AAOIFI Details

AAOIFI works in the parameters of Shari’ah law, which governs the aspects of everyday Islamic life. Members of the organization issue acceptable standards within this law for various elements of the Islamic finance industry. And there are plenty to keep up with. AAOIFI has defined a total of 100 standards.

As an organization, the AAOIFI has the following objectives:

  • Develop and disseminate governance, accounting, auditing, and ethics relating to Islamic financial institutions.
  • Prepare, interpret, and propagate governance, accounting, auditing, and ethics standards for Islamic financial institutions.
  • Review and alter governance, accounting, auditing, and ethics standards for Islamic financial institutions when necessary.

Islamic financial institutions must comply with these standards and restrictions. The most prominent restriction is the prohibition of collecting interest, also known as “riba.” Islamic law allows neither institutions, e.g., banks, nor individuals to gain profit through the interest of loans or other financial vehicles. However, AAOIFI permits entities to earn revenue through other standardized means, mostly related to profit-sharing.

Apart from interest, Shari’ah also prohibits Islamic businesses from investing in certain industries, e.g., alcoholic beverage companies, adult film industry, weapons manufacturers, as well as haram food producers.

Real-World Example of AAOIFI

Banks can still gain loan profit without interest through equity participation. Equity-participation is an AAOIFI-approved method. Popularized by an Islamic bank in Egypt in 1963, equity participation systems are not dissimilar to the profit-sharing model. A bank loans cash to a business in exchange for a share of the business profit. If the borrowing company has a negative net income during a fiscal period, the bank won’t gain a profit apart from the returned debt money.

AAOIFI also regulates Shari’ah-compliant investment vehicles such as Sukuk. Sukuk is an Arabic term for Islamic financial certificates—similar to bonds—that adhere to the Shari’ah law. Unlike bonds, Sukuk holders don’t earn profit through interest or riba. Instead, they can gain periodic profit by owning an asset linked with Sukuk. Sukuk holders give an asset a backing through debt financing to get the benefits of the asset when it appreciates.

To this day, the popularity of profit-sharing systems and Islamic financial investments are growing thanks to the increase in oil prices. Many western financial services are eager to work with Middle Eastern countries and are beginning to provide investment vehicles that obey the AAOIFI regulations.

History of AAOIFI

The AAOIFI is a relatively young organization that has grown fairly quickly. On February 26, 1990, in Algiers, Algeria, Islamic financial instructions signed the Agreement of Association, which prompted the establishment of AAOIFI. The organization was registered on March 27, 1991, in Bahrain in accordance with the agreement. As of March 2020, AAOIFI has members in more than 45 countries that include central banks, other financial institutions, and parties working in the financial industry. Because of AAOIFI, the Islamic financial sector works under a consistent set of standards and will continue to do so as it experiences more global outreach.