How Islamic finance can support development in agriculture

Demand for food is expected to increase by 70% by 2050 and annually $ 80 billion investment is needed to meet the future demand according to the estimates of World Bank. Middle- class population from developing country has led to the increasing demand for higher value foods such as fish, meat, and dairy products. Overall, the demand for higher value foods going to increase in next three decades which can result in increased in investment for agriculture. Agriculture is one an important source of income for the people living in rural area of developing countries. The major challenges faced by the farmers are lack of access to finance their agricultural production. Financial institutions don’t want risk themselves by investing in agricultural production and business due to their inherent risks and lower returns. Farmers are less fortunate to get loans compared to the business and industries.

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Islamic Finance: Using blockchain to solve wakaf challenges

Wakaf — the Arabic word for an endowment to a charitable cause — contributed significantly to the global socioeconomic landscape in the past, especially in eradicating poverty. However, in modern times, wakaf has not had a compelling impact on improving the welfare of the people, according to Dr Farrukh Habib, researcher at International Shari’ah Research Academy for Islamic Finance.

While there are many reasons for this, it is mainly due to the mismanagement of wakaf assets, he says. Although these assets are estimated to be worth more than US$1 trillion globally, it has been difficult for individuals and institutions to maximise the value of the endowments.

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Green Financing : Sukuk going Green

The issuance of world’s first Green SRI sukuk by Malaysia not only serves as a testament for its leadership in sukuk market but also exemplifies the country’s commitment towards green and sustainable responsible investments. Malaysia’s experience in facilitating the green sukuk issuance by developing the necessary framework and infrastructure for a conducive market of green sukuk is set to become a model in bridging Islamic finance and SRI industry. more

FinTech Islamic Finance Challenge

What is the FinTech Islamic Finance Challenge?

FinTech Islamic Finance Challenge is an opportunity to transform your technology-based idea into a social impact finance project. We are here to listen to creative and innovative minds looking for solutions to improve the access to Islamic financial services through technology and to those who are determined to contribute to a socially responsible development according to the Islamic finance principles.

Further detail

Goldman Sachs First & Second Sukuk Issues

Done by: RAZAN ALTWAIRQI, Zainab Bin Mafouz, and Noha Dhaba’an

Goldman Sachs The firm

Goldman Sachs is an American multinational firm founded in 1869 in New York, while Saudi Arabia Goldman Sachs were authorized in January 2009. The firm offers a wide range of financial services primarily in investment banking services, lending, securities, financial management and financial engineering. It deals basically with institutional clients beside the high-net worth individuals, and provides a variety of financial specialized services that can be classified into four major categories:

 1- Investment banking as strategic advising, risk management, IPOs and underwriting for other securities.

 2- Institutional client services as facilitating the client’s transactions and making markets in financial and commodity products.

3- Investing and lending services as originating loans to finance the clients and investing through financial assets and real estate entities.

4- Investment management services as financial counselling, portfolio management, wealth advisory and transaction services.

The first Sukuk issue:

In 2011 Goldman Sachs intended to inter the Islamic capital market by issuing a 2 billion U.S.D worth sharia compliant Sukuk. This issue has caused a large debate in the Islamic region due to many reasons. Firstly, the Islamic community had a great doubt in the intention and the goals behind this issuance. As per the idea that says, Muslims are willing to accept lower returns on their investments in comparison to their conventional counter party just for the sake of a sharia compliant product that they understand its cost and liabilities.

 In addition, they are willing to share risk with the issuer of the Sukuk as part of the main profit loss sharing Islamic principle. The second reason the Islamic society was hesitant about this issuance is the accusations to the western financial sector of causing the financial crisis by applying the easy money product that contradicts the Islamic principles, so what do they have to offer to the Islamic conservative capital market. The third and most important reason is that the society was skeptical on what sharia knowledge does Goldman Sachs has to create an Islamic compliant product. (Global Islamic Finance Report “GIFR”2012).

On the other hand, voices in the Islamic capital market supported this issuance as they expected it to boost the market and enhance the current creditability of the market. Moreover, it will open new financing channels by the cooperation between the advanced western capital market and the Islamic markets.

In spite of these two contradicting opinions of the Goldman Sachs issue, the logic would be to inspect the compliant of the Sukuk structure offered. As per the rulings of Islam, everything is permissible unless it violates a sharia rule. Western companies are offering many different products to the Islamic world, and Muslims have been trading with non-Muslim countries for ages. Then the core of this issue is to investigate the compliance of the Sukuk despite its source and take a decision that considers the best interest of the society.

The first Sukuk structure:   

Goldman Sachs announced that it was going to the market to rise financing totaling $2 billion through a Murabaha agreement; they set up a special purpose vehicle (SPV) called “Global Sukuk Company Limited” as a trustee. The Trustee was incorporated under the laws of the Cayman Islands on 6 September 2011 as an exempted company with limited liability. The Trustee is a newly formed entity and has no operating history, there only asset will be the Trust Assets held for credit holders (from Goldman Sachs’ base prospectus). The base prospectus submitted to various stock exchanges including the London Stock Exchange and the Irish Stock Exchange. The SPV in its capacity as issuer and trustee has established a program for the issuance of Murabaha trust certificates in a maximum aggregate face amount of $2,000,000,000 as may be increased in accordance with the terms of the Master Declaration of Trust (MUSHTAK, 2012).

Below are the terms and conditions of Trust Certificate Issuance Program taken from GLOBAL SUKUK COMPANY LIMITED’s base prospectus.

Trustee: Global Sukuk Company Limited, as trustee for and on behalf of the Certificate-holders and, in such capacity, as issuer of the Certificates.

Ownership of the Trustee: The authorized share capital of the Trustee is U.S.$50,000 consisting of 50,000 ordinary shares of U.S.$1.00 each, of which 250 have been fully paid up and issued.

Arranger: Goldman Sachs International

Guarantor: The Goldman Sachs Group, Inc.

Guarantee: GSG (as the Guarantor) will agree to unconditionally and irrevocably guarantee to the Trustee the prompt and complete payment when and to the extent due, whether by acceleration or otherwise, of all payment obligations, of GSI arising out of or under the Master Murabaha Agreement.

Initial Program Amount: Up to U.S. $2,000,000,000 (or its equivalent in other currencies) aggregate face amount of Certificates outstanding at any one time.

Issuance in Series: The Certificates will be issued in series .The specific terms of each Series will be completed in the applicable Final Terms. Certificates may be distributed by way of private or public placement and in each case on a syndicated or non-syndicated basis.

Currencies: Certificates may be denominated in Dirhams, U.S. Dollars, Saudi Riyals and Singapore Dollars or any other currency or currencies, subject to compliance with all applicable legal and/or regulatory and/or central bank requirements.

Maturities: The Certificates will have such maturities as may be agreed between the Trustee and the relevant Dealer.

Issue Price: Certificates may be issued at any price on a fully paid basis.

Status of the Certificates: Each Certificate will represent an undivided ownership interest in the Trust Assets of the relevant Series.

Dissolution Amount: In relation to a particular Series, the sum of (i) the aggregate face amount of the Certificates of the Series and (ii) the profit amount due on the maturity of such Series, which shall in aggregate, be equal to the Deferred Payment Price in respect of the Murabaha Contract for such Series.

According to Wouters (2011) he indicated that the above chart represents Murabaha Arrangements used by Goldman Sachs in their first Sukuk issuance:

1. The Trustee (as the Seller) will, at the request of the Purchaser, enter into a Murabaha Contract with the Purchaser whereby the Seller will use the proceeds from the issuance of the Series to purchase certain commodities from a third party supplier on immediate delivery and immediate payment terms.

