The Governance and Ethics Board (AGEB / the board) of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in its 25^th meeting approved the issuance of the exposure draft of a governance standard on “Development and Governance of Shari’ah Compliant Benchmark Rates”.

The proposed standard addresses the core principles in respect of establishing criteria for selection, computation, governing, administering, publishing and applying benchmark rates for Islamic finance transactions and structures, in a transparent manner.

With the discontinuation of IBOR based benchmark rates for the financial markets and transition to the risk-free benchmark rates in respective markets, the global Islamic finance industry is facing certain great challenges. This is because traditionally most Islamic finance variable rate transactions are also based on IBOR based benchmarks. AAOIFI has commenced multiple initiatives to address these challenges.

After initial evaluation of the challenges, including specific committee meeting involving experts, AAOIFI Shari’ah Board decided to issue a letter to the regulators of Islamic banking and finance around the globe, identifying certain challenges in the transition, as well as, emphasising on the need for coordinated efforts in the development of a specific Islamic finance benchmark. AAOIFI Shari’ah Board also decided that it shall provide guidance to the working group already formed by AGEB for the alternate benchmark rate project.

In this regard, AAOIFI secretariat has been coordinating with industry players and infrastructure bodies including the International Islamic Financial Market (IIFM) and the Central Bank of Bahrain (CBB) Waqf Fund. Also, the working group formed by AGEB includes members from the Islamic Financial Services Board (IFSB), Islamic Development Bank (IsDB), International Shari’ah Research Academy for Islamic Finance (ISRA) and other key institutions.

AAOIFI in collaboration with IFSB and IIFM held the inaugural roundtable on alternative Islamic benchmark rates on 18 January 2022 to discuss the issues and challenges for Islamic finance in adopting alternative benchmark rates and finding an Islamic benchmark rates.

Mr. Farrukh Raza, Chairman of AGEB stated that: “I would like to thank the board, the relevant working group members and the secretariat for their outstanding efforts and dedication to the development of this standard”. He added that: “I am confident this standard once it is finalised, will play a vital role in the pricing of Islamic finance transactions, and in the transition away from conventional interest rates benchmarks. I also believe it will enhance market discipline and transparency in the Islamic finance industry”.

On this occasion, Mr. Omar Mustafa Ansari, Secretary General, AAOIFI stated that: “I would like to extend my gratitude and appreciation to the board and members of the working group for their commitment and dedicating their valuable time to the cause of AAOIFI which is to serve the industry”. He added that: “Regarding the second phase of this project, it is expected to publish illustrative examples of the models of Shari’ah compliant benchmark rates in the form of an updated version of this exposure draft”.

The public hearings for the standard will be held in the upcoming months in different parts of the world and / or on a virtual basis to obtain industry feedback on the exposure draft. Further details with respect to dates and venues, will be announced shortly via the AAOIFI website.

Comments on the exposure draft are welcomed and should be directed no later than 31 March 2023 to [email protected]. All comments and suggestions from the public hearings and written comments are presented to the relevant working group and AGEB to discuss and make necessary changes before issuing the final standard.

The exposure draft of the governance standard on Development and Governance of Shari’ah Complaint Benchmark Rates can be accessed by CLICKING HERE