Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)

What Is the Accounting and Auditing Organization for Islamic Financial Institutions?

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a not-for-profit organization that was laid out to keep up with and advance Shari'ah standards for Islamic financial institutions, participants, and the overall industry. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was made on February 26, 1990, to guarantee that participants adjust to the regulations set out in Islamic finance.

The establishing and associate members, as well as the regulatory and supervisory specialists of the Accounting and Auditing Organization for Islamic Financial Institutions, characterize the acceptable standards for different capabilities. This incorporates areas like accounting, governance, ethics, transactions, and investment.

Grasping the Accounting and Auditing Organization for Islamic Financial Institutions

In Islamic finance, there are unique rules, limitations, and requirements in regards to business and investing. To be thought of as acceptable, transactions must stick to the administrators under Shariah. The Accounting and Auditing Organization for Islamic Financial Institutions sets compliance standards for institutions that wish to gain access to the Islamic banking market.

The AAOIFI is constantly refreshing its scope to incorporate the different new financial instruments entering markets around the world. For instance, new hedging systems would initially should be talked about and accepted by the AAOIFI before any member would offer these services.

Islamic Finance Basics

Two fundamental principles of [Islamic (shari'ah) banking](/shariah-consistent assets) are the sharing of profit and loss, and the preclusion of the assortment and payment of interest by lenders and investors. Islamic law prohibits gathering interest, known as "riba." Although Islamic finance started in the seventh century, it has been formalized progressively since the late 1960s. This cycle was driven by the colossal oil wealth that energized reestablished interest in and demand for Sharia-agreeable products and practice.

To earn money without the utilization of charging interest, Islamic banks use equity participation systems. Equity participation means in the event that a bank loans money to a business, the business will pay back the loan without interest, however rather gives the bank a share in its profits. In the event that the business defaults or doesn't earn a profit, then the bank likewise doesn't benefit.

For instance, in 1963, Egyptians shaped an Islamic bank in Mit Ghmar. At the point when the bank loaned money to businesses, it did as such on a profit-sharing model. To reduce its risk, the bank just approved around 40% of its business loan applications, yet the default ratio was zero.

Features

• In Islamic banking, the assortment of interest (riba) is prohibited, and sharing of profits and losses among the community is commanded.
• The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) manages Islamic banking to guarantee its members follow the rules and denials set forward by Shari'ah law.
• Due to the increased job of global finance, and the significance of Arabic and Muslim districts in the world economy, the AAOIFI is continually refreshing its best practices and rules to adapt to new innovations like hedging instruments and derivatives.