2. The client (GSI) will act as the buying agent of the trustee in this acquisition transaction from the supplier.

3. Then the trustee will sell the commodities to the GSI (as a purchaser) on immediate delivery but with deferred payment basis (cost + the markup).

The certificate holder will receive their periodic distribution amount as it comes due.

Sharia Issues:

In 2011, GSI declaration of $2 billion Sukuk issuance was marred with controversy, and consequently, was faced by a storm of disapproval to the extent that is was never issued. Before going through the main issues in GSI first proposed Sukuk issue, it is worth noting that the idea of a conventional bank issuing Islamic bonds is by itself widely controversial. According to (CHAPTER 10: Goldman Sachs Milestone Global Sukuk, 2012); while some Muslim investors are willing to sacrifice high return for being in compliance with Sharia principles, and consequently, will refrain from investing in any financial products issued by conventional financial institutions, others deem the participation of conventional banks in Sukuk issuance as a step that might contribute to the development of Islamic markets. In general, scholars and Islamic finance practitioners had specified three main problems in GSI 2011 Sukuk issue related to its structure, listing on an exchange, and the use of its proceeds.

The Structure

Regarding the issue of GSI’s 2011 Sukuk structure, it was stated in the prospectus that it was Murabaha based Sukuk as the contract between the SPV (Global Sukuk Company as a trustee and seller) and GSI was Murabaha. However, Mohammed Khnifer, a renowned Islamic banking practitioner, Sukuk structurer, and strategist, argued that GSI’s 2011 Sukuk issue structure can possibly be deemed as reverse Tawarruq as the Sukuk proceeds’ cycle was not entirely revealed prospectus (2011). Accordingly, a verification of such a claim is essential.

Murabaha Sukuk, as defined by AAOIFI, are certificates of equal value issued to provide financing for the acquisition of goods through a Murabaha-based sale contract where the certificate-holders are the owners of the commodity. Figure (2) illustrates the structure of Plain Vanilla Murabaha Facility as proposed by GSI Sukuk base prospectus in which the following statement was repeatedly stipulated

“…whereby the Trustee will, at the request of GSI, use the proceeds of the issuance of the Series to purchase certain commodities from a third party Seller on immediate delivery and immediate payment terms and will immediately sell such commodities to the GSI on immediate delivery terms but with payment on a deferred basis.” (Global Sukuk Company Limited, 2011, p. i)

Moreover, Mr. Asim Khan, MD and head of structuring for Dar Al Istithmar (the Sharia advisor for Global Sukuk issue), stated that the documents “clearly shows that Trustee, as seller, sells the commodity to GSI, as purchaser. That’s it…” (Khan, 2011)

However, despite the apparent conformity to Sharia, the structure requires a second leg to attain cash flows to make Sukuk of value, a thing that originated the debate regarding the existence of Tawarruq transaction. Apparently, a simple review of the legal documentation is insufficient to provide a clear evidence regarding the implicit existence of reverse Tawarruq. Therefore, looking at the intentions of the parties involved might provide an insight on this issue. In essence, GSI is likely to sell the commodities immediately in order to get cash. This constitutes a situation of gaining money against deferred payments with a markup. Thus, for sure there will be a pre-intended second leg associated with the proposed Murabaha facility as it was stated in the base prospectus

Upon completion of the sale of the Commodities by the Trustee (in its capacity as Seller) to the GSI, the latter may hold the Commodities as inventory or elect to sell the Commodities in the open market provided that where GSI elects to sell the Commodities, it shall sell the Commodities to a third party buyer that is not the initial Seller.” (Global Sukuk Company Limited, 2011, p. 16)

Additionally, and to ensure the full compliance with Sharia, Dar Al Istithmar declared in the base prospectus that once the commodities are sold to GSI, it will have full discretion regarding the utilization of commodities (Khan, 2011). This seems like a confirmation that the structure of GSI 2011 Sukuk is far from being tainted with the non-complaint features of Organized Tawarruq.

Tawarruq, in its essence, is generally deemed acceptable from a Sharia point of view as it is considered a cash generating facility as funds will be firstly converted to commodities with deferred payment, and then back to cash. Yet, the organized version of Tawarruq, where the Islamic financial institution (IFI) will organize the process by acting as an agent that will sell the commodity on behalf of the client, had been categorized as unlawful by the Organization of Islamic Countries (OIC) Fiqh Academy (2009). Traditionally, the IFI used to provide assistance to the client by offering to organize the Tawarruq process, as the client usually has no expertise in regards to the sale of the commodities. This is a situation in which the client only has to sign some papers in order to end up with cash at the cost of deferred payments. Accordingly, one can conclude that since the Trustee (SPV/IFI) is not playing the role of an agent of GSI (in its client capacity), this will render the structure far from being classified as Organized Tawarruq. Yet, further scrutiny in regards to GSI Sukuk structure will reveal the true classification of this Sukuk structure.

In (Khnifer, 2011), the author argued that the structure of GSI 2011 Sukuk, illustrated in Figure (4), suggested that except for the legal issues (signing of papers and transfer of legal title), the Trustee (SPV) has no role in the first purchase transaction. Instead, GSI acted as an agent for the Trustee in this transaction, thus, was actually organizing the two legged structure by itself with full control over the process and the behavior of the Trustee. It is true that GSI, with its well situated global presence, is utterly capable to solely run the two legs of the structure, yet, this situation is deemed in clear contradiction to Sharia principles. This is because the purpose for which the SPV presence was required (to protect the rights and to work for the interest of the certificates-holders) was not fulfilled. The fact that the role of the Trustee in GSI Sukuk structure was clearly marginalized has rendered the structure not in full compliance with Sharia. This explains why most of the Islamic scholars, especially those who were mentioned in the base prospectus as members of the Advisory board of Dar Al Istithmar, refrained from approving this Sukuk issue (Davies, 2012).

Listing on the Irish Stock Exchange

Mr. Mohammed Khnifer and other Islamic financial practitioners had further concerns regarding GSI 2011 Sukuk listing on the Irish Stock Exchange (ISE). It was clearly stated in (Khan, 2011) that

…the offering circular clearly states in several places that the certificates can only be traded on a spot basis and at par value if they are to be Sharia compliant … hence the listing can, practically speaking, only have a taxation and regulatory benefit without impinging on Sharia principle in any manner.

Although this statement might seemingly provide reassurance regarding the Sukuk trading on ISE, neither it nor the base prospectus provided a clarification regarding the procedures by which the implied non-tradability feature of Murabaha Sukuk can be ensured. Khnifer (2011) asserted that the ability of ISE to ensure that GSI Sukuk will be traded at par is questionable. More importantly, he stated that, practically, listed securities are intended to be traded and this is always associated with fluctuations in the yield. Thus, a situation of debt trading will be created, a thing that will render the process of Sukuk issuance impermissible due to the prohibition of debt sale under Sharia.

In fact, any leniency in regards to such a case might open the door for possible disguised interest bearing transaction to be dominant, a thing that will surely compromised the credibility of Islamic finance as a whole. This is because as time passes, and with enough clemency, modifications to what are supposedly non-tradable Sukuk would be applied just to create more demand by attracting more investors regardless of their sentiments. In other words, the mere intention to promote Murabaha Sukuk, by listing them on a stock exchange for instance, just to make them more appealing to non-compliant investors is hazardous as it jeopardizes the authenticity of this type of Islamic investments as it cannot be distinguished from conventional bonds any more. Ideally, non-compliant investors must accept the principles of Islamic finance if they want to invest their wealth using any facilities categorized under this concept. Hence, issuers as well as investors involved in Islamic oriented investments must abide by the rules and principles of Islamic finance while the “vice versa” situation cannot be applied.

