Bahrain tightens Islamic finance rules

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Dubai

Bahrain is tightening its rules for Islamic banks by requiring all of them to undergo independent, external audits to certify they are following Muslim laws known as Shariah. The move, announced by the central bank on Sunday, could make Bahrain among the strictest jurisdictions for Islamic banking and help Manama maintain prominence in the industry, which it helped to pioneer, against competition from centres such as Dubai and Kuala Lumpur. Islamic banks in the Gulf have traditionally used in-house boards of scholars to determine whether their products and operations obey Shariah, which includes rules such as bans on interest payments and pure monetary speculation. Some scholars argue this decentralised approach allows more flexibility and diversity, but it is not transparent and is vulnerable to conflicts of interest, since scholars are employed by the banks which they vet. Bahrain is therefore insisting Islamic banks introduce external audits, starting with reports issued in 2020 on their business in 2019. A consultation paper issued by the central bank last year proposed that external audits be annual, but Sunday’s statement did not say how often they would occur. The central bank said it would provide guidance later on who would be qualified to conduct external audits. Banks would not be required to make audit results available to the public.—Reuters