External audit, centralized regulation likely for global Islamic banking market

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Amanullah Khan

Karachi

The fast growing Islamic Banking Industry all over the world may opt external audit and centeralized regulation of the Islamic banking industry following the example set by the Bahrain Islami banking sector which has decided centralized regulation of the industry.
The Bahrain experience is expected to serve as an example for the region and the global Islamic banking market.
Earlier, the UAE approved the formation of a high Shariah authority for Islamic finance, which is expected to set rules for governance of banks. Malaysia already has country-level Shariah boards in its central bank and capital markets regulator which oversee the industry.
Bahrain’s central bank said it would also issue new rules, effective from next June 30, on Shariah boards within banks, ensuring their independence and clarifying their roles and responsibilities.
Rulings of in-house Shariah boards on financial products and the reasoning behind them will have to be made available to the public, in a move that could press scholars across the industry to develop more uniformity of opinion.
The central bank said it would soon issue training and competency requirements for members of Shariah boards and for Shariah auditors. This could address another source of uncertainty in the industry: a lack of consensus on minimum qualifications for scholars.
It may be noted that 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 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.
Generally speaking the 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.