 The use of the Sukuk Proceeds

According to Khnifer (2011), there are strong indications that GSI will eventually use the proceeds of the Sukuk to fund its conventional activities, a thing that was clearly classified as impermissible by AAOIFI. Referring to Khan (2011), who was quoted previously in this paper, he asserted that proceeds would be only used for GSI “general corporate purposes and to meet its financing needs.” Assuming that GSI will do this with good faith, still, the alternatives available for this conventional, creative financial engineering practitioner to use funds in Sharia compliant investments are outnumbered by the proliferated non-Islamic investment activities. The fact that GSI lack an Islamic window/unit raises more concerns regarding the true availability of Sharia compliant ventures in which Sukuk proceeds can be utilized. Furthermore, according to Wouters (2012), none of the following was found in the base prospectus:

1)    A written commitment from GSI to utilized the proceeds in full compliance to Sharia principles;

2)    A guarantee by GSI in regards to provide full isolation to the proceeds from the institution’s interest-contaminated funds;

3)    An assurance by the Sharia Board regarding the existence of continuous monitoring, reporting, isolating, and cleansing of the funds.

In general, people with conservative perspectives oppose the participation of conventional banks in Sukuk issuance due to the possibility of the use of the proceeds in financing non-Sharia compliant activities. According to (Davies, 2012), Badlisyah Abdul Ghani, the chief executive of the Islamic unit of CIMB group in Malaysia, stated that except for development banks, conventional banks should be banned from issuing Sukuk. This is because Islamic finance, in essence, involves providing funds for Sharia-compliant activities, a thing that is not applicable to the interest-based nature of the conventional banks activities.

As we have seen the Goldman Sachs has offered a controversial structure in its Sukuk, this Sukuk remained as a plan and was not issued in real. However, Goldman Sachs has planned a second Sukuk issuance in 2014.

The second Sukuk issuance:

In 2014 Goldman Sachs issued their five-year second Sukuk of 500 million U.S.D. In this Sukuk issuance results turned around after the first issue failure, after the roadshows in Qatar and UAE the majority of the Sukuk were bought by Middle Eastern banks as the represented 87% of the investors while European investors represented 11% and Asian investors by 2% according to Gulf Business. These were significant results as the second issue of a conventional bank in a Muslim country especially after the controversial first Sukuk were Goldman Sachs has to cancel the issuance due to sharia incompliance.



The information about this issuance as per the base Goldman Sachs prospectus:

Face amount: 500,000,000 U.S.D

Issue price: 100%

Profit rate: 2.844%

Maturity date: 23 September 2019

Expected rating (S&P/Fitch): A- / A

Lead Manager(s): Goldman Sachs International, Abu Dhabi Islamic Bank, Emirates NBD Capital, National Bank of Abu Dhabi, NCB Capital & QInvest.

Trustee: JANY Sukuk Company limited

Arranger: Goldman Sachs

Guarantor: The Goldman Sachs Group, Inc.

The primer asset: crude oil assets via Wakalah agreement invested in a portfolio as follows:

51% sharia compliant commodities.

49% deferred payment Murabaha.

Dissolution Amount: As per the event of dissolution, the company is obligated to find a third party purchaser to purchase for a price equal to the then market value of the commodities.

By this Sukuk Goldman Sachs managed to inter the Islamic capital market after three years of its first attempt. Muslim investors represented mainly by Islamic financial institutions as banks bought the Sukuk Al-Wakala and were the majority of investors who invested in this Sukuk.  Goldman Sachs could inter the Islamic capital market this time by changing the structure of its Sukuk and due to changes in circumstances in the Middle East.

 The second Sukuk structure:

This is Goldman’s second attempt to issue Sukuk, after a $2 billion plan to issue a one-year Sukuk in 2011 was withdrawn amid charges that it failed to uphold Sariah principles. Goldman plans to use a new hybrid structure and has named four prominent Arab Gulf banks to manage the proposed $500 million, five-year issue: Abu Dhabi Islamic Bank, Emirates NBD Capital, National Bank of Abu Dhabi, and Saudi Arabia’s NCB Capital. The Sukuk will be listed on the Luxembourg Stock Exchange (Gordon, 2014).

Gordon stated in Global Finance magazine in October 2014 that Goldman investment vehicle JANY Sukuk will act as the Trustee and enter into a Murabaha (cost-plus sale agreement) for 49% of the issue and into a Wakala agreement for 51% with Goldman subsidiary J. Aron. Under a Wakala, where one party manages assets on behalf of another.

Figure 5 GSI Second Sukuk Issue Structure

Fitch Ratings, which said it expected to issue an A rating to the Sukuk program, noted that Goldman will unconditionally and irrevocably guarantee the payments of J. Aron under the Murabaha contract. The underlying assets are linked to commodities and crude oil (Bernardo, 2014).

Below are further details of the Sukuk terms and conditions taken from the Goldman Sachs’ Base prospectus. However, the structure diagram was taken from the general hybrid Wakala-Murabaha structure concept.

1, 2.The Goldman investment vehicle JANY Sukuk (SPV) will receive the proceeds from certificate issuance.

3. Then SPV will enter a 49% of Murabaha cost plus in Sharia commodities and 51% Wakala agreement with J. Aron (Wakeel).

4, 5. The Wakeel will purchase the assets from a third party (seller) and invest in the Wakala assets profile.

6, 7. The return on investment will be transferred to the SPV by the wakeel in order to be distributed to the investors.

8. Investors will receive the periodic amount distribution as well as the dissolution amount at maturity.

9. At the maturity the GSI will buy the assets as the purchaser and pay the exercise price.

Resolving the Previous Sharia Issues:

Apparently, GSI had learned the lesson and was able to resolve most of the Sharia issues related to the first Sukuk issue. Firstly, GSI opted to issue the second Sukuk using Wakala facility, in which one party manages assets on behalf of another, which became the preferred structure for Sukuk by multinational banks such as Societe Generale, HSBC, and Bank of Tokyo-Mitsubishi UFJ (Narayanan & Hamzah, 2014). Wakala is a basic structure and less complicated than other structures opted for in similar deals such as Murabaha; thus posing fewer challenges as to its conformity and compliance with Islamic Sharia principles, especially when it is structured and promoted by a conventional bank.

Moreover, it was clearly specified that the proceeds of the Sukuk would be used to fund the commodities business of J. Aron & Co. (Goldman Unit). This is deemed as an assurance by GSI that the Sukuk proceeds will be used to finance Sharia complaint activities (Narayanan & Hamzah, 2014).

More importantly, this time around GSI made sure it had on board key players in the GCC, including Abu Dhabi Islamic Bank (ADIB), Emirates NBD, National Bank of Abu Dhabi, QInvest and NCB Capital as arrangers, as well as itself (Narayanan & Hamzah, 2014). This has been done to engage institutions with more expertise in Sukuk issuance field to provide simultaneous facilitation and guidance regarding the requirements of Sharia compliant investors, especially those high net worth ones in GCC region.

Furthermore, the issue had been listed on the Luxembourg Stock Exchange as the trading of Wakala Sukuk is less controversial than trading Murabaha-based Sukuk (Kerr & Braithwaite, 2014). This is due to the absence of the indebtedness in the former type of Sukuk which rendered the trading of latter type impermissible. Yet, Mr. Mohammed Khnifer still emphasized on GSI expected efforts regarding ensuring the isolation of the Sukuk proceeds from financing its conventional activities (Kerr & Braithwaite, 2014).

Additionally, the involvement of multinational financial institutions with their profound financial expertise and investor base would, in a way or another, positively contribute to development of Islamic finance. However, this is contingent to these financial wholesalers level of disclosure regarding the characteristics of the underlying assets/projects and to the extent to which they abide by Sharia principles.


(2009). OIC Fiqh Academy Ruled Organised Tawarruq Impermissible. Organization of Islamic Contries.

CHAPTER 10: Goldman Sachs Milestone Global Sukuk. (2012). EDBIZ-NASDAQ OMX Sharia Indexes. NASDAQ OMX. (pp. 99-104).

Davies, A. (2012, April 24). Islamic Finance: Islamic Sukuk By Goldman Sachs Causes Debate. Retrieved from Huff Post Religion:

Goldman Sachs. (2015). Retrieved November 23, 2015, from

Kerr. S. & Braithwaite. T. (September 4, 2014). Goldman Sachs to issue its first Islamic bond. Financial Times, Retrieved from

Khan, A. (2011, December 8). Controversy dogs GS Sukuk. (T. I. Globe, Interviewer)

Khnifer. M. (2012). Disclosure of 3 Flaws in Goldman Sachs’ $2 Billion Islamic Bonds. Retrieved from http:// Disclosure_of_3_Flaws_ in_Goldman_Sachs_2_Billion_Islamic_Bonds.

Khnifer, M. (2011). Goldman Sachs Claims that its $2 billion Sukuk Program Follows a Murabaha Structure, Mohammed Khnifer Claims Otherwise–That it’s Nothing More than A reverse Tawarruq. (December 6, 2011).

Limited, G. S. (2011, October). Trust Certificate Issuance Programme. Goldman Sachs Base prospectus. Goldman Sachs.

Narayanan. A. (Sep 16, 2014). UPDATE 1-Goldman Sachs gets strong demand for landmark Sukuk issue. Thomson Reuters. Retrieved from

Narayanan, A., & Hamzah, A.-Z. A. (2014). UPDATE 3-Goldman Sachs plans debut sukuk issue as Islamic finance goes mainstream. Dubai/Kuala Lumpur: Reuters. Retrieved from idUSL5N0R513N20140904#KKQbbYXyHazVtqpi.99

Parker. M. (2012). The lessons from the Goldman Sachs proposed $2bn Sukuk saga.  ARAB NEWS, Retrieved from

Platt. G. (October 09, 2014). GOLDMAN SACHS TO TAP GROWING ISLAMIC MARKET. Global Finance Magazine, Retrieved from

Reuters. (2014, September 18). Middle East Banks Buy Vast Majority of Landmark Goldman Sachs Sukuk. Gulf Business. Retrieved November 15, 2015, from

The base prospectus of Goldman Sachs Global Sukuk. Retrieved from base20prospectus.pdf

Vizcaino. B. (Sep 14, 2014). MIDEAST DEBT-Conventional banks’ Sukuk to push limits of Islamic finance. Reuters Report, Retrieved from

Vizcaino. B. (Sep 4, 2014). UPDATE 3-Goldman Sachs plans debut Sukuk issue as Islamic finance goes mainstream. Thomson Reuters. Retrieved from

Wouters, P. (2012, January-February). Goldman Sachs : Genuine or Ribawi Sukuk in the Making? Business Islamica Magazine, pp. 34-37.



Sukuk defaults – Country wise analysis

By : Haifa Al Mahmoud, Malak Bakhsh, Sara Aref

Effat University.


The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines sukuk as certificates that provide the investor the right to own the underlying revenue-generating assets and rights and/or services, besides of the income stream they might yield. Sukuk are normally ruled by English law in cases of dispute or arbitration, owing to its trustworthy law provisions.

Since mid-2000s, Sukuk emerged with growing popularity as a realistic and practical shariah compliant long-term financing tool. Malaysia is the largest country in the world for sukuk market, and is committed to continuously advance its financial services industry to meet the ever growing needs of its stakeholders who include, businesses, investors, and the government. Additionally to appeal on the regional and global market levels. This has led to the Sukuk markets around the world to grow and raise significant sources of capital despite a series of substantial amount of sukuk defaults in the Gulf Corporation Countries (GCCs) had blemished the market’s confidence on sukuk, as well as some Malaysian cases such as of Johor Corporation, Ingress Sukuk, Tracoma Holdings, and Nam Fatt Corporation.

Implications of sukuk default

Sukuk defaults elevated numerous questions about the underlying structures and capability of the sukuk as an alternative source of funding as this is issue very crucial since it affects the welfare of all the involved stakeholders. This has laid down more emphasis on the need to identify default risk in sukuk in order to better supervise and manage its affiliated risks. High degree of certainty was needed concerning the post-default process in sukuk transactions since the risk for a default is inherent in all sorts of transactions. Now, the utmost carefully structured products could flop due to conditions beyond investors’ control.

Therefore, this paper aims to shed light on the issue of sukuk default and its implication on several cases. Also, it attempts to analyze the implication of sukuk default on a country’s reputation, the legal aspect and on the investor’s protection.

Sukuk market

As previously mentioned above, the market for sukuk has developed quickly over the last few years with regards to size, numbers, and complexity. Sukuk is now known as a substitute for conventional bonds and is employed in Islamic financing framework for the last two decades. It provides access to foreign governments and corporations to an enormous and increasing Islamic liquidity pool of funds, other than conventional methods.  

While sukuk are supposed to be more secure than the conventional bonds, since they are performed only on asset backed assets, sukuk are now asserted to have lost trustworthiness as a practicable and worthwhile Islamic long-term project financing instrument. Due to the complexity of their structure and several legal issues, it was difficult to apply a reliable rating process for sukuk. However, from a rating view point, evaluating the risk of the issuer’s innate credit strength is central to the final rating result. This was acknowledged when a series of default events took place.


For instance, the period 2003 till 2010 witnessed a series of default in some counties. On top of them is Malaysia with nine big cases, then Pakistan with two and one default event in each of Saudi Arabia. Kuwait, and the USA. Those default cases are: Saad Group’s Golden Belt($650 M), East Cameron Gas ($165.6 M), The Investment Dar Company($100 M), New Allied Electronics Indus-tries ( $ 16.4 M) + Maple Leaf(Rs8 billion), Oxbridge Height ($2.82 M), Hartaplus, Ingress ($ 7.2 M), Oilcorp Bhd ($ 20.6 M), PSSB Ship management (RM40 m), Tracoma Holdings (RM 100 m), M-Trex Corporation (RM 60 m), Englotechs HOLDING (RM 50 M), Straight A’s portfolio (RM 200 M), and Malaysian International TunaPort (RM 240 m ). Based on information from RAM rating agencies, there were 24 recorded default events in Malaysia over the period 2003-2010. Other defaults did follow the ones mentioned earlier. A sample of those defaults will be discussed in the next part in this research along with the reasons that lead to their occurrence.


Court cases relating to defaulted sukuk

The first case of default revolves around East Cameron Partners (ECP). The structure of the sukuk was made in the following sequence. The issuer SPV, East Cameron Gas Company (ECGP), which is incorporated in Cayman Islands issued USD165.7 million worth of sukuk. The proceeds of the sukuk would be employed to buy the ORRI from the Purchaser SPV, just after the Funding Agreement for USD$ 113.8 million would be made. The left over sum was to be used for a development plan, standby account, and to purchase put options for natural gas to hedge against the risk of fall in gas prices. Then, the originator paid his share of the capital in the form of a transmission of ORRI into the buyer SPV. The next step was that the purchaser SPV would be holding ORRI in the properties, would then entitled to around 90 percent of East Cameron Partners’ net revenue generated though gas production. The gas and oil production would be sold to two sources with Merill Lynch acting as a backup. The Proceeds of the oil and gas sale would be channeled into an allocation account.  When sukuk reach maturity, the issuer SPV would exchange all the sukuk against the amount left to be transferred to the sukuk holders.


Reason of default was because that the originator attempted to wrap the sukuk assets that was royalty interests on oil and gas revenues kept by an offshore special purpose vehicle (SPV), into its domain, while the sukuk issuer had been publicized as bankruptcy tool. Meanwhile, the assets were moved in a seemingly shariah compliant true sale. The court holding was that the originator had already sold the underlying assets in a true sale deal.

The second case was for a 5-year musharakah sukuk was issued by The Investment Dar (TID) with the association of ABC Islamic Bank (Bahrain) in 2005. The sukuk offered 6-month LIBOR plus 2% annual, while the 2006 sukuk issue guaranteed a LIBOR plus 1.25 percent for the first 3 years and LIBOR plus 1.75 percent for the rest of the remaining period, to be paid every six months. The Sukuk issued in 2005 were registered on the Bahraini Stock Exchange whereas the 2006 sukuk were issued and registered in Dubai International Financial Exchanges. The first issue was limited and was established in the Cayman Islands. Next, sukuk are issued by the SPV to sukuk investors, primarily against the proceeds of the sukuk. The second issuance was a trust agreement with sukuk holders, the SPV entered into a musharakah agreement, in which the SPV capitalized the proceeds of the sukuk to hold 48.78 of musharakah capital. Instantaneously, the originator, TID, paid its share by shifting all rights, benefits, and entitlements to the TID vehicles and property to musharakah, valued at $157.5 million valuation as specified by a third party and arranged by the partners, thus acquiring the outstanding 52.22 percent of capital in musharakah. The total amount was invested in the motor vehicles and in property assets. The musharakah assets were converted into 150 units, in which TID acquired 76.83 units and the issuer held 73.17 units. The agreement was that the returns on the underlying assets were to be split among the SPV and TID. For more security for the investment, the originator offered an undertaking to repurchase the SPV portion in the underlying assets at the end of sukuk period or in case of early insolvency. As agreed upon between the originator and the SPV, management of the musharakah would be carried out by the originator, in exchange for a fee and plus an incentive fee in case the musharakah accounts would provide a net profit during a given time. The structure of the sukuk was approved by the shariah boards on each partner side.

Later when the agreement took place, TID defaulted under a $100m sukuk in January 2009. The sukuk was ruled by English law using an offshore SPV and the underlying assets were located in Kuwait. Since the sukuk were asset-based, investors were at the theoretical positon to sell the assets if TID.  Following in March 2010, TID gained court defense under Kuwait’s new financial firmness law that ceased all lawsuits related with insolvency towrds TID. TID subsequently settled with Sukuk holders on a six year period of restructuring.



Reasons for Default

TID was in good financial condition till 2007. But during 2008, TID reported a net loss of KD 80. 3 million, for the first time since its foundation. Two reasons were behind this situation. First, was the unrealized losses of KD 88.14 million relating to an impairment in the value of investments in associates. Second, was the actual realized losses of about KD 9.3 million on investments, which in the eventually led to the downfall of the company. During late 2008, TID defaulted on its debt obligations as to liquidity problems. Early in 2009,TID entered in a debt restructuring plan.  




The third sukuk default occurred on mid-2009, where a Saudi business company defaulted on periodic disbursements. Consequently, Moody’s lowered the rating of the company to junk grade. Few banks in the Gulf were affected harshly by the Saad sukuk default for of their exposure to the deeply distressed Saudi conglomerates who are Saad Group and Ahmad Hamad Al Gosaibi and Brothers.  

Saad Sukuk Structure was based on lease and sublease contracts. The transaction was structured according to a head lease agreement, Golden Belt 1 Sukuk Company, which is a SPV listed in Bahrain, entered into a long Head Lease Agreement with the chairman of Saad, in which the SPV, as head lessee, obtains some land parcels on lease from the Head Lessor, Mr Al-Sanea, for 25 years maturity. The net takings of the sukuk would be employed to pay the total rental amount due in upfront by the issuer/head lessee to the head lessor. Then, the Golden Belt 1 issues sukuk of $650 million in exchange of the leasehold rights on the land parcels and pays full rental payment upfront to owner of Saad Group. Afterwards, according to a sub-lease agreement, Golden Belt 1 sub-leases the land parcels to Saad for five years in return for half yearly rental payments at LIBOR plus 0.85 percent, which happened to be the same return as paid for the Sukuk that was an Ijara contract. This would lead to Saad transfering the rental amounts to the SPV at the promised rate, which enables the SPV to transfer the rental amount to the sukuk holders accordingly. Once they reach maturity, sukuk are then exchanged by the sukuk holders, Saad transfers the sukuk amount to the SPV. 7. The SPV, subsequently pays out the sukuk amount to the investors.


Reasons for Default

Saad company had a huge default amount that was $15.7 billion, comprising its Islamic bonds. Saad was confronted with huge liquidity crisis during 2008 and was not able to service its debt obligations promptly. The originator company was surprisingly providing improper and misleading information that was not never delivered to the regulators. Consequently, the Saudi Arabian Monetary Authority (SAMA) halted Saad group assets on May 2009. Additionally, was accused of dishonesty and fraud and was charged of USD10 for misappropriation of the funds of Algosaibi Investment Holding company, the formal owner of the SPV. As a result, the accounts of Saad in Cayman Islands, which were valued at around $9.2 billion, were frozen by November 2009.


The fourth and last sukuk case to be discussed in this research will be Nahkeel sukuk, which was Dubai-based. Nahkeel was a high profile and the largest ever sukuk default case to date. It was issued late in 2006, with maturity of 3 years, which raised a total of $3.5 billion. The sukuk were registered on the Dubai International Financial Exchange. The purpose of the sukuk was to finance a property development project for one project in Dubai, which is Nahkeel Co. PJSC. A SPV was established for this purpose under the name of Nahkeel Development Limited. The originator, Nahkeel Holdings 1, was a subsidiary of Nahkeel World, which was itself owned by another public sector company, Dubai World. Nahkeel Holdings 1, Nahkeel Holdings 2 and Nahkeel Holdings 3 held full ownership in Nahkeel Co. PSJS. The sukuk had the status of a sovereign bond by the rating agency as they were issued by public sector.  Investors then, expected an implicit government warranty for the sukuk. In addition the sukuk had a Moody’s (A1) and Standard & Poor’s (A+) ratings.


The Nahkeel sukuk had been issued on an Ijarah manfaa basis, which enabled sukuk holders’ to obtain the leasehold interest of the primary assets without transferring the title of the assets to them via SPV. Thus, Sukuk holders had only the right to the stream of income generated by the assets but not on the assets themselves.

The agreement was structured that the SPV, namely Nahkeel Development, would issue Nahkeel sukuk to raise $3.5 billion to purchase the leasehold interest in definite land, building and other property at the Dubai Waterfront, which was valued at that time at AED 15.5 billion in 2006 by Jone Lang Lassalle. The SPV would then transfer the collections of the sukuk to Nahkeel holding 1 and purchases leasehold rights of the underlying properties from Nahkeel Holding 1, for 50 years. Additionally, the SPV, would lease the sukuk assets to Nahkeel Holding 2 for a period of 3 years. The SPV would upon maturing of the lease period at specific price and with payment of the other half of the rental payments.

By November 2009, Dubai World demanded a restructuring of its $26bn debt. Investors feared that its $4bn Nakheel sukuk would also default. The sukuk was governed by English law and structured using English trust law concepts to bestow only beneficial ownership on the investors in the form of leasehold rights. Significantly, leasehold rights are not deliberated real rights under UAE law, where the assets indirectly owned by the government were located. Eventually, the default was prevented by Abu Dhabi bailout of $5 billion.


Reasons for Insolvency/default

On the outbreak of the financial crisis over the period 2007-2009, the macroeconomic condition forced Dubai’s government to seek a standstill for $59 billion debt owed by one of the state-owned companies Dubai World, including Islamic sukuk of 3.5 billion. Several factors interplayed and lead to the factors which caused Dubai World to in effect default, including huge short term borrowings, decrease in oil prices, the explosion of the real estate price bubble because excessive supply of residential and commercial properties. At that time, the value of Nahkeel was not clear. Furthermore, the guarantee of Dubai World became worrying since the holding company itself was additional negatively affected by the financial crisis. Moreover, being a holding company, Dubai World may have superior creditors than sukuk holders. Finally, the sukuk’s default was activated by the exact financial situation of the obligor. It was held that if the majoirty of funds in related parties had been utilized sensibly, the halt demand for at least the Nahkeel sukuk, could have been prevented.



Despite the defaults which faced Islamic sukuk in the past years in several countries especially in the gulf however it seems Islamic sukuk are still in demand and actually growing and becoming very popular, perhaps due to the increased regulation. This demand can be attributed to that Islamic sukuk are founded on Shariah principles and on real assets such as real estates.

The overall market sentiment show that many investors and business yet believe in rightly believe that Islamic sukuk have decent investment forecasts and are safer than other forms of investment investments when compared with other conventional instruments..…/Shocking_21_defaulted_sukuk_cases_in_the_last Sukuk Defaults: On Distress Resolution in Islamic

 Finance AAOIFI, 2008, Accounting and auditing organization for islamic financial institutions. Anwar, Haris, and Michael Patterson, 2009, Aston martin owner is first to default on gulf sukuk (Bloomberg). Boustany, Iad G., Sleiman Roula, and Elias Sayegh, eds., 2005. Securitization in mena/gcc: Activity overview by asset class (Globe White Page Ltd, London).

Boustany, Iad Georges, 2006, New sukuk technology, (International Financing Review, Middle East). El-Gamal , Mahmoud A., 2007, Mutuality as an antidote to rent-seeking shari‘a arbitrage in islamic finance, Thunderbird International Business Review.

 El-Hawary, Dahlia, Wafik Grais, and Zamir Iqbal, 2004, Regulating islamic financial institutions: The nature of the regulated, Working Paper No. 3227 (World Bank Policy Research ).

Fidler, Stephen, 2009, Defaults pose latest snag in islamic-bond market, Wall Street Journal Halawi, Adnan, and Abir Atamech, 2012, Sukuk quarterly bulletin, (Zawya).

Hasan, Zulkifli, and Mehmet Asutay, 2011, An analysis of the courts’ decisions on islamic finance disputes, ISRA International Journal of Islamic Finance 3.

Hassan , Kamal Abdelkarim , and Muhamad Kholid, 2010, Bankruptcy resolution and investor protection in sukuk markets, (QFINANCE).

Howladar, Khalid 2009, The future of sukuk: Substance over form? Understanding islamic securitization, asset-backed and aaoifi principles, (Moody’s Investors Service).

IMF, 2010, United arab emirates: 2009 article iv consultation, IMF Country Report (International Monetary Fund).



Ethics and Social Accounting vs. Islamic Accounting

 by  : Hanan Gabil, Wed Al-Nafie and Wejdan Al-Harbi

In early history of accounting, the first name to describe the system of debits and credits in journals and ledger which in fact still the basics of today’s accounting is called Luca Pacioli, year 1494.


Accounting is defined as a valuable knowledge to be performed and it is considered to be the main index for all countries’ economy. Accounting is also an essential part in processing information of business and economy activity into financial statements. In other words, accounting is the universal language of business and economics as well as finance. However, unfortunately, there is still fraudulent and dishonest practices in business and economic activities. Accounting can be divided into 6 categories as follows:

  1. Finance Accounting
  2. Management Accounting

iii.  Auditing Accounting

  1. Taxation
  2. Funds
  3. Forensic Accounting.


There is no certain activity that could be possible done without relying on accounting, because accounting deals with information that consists of financial status and profitability of economic enterprises.


Islamic accounting has existed since the 1500s and has its own principle that not only can decrease the degree of unexpected activities pertaining to accounting process but also increase the welfare of both internal and external parties of the business. That’s because Islamic accounting has an aspect that has more meaning and value which is a similar aspect of conventional accounting too. It comprises of all values required to the most preferable accounting process. This essay details the differences between Social accounting and Islamic accounting.



Ethics in accounting has been posed after scandals that had the greatest impact of the recent century such as examining collapse hiding, law breaking, fraud and violating moral standards. This setback drove companies towards a common strategic goal – principles of accounting. Thus, the following four elements of principle are essential in ethics:

  1. Honesty and trustworthiness

This rule requires a complete and honest presentation of relevant financial and non-financial information. Information presented should be adequately transparency and must not be used for an ethical advantage. A high degree of integrity and discretion is essential.



  1. Objectivity

Objectivity requires all professionals and information to be fair and unbiased. Professional judgment must be free from conflict of interest such as hospitality and family relationship. It is strongly recommended to refrain from personal relationships and accepting gifts on duty.


  1. Confidentiality of information

Unless absolutely necessary and required by the relevant accounting and auditing standards, confidential information should not be disclosed or be used to gain any unethical advantage.


  1. Professional competence and conduct

Professionals are required to have an appropriate level of academic and work competence, preferably related to their field. Any offers of professional duty for which one does not possess sufficient skills to execute the task effectively should be declined. Professionals must always comply with relevant accounting and auditing standards and perform their duties diligently.


According to the ethical code of conduct, having a code does not eliminate fraudulent activities. In fact, it is a guide to accountants which needs to be fully accepted by professionals before it can be effectively adopted into practice. Therefore, there are two additional codes that are incorporated into Islamic accounting:


  1. Faith-driven conduct

Under Islamic accounting, self-monitoring is fundamental. Self-monitoring may be defined as being constantly conscious of one’s actions and their accountability before Allah on the day of judgment. It is also important to seek Allah’s satisfaction instead of pleasing people while performing professional duties which are consistent with Islamic values and the Shariah. One must always be diligent and sincere in his work and actions. This also stresses on keeping promises and honouring agreements.


  1. Legitimacy

Legitimacy requires all professional duties to be according to the Shariah. Accountability to Allah is given priority over accountability to the management. Professionals must have competent knowledge of the Shariah rules and principles through education and formal training. All business activities and transactions must be Shariah compliant and should be verified for religious legitimacy by professionals who are responsible for executing them.


Social Accounting

Social accounting is also coined as Social Responsibility Accounting because of its responsibility to measure and inform the public about the social activities undertaken by the enterprise and their impact on the society. It is the vision of  which a business seeks to make a valuable impact on social operations. In simpler words, social accounting can facilitate the identification and management of social risks.


Business is a socio-economic activity and its objective is the welfare of the society. It requires full responsibility for providing solutions for social issues. Therefore, the concept of social accounting is to manage huge amounts of funds at their disposal and invest substantial amounts in social activities so as to nullify the adverse effects of industrialization.



The benefit of social economy is to act as an evidence of social commitment, fulfill its obligations, and advise the government and the general public to form correct opinions that are just and ethical. However, it does have its limitations. It can be labor intensive if strategic planning has not been set, or also been not useful for benchmarking.


Islamic Accounting

In an Islamic society, accounting should establish purposes according to Islamic teachings in relation to contemporary accounting thought. Those which are Shariah-compliant are pursued and those that are not are discarded.


Certain Islamic ethical principles have a direct impact on accounting policy and principles.

These principles are derived from the Holy Qur’an and the Sunnah, that stresses on the need for justice, truth, and fairness, and are considered to be a society’s priority and responsibility. This also contains specific standards for accounting practices. In Islamic financing principles, it must follow specific elements which gives it distinctive religious identity. These elements  are:

  • Riba (interest): The payment and taking of interest as occurs in a conventional banking system is explicitly prohibited by the Holy Qur’an.
  • Zakat: The process of repetitive distributions of income and wealth is inherently in Islam to guarantee a fair standard of living for every people especially the poor. Zakat is different from a tax, A tax is an obligation of citizens toward the society, whereas zakat is an obligation of a Muslim not only to society but also to Allah.
  • Haram: Islamic banks cannot finance activities or items forbidden in Islam,

Islamic banks give priority to essential production which caters to the needs of

the majority of the Muslim community.

  • Takaful (joint-guarantee): The only type of insurance that would appear to be lawful according to the Shari’ah insurance.


Muslims ought to conduct their business activities according to the requirements of their religion which are moderation, justice, kindness, honesty, spending to meet social obligations. Unfairness and greed should be avoided at all times.


Applying Islamic accounting principles leaves a beneficial impact directly and indirectly on the internal and external parties of the business; some of which are highlighted below.


  • Less possibilities of unexpected activities by the accountant such as fraud in business and society.
  • The creditor will feel more secure in investing their funds in the business.
  • Financial statement and reporting will facilitate better and more accurate decision making by the users.
  • One of the Islamic accounting purpose is to be concerned about the employees and their families when performing their jobs. It can be useful in reducing poverty and increasing the welfare of the society within the company. This increases the purchasing power of the underprivileged which indirectly contributes to the economic growth.


The company also benefits from increased profits, customers’ loyalty, trust, positive brand attitude, combating negative publicity, and having a rightful place in the business world.



Overall, accounting is the recording of financial transactions and focuses on presenting the information in financial statements, These reports must be prepared according to accounting principles. Accounting also provides essential information to the management to keep the business financially healthy. It places high importance on ethical values. It is of utmost importance for a business to provide accurate evaluation, truth in operations, clear revenues and expenses.


Social accounting differs from Islamic accounting. The general concept of Corporate social responsibility (CSR) is to guarantee sustainability which is forbidden under Islamic accounting Exception is only made if it can be regenerated. CSR activities has a direct impact on the social environment. Therefore, it is required by law for CSR activities and information about its operations to be truthfully disclosed to the general public.


Because Islamic accounting obligates businesses to follow the Sharia strictly, it is considered a religious responsibility. Economic responsibility requires financial statements to be viable, profitable and efficient whereas ethical accounting is obliged to respect societal and religious values.


Therefore, Islamic accounting is considered to be much more complex than the social CSR concept in terms of providing the economy with accurateness, justice without taking or giving interest.


Lewis, M. K. (2001). Islam and accounting. Accounting Forum,25(2), 103-127. doi:10.1111/1467-6303.00058


Yarahmadi, H., & Bohloli, A. (2015). Ethics in Accounting. International Journal of Accounting and Financial Reporting,5(1), 356-360. Retrieved April 27, 2017, from


Schneider, B. (2017). Accounting Basics: History Of Accounting. Retrieved April 26, 2017, from


Mishra, S. (2015). Social Accounting: Concept, Definition, Features and Benefits | Financial Analysis. Retrieved April 27, 2017, from


Islam, M. A. (2015). Social Compliance Accounting Managing Legitimacy in Global Supply Chains. Cham: Springer International Publishing.


Asfadillah, C., et al. (2012). The Importance of Islamic Accounting in Modern Era. Cambridge, UK.


Comprative analysis of AAOIFI Vs IFSB

Nahlah Aljudaibi, Adwaa S. Melebari and Hanadi Simbawah


Islamic finance has been rapidly grown recent few years nearly 20 percent annual growth in each year (Zeine Zeidane, 2015), The Islamic Financial Services Industry now has assets of over $175billionwith equity of US$15billion. With more than 300 Islamic banks, finance companies, investment banks (Shahul Hameed bin Mohamed IbrahimStandard,2007 )& Poor’s Ratings declare that over all assets held by Islamic financial institutions estimate around $1.8 trillion with probability to increase for double-digit growth over the coming few years to reach about $3 trillion.

Thus the Islamic finance system must adapting a stander accounting system that compliant with sharia rule and has a sharia objective which cares about Din(faith), nafs (life), maal(wealth), nasel(progeny) and aqal (rational). For following these principles and provide stander accounting system to service Islamic finance institutions and  guide the operations of the industry around the world, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established since 1991 in Bahrain which was issuing accounting, auditing and Sharia standards for financial reporting at Islamic financial institutions. The another institution that considers as issuing supervisory and regulatory standards and guidelines which are governance standards for Islamic institutions is The Islamic Financial Services Board (IFSB) that established in 2002 in Malaysia.

Before elaborate, the two Islamic accounting stander in details must explain the general principles of Islamic accounting.



General principles of Islamic accounting;

According to the (Muhammad, 2002), there are three general principles in Islamic accounting

  1. Accountability:

The concept of accountability is that everyone is accountable for his actions on the Day of Judgment.  The accounting man is a person who involves in accounting issue which let him responsible with the mandated and also related parties, forming in financial statements.

  1. Justice

Justice in accounting system has a meaning of honest and cares about ethical and moral value regarding the parties are included in the financial transaction.

  1. Truth:

The measurement and reporting of accounting activity must create justice or fairness for all shareholders and this cannot happen without Truth principle


AAIOIFI is based in Bahrain and operates as an independent international organization with support from some200 institutional members coming from about 45 different countries. Consist of central banks and monetary authorities, financial institutions, accounting and auditing firms, and other institutions that support the international Islamic finance industry.

AAIOFI is a stander for sharia, accounting, auditing, and governance exactly is issued of 88 standers including of 48 Sharia standards, 26 accounting standards, 5 auditing standards, 7governance standards and 2 codes of ethics. The standards are implemented globally even in non-member countries as they are applicable to IFIs worldwide.

The objectives of AAOIFI:

  • To develop accounting and auditing thoughts relevant to Islamic financial institutions
  • To disseminate accounting and auditing thoughts relevant to Islamic financial institutions and its applications through training, seminars, publication of periodical newsletters, carrying out and commissioning of research and other means
  • To prepare, promulgate and interpret accounting and auditing standards for Islamic financial institutions
  • To review and amend accounting and auditing standards for Islamic financial institutions

AAOIFI carries out these objectives in accordance with the precepts of Islamic Shari’a which represents a comprehensive system for all aspects of life, in conformity with the environment in which Islamic financial institutions have developed. This activity is intended both to enhance the confidence of users of the financial statements of Islamic financial institutions in the information that is produced about these institutions, and to encourage these users to invest or deposit their funds in Islamic financial institutions and to use their services.

AAOIFI Standards

Shari’ah Standards

Guidance on Shari’a permissibility and rules for specific Islamic finance products and mechanisms. AAOIFI’s Shari’ah standards are typically issued through a professional and meticulous scholarly methodology (known as the due process). The standards development process follows a number of stages, commencing with the commissioning of consultants to conduct a thorough study on a specific topic or issue that greatly impact the Islamic finance industry. The study involves Shari’ah characterization of the topic in question and the compilation of Fiqh academy fatwas and collective fatwas pertaining to the topic, and it accounts for all relevant practical applications. The exposure draft is then submitted to the respective Shari’ah standards subcommittee which discusses and reviews it. If approved, the consultant will be commissioned to prepare an exposure draft on the same topic or issue. The first exposure draft will then be discussed with the subcommittee prior to submission to the Shari’ah Board for further discussion and elaboration.

Accounting Standards

Guidance on accounting treatment for specific Islamic finance products and mechanisms and guidance on presentation of financial statements for Islamic financial institutions. Accounting standards due to the unique characteristics coupled with the growing demand of IFIs’ products and services so as to facilitate and enhance the credibility and reliability of the financial statements and reports. It is argued that the current standards which are based on conventional framework seem insufficient to guide the IFIs. Currently, the various IFIs apply different accounting standards in their preparation of their accounts due to the absence of Islamic accounting standards (Zaini, 2007). The trend towards the AAOIFI standards has become a pressing issue that has generated heated debate among Organization of Islamic Cooperation countries.

AAOIFI accounting standards have been made part of mandatory regulatory requirement in jurisdictions such as Bahrain, Jordan, Oman, Qatar, Qatar Financial Centre, Sudan, and Syria.

AAOIFI accounting standards have also been adopted by Islamic Development Bank Group, a multilateral institution.

In addition, AAOIFI accounting standards have also been used as basis of national accounting standards in jurisdictions such as Indonesia and Pakistan..

Auditing, Governance and Ethics Standards

AAOIFI auditing, governance and ethics standards are not part of mandatory regulatory requirement for Islamic finance.  Instead, these standards are used voluntarily by leading Islamic financial institutions across all major Islamic finance jurisdictions.

AAOIFI’s Auditing Standards broaden the scope of the external auditor so that s/he is satisfied with reasonable assurance that the Islamic bank’s transactions comply with Shari’a rules and principles. Require the external auditor’s report to clearly state in the auditor’s opinion whether or not the financial statements give a true and fair view in accordance with Islamic Shari’a rules and principles and the financial reporting framework.

AAIOFI’s Governance Standards aim to enhance the role of SSB in corporate governance. Provide guidelines to harmonize the SSB’s structure and process, including: l Its appointment, dismissal, and the format of its report and the information it should contain. l Steps that should be followed by the SSB in its review to form an opinion as to whether or not the bank has complied with Shari’a precepts.

AAOIFI’s code of ethical structure conduct consists of three sections; namely the foundations of accounting ethics, the principles of ethics for accountants, and the rules of ethical conduct for accountants. The foundations of accounting ethics delineate seven basic foundations; namely, integrity, vicegerency, sincerity, piety, righteousness, Allah-fearing, and, accountability to Allah. From these seven foundations, AAOIFI developed six basic ethical principles; namely, trustworthiness, legitimacy, objectivity, professional competence and diligence, faith-driven conduct, and professional conduct and technical standards. Finally, for all six ethical principles, they developed guiding rules for accountants in their professional works.


Islamic Financial Services Board, it’s an international organization that issues guiding principles and standards for association to central bank and monetary authorities and other institutions that are responsible for regulation and supervision of Islamic financial services industry. IFSB was founded in Malaysia 2002 and started operation on 2003. It serves as an International standard-sitting body of regulatory and supervisory agencies to ensure soundness and stability of the Islamic financial services industry in banking, capital market, insurance.

IFSB definesShari’ahgovernance system as a set of institutional and organizational arrangement through which an Islamic financial institution ensures that there is effective independent oversight of Shari’ah compliance over each of the following structures and process:

  1. a) Issuance of relevant Shari’ah pronouncement or resolution. This refers to a juristic opinion on any matter pertaining to Shari’ah issues in Islamic finance given by the appropriately mandated Shari’ah board.
  2. b) Dissemination of information on such Shari’ah pronouncement or resolutions to the operative personnel of the IFIs who monitor the day-to-day compliance with the Shari’ahresolutions vis-à-vis every level of operations and each transaction. However, this task would normally be done by the internal Shari’ah compliance department.
  3. c) An internal Shari’ah compliance review or audit reports that if there is any incident of non-compliance, it should be recorded and addressed and rectified. With regard to this, IFSB-3 sets out that Shari’ah resolution issued by the Shari’ah boards should be strictly adhered to. d) An annual Shari’ah compliance review or audit for verifying that internal Shari’ah compliance review or audit has been appropriately carried out and its findings have been duly noted by the Shari’ah boards.

The IFSB members have increased from 9 in 2003 to 188 members in 2016with 3 membership type:

1)      31 as full members.

2)      22 as associate members.

3)      125 as observer members.

The ISFB consists of:

  • The general assembly, which includes all members of the ISFB
  • The council, which acts as the policy making body of the IFSB and includes the senior executive of each full member of the organization
  • The technical committee, which advises the council on issues and consists of up to 15 persons appointed by the council
  • The working group, which drafts standards and guidelines and reports to the technical committee
  • The secretariat, which acts as the permanent administrative body and is headed by a secretary-general appointed by the council



The objectives of the IFSB are:

* To promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Sharî’ah principles, and recommending these for adoption

* To provide guidance on the effective supervision and regulation of institutions offering Islamic financial products and to develop for the Islamic financial services industry the criteria for identifying, measuring, managing and disclosing risks, taking into account international standards for valuation, income and expense calculation, and disclosure.

* To liaise and cooperate with relevant organizations currently setting standards for the stability and the soundness of the international monetary and financial systems and those of the member countries.

* To enhance and coordinate initiatives to develop instruments and procedures for efficient operations and risk management.

* To encourage cooperation amongst member countries in developing the Islamic financial services industry.

* To facilitate training and personnel development in skills in areas relevant to the effective regulation of the Islamic financial services industry and related markets.

* To undertake research into, and publish studies and surveys on, the Islamic financial services industry.

* To establish a database of Islamic banks, financial institutions and industry experts.

IFSB Standards

the IFSB has issued twenty-seven Standards, Guiding Principles and Technical Note for the Islamic financial services industry. The published documents are on the areas of:

  1. Risk Management (IFSB-1)
  2. Capital Adequacy (IFSB-2)
  3. Corporate Governance (IFSB-3)
  4. Transparency and Market Discipline (IFSB-4)
  5. Supervisory Review Process (IFSB-5)
  6. Governance for Collective Investment Schemes (IFSB-6)
  7. Special Issues in Capital Adequacy (IFSB-7)
  8. Guiding Principles on Governance for Islamic Insurance (Takāful) Operations (IFSB-8)
  9. Conduct of Business for Institutions offering Islamic Financial Services (IIFS) (IFSB-9)
  10. Guiding Principles on Sharī`ah Goverance System (IFSB-10)
  11. Standard on Solvency Requirements for Takāful (Islamic Insurance) Undertakings (IFSB-11)
  12. Guiding Principles on Liquidity Risk Management (IFSB-12)
  13. Guiding Principles on Stress Testing (IFSB-13)
  14. Standard on Risk Management for Takāful (