Bahrain's Waqf Fund, a non-profit body set up by the central bank, has proposed mandatory external sharia audits for Islamic financial institutions to help strengthen compliance and improve the image of the industry, reports Reuters (3 March 2014).
Regulators around the world are increasing their scrutiny of Islamic finance, including the boards of sharia scholars who rule on whether activities follow religious principles.m Since sharia boards tend to be paid by the institutions whose activities they oversee, the scholars can be open to accusations of conflicts of interest - prompting calls for separate and independent oversight, the report adds.
The report adds: The Waqf Fund, established in 2006, is backed by 21 institutions such as banks and mostly focuses on educational initiatives. Bahraini regulators do not have to accept its proposals but since it is chaired by the central bank's executive director of banking supervision, Khalid Hamad, its recommendation appears likely to be adopted. While the proposal is for Bahrain, it may have an impact on Islamic finance globally because of Bahrain's central role in the industry.
WHAT IS THE WAQF FUND:
The Waqf Fund was established in November 2006 under the auspices of the Central Bank of Bahrain (CBB) in partnership with Islamic Financial Institutions (IFIs) in Bahrain. Among the founding IFIs were Arcapita Bank, Bahrain Islamic Bank, Kuwait Finance House (Bahrain), AlBaraka Banking Group, Unicorn Investment Bank, ABC Islamic Bank, Shamil Bank (now Ithmaar Bank) and Gulf Finance House. The member institutions made one-time contributions to the Waqf Fund's corpus which is invested in Islamic money market instruments and the return is used to finance the Fund's initiatives. These initiatives are executed through partner organisations. - INFORMATION ON THE FUND FROM BAHRAIN CENTRAL BANK
MORE INFO ON THE FUND:
The fund has a budget of US$1.4 million for 2014, approved at its 19th Board of Trustees meeting at the Central Bank of Bahrain in December 2013.
In a press release then, available on the website of the Central Bank of Bahrain, the fund was described as 'a Bahrain-based special fund to support Islamic finance training, education and research'. At the meeting, its board approved the leadership grooming program for member institutions and providing financial support to help Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) in further developing the Certified Islamic Professional Accountant (CIPA) qualification.
In July 2013, according to another statement, the fund started a monthly discussion session is planned with prominent Shariah scholars to 'an opportunity to interact with the scholars, ask questions, seek clarifications and discuss new ideas'. In a statement, the sessions were meant 'to groom the next generation of Shari’a scholars'.
THE REUTERS REPORT GOES ON:
The proposal ties in with growing pressure for reforms to the sharia oversight system in other countries. For example, Kuwait's central bank governor Mohammad al-Hashel suggested in a December speech that an independent legal entity should oversee the way in which Islamic financial institutions certify they are following sharia principles.
The Waqf Fund will develop a framework for external sharia audits with a team of audit firms, scholars and the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
"An independent sharia audit should be made mandatory by regulators in order to achieve the desired benefits," the fund said in a statement on Sunday.
Many countries, including Malaysia and Pakistan, have over the past year taken steps to overhaul their Islamic finance rules; the reforms have included taking a more active role in monitoring sharia scholars. In Malaysia, scholars are now legally accountable for the financial products they approve and liable to fines and prison time for wrongdoing.
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