MANAMA: Despite the economic downturn in the aftermath of the global financial crisis, the Islamic finance industry has been growing strongly with the opening of new markets such as the Commonwealth of Independent States.
The industry is poised to reach $1 trillion this year, a major landmark. Crossing this threshold could possibly ignite a new growth path for the industry, which according to some estimates has the potential to become a $5trn industry.
Given this background, the role of standard setting bodies such as the (Accounting and Auditing Organisation for Islamic Financial Institutions) AAOIFI becomes even more critical than before, according to Ernst & Young's Islamic Financial Services Group (IFSG) partner Sameer Abdi, who was speaking on the sidelines of the AAOIFI annual Sharia conference in Bahrain, which opened at the Crowne Plaza yesterday.
"Islamic finance is at a critical juncture in its natural evolution," he said. "Typically when an industry is in early growth phase, the regulator has to play an enabling role and standard setting bodies bring in standardisation to a fragmented industry.
"After the industry achieves a critical size it enters a rapid growth trajectory, doubling within a short period of time.
"However, for this to happen, it is absolutely critical that there is industry-wide acceptance of basic standards, which are accepted by mainstream markets and players."
"The role of AAOIFI as the pioneering standard setting body for the last two decades is of paramount importance in this respect," said Ernst & Young Bahrain group head of IFSG Ashar Nazim.
"Islamic banks have weathered the global financial crisis better than their conventional counterparts due to Sharia restrictions on investing in derivatives and other toxic assets.
"Unfettered financial innovation has proven too risky and market participants need to adhere to the letter and spirit of Sharia standards in order to keep their risk at manageable levels."
He welcomed AAOIFI's recent announcement that in addition to providing guidelines and standards, it will certify that financial contracts between Islamic financial institutions and their clients comply with AAOIFI's standards.
"Banks need to be cautious and proactive about Sharia legitimacy of their products," he said.
"It is a very sensitive issue because even a perception amongst general public that a product is not Sharia-compliant can destroy the reputation of a bank."