the field of Islamic finance. Covering a diverse range of topics, including weightages and income-sharing ratios for profit distribution in Islamic banks, Shariah-compliant benchmark rates, and the transformation of Takaful operations under FAS 43, the journal served as a hub for research and innovation in the industry.
Strategic Collaborations: Building Alliances For Industry Growth: AAOIFI entered into numerous strategic collaborations in 2023, solidifying its commitment to promoting the growth and development of Islamic finance. Notable partnerships included agreements with central banks, regulatory authorities, financial institutions, academic organizations, and industry bodies worldwide. Some of the key collaborators included the Central Bank of Libya, Central Bank of Oman, Central Bank of Yemen, Banque Du Liban, Da Afghanistan Bank, Central Bank of Iraq, Central Bank of the Turkish Republic of Northern Cyprus, Indonesian Institute of Certified Public Accountants, Refinitiv, iSecurities Hub, International Islamic University College Selangor, BIBF, Russian Association of Experts in Islamic Finance, Luiss Business School (Italy), MISFA Afghanistan, Central Shariah Board for Islamic Banks of Bangladesh, Center for Islamic Finance, Compliance, and Advice of Tanzania, Guidance College of the United States of America, ZamZam Bank and Awash Bank – Ikhlas of Ethiopia, Bank Nizwa and Al Ahli Islamic of Oman, and the Academy of BEPS/Tax Insights of the Netherlands, among others.
In addition to forging new partnerships, AAOIFI renewed its Memorandum of Understanding (MoU) with TKBB (Participation Banks Association of Turkiye) for another three years. AAOIFI also engaged in meaningful meetings with stakeholders, including the Bank of Russia, Maldives Monetary Authority, Capital Market Development Authority of the Maldives, Ministry of Finance and National Bank of Tajikistan, Azzad Management Assets, Iraqi Islamic Bank, Bank Asia, and numerous other financial and non-financial institutions globally.
Charting The Path Forward: In 2023, AAOIFI demonstrated unwavering dedication to its primary objective of developing robust standards for the Islamic finance industry. The organisation’s achievements in standards development, capacity-building, advocacy, and collaborations have positioned it as a key player in the evolving landscape of Islamic finance.
As the industry looks ahead into 2024, AAOIFI is poised to continue playing a pivotal role in shaping the future of Islamic finance. The organisation’s commitment to fostering global adoption of its standards, conducting impactful capacity-building programmes, and actively engaging in strategic collaborations positions it as a driving force for the sustained growth and development of Islamic finance worldwide.
AAOIFI’s membership base saw a steep rise in 2023, reflecting the industry’s recognition of its leadership and influence. With an expanding network of collaborations, a commitment to ethical standards, and a forward-looking approach, AAOIFI is well-positioned to navigate the complexities of the global financial landscape, ensuring the continued success and resilience of Islamic finance. As the organisation continues to chart its course, the Islamic finance industry can look forward to a future marked by innovation, inclusivity, and adherence to the principles that underpin this dynamic and rapidly evolving sector.

Md. Touhidul Alam Khan is Managing Director & CEO of National Bank Limited. He is also a fellow member of the Institute of Cost & Management Accountants of Bangladesh (ICMAB)). [email protected]

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