AAOIFI needs to adapt

AAOIFI is undergoing a radical transformation under its new Secretary General since his appointment following his predecessor's, Dr. Mohamed Alchaar's departure to head the Economy and Trade ministry for the murderous Assad government in Syria.  The shakeup following Dr. Alchaar's departure is a welcome move for the industry since AAOIFI is one of the top standards-setting bodies in Islamic finance.  Until now, it has relied on revenues from publishing the dead-tree versions of its standards as a key revenue source. 

With most regulatory bodies moving online, AAOIFI has been decidedly behind the trend in keeping its standards only available in hard-copy, even while other Islamic finance bodies (e.g. the IFSB) have provided their standards online in freely available PDF files.  Reuters is reporting that AAOIFI is considering significant reforms of its policies, importantly including rules that would mitigate the potential conflicts of interest in the Shari'ah supervision process. 

The conflict of interest policies that AAOIFI is considering do not necessarily implicate Shari'ah scholars in any wrongdoing.  Most Shari'ah scholars are doing their best to adapt the financial structures used by Islamic banks to meet the real financial needs of Muslims who eschew conventional banks.  There have been a few instances where conflict of interest has played a role in scandals in the Islamic finance industry, however, that merit greater attention. 

For example, the president of Sunrise Equities, a purportedly Shari'ah compliant company in Chicago that ended up as a fraud with the company's founder fleeing the country had significant conflicts of interest with the Shari'ah board that ruled on the product being supported financially and operationally by the president of Sunrise.   A little further north, UM Financial in Toronto, had a Shari'ah board whose chairman is alleged to have been in cahoots with the founder of UM, Omar Kalair in diverting home financing payments out of the company through the Shari'ah board, in transactions that were supposedly payment for Shari'ah consulting services. 

Islamic finance, particularly in the West, is under a microscope for any wrongdoing.  I believe that most Shari'ah scholars are doing their jobs honestly and with the best of intentions, but there are critics waiting for any slip up to proclaim the industry corrupt.  The best way to counter the critics of the industry is to put in place rules that limit wrongdoing and that are fully transparent.  AAOIFI is currently the best venue for this to occur because it has the widest acceptance by Islamic financial institutions.  However, it must become much more transparent itself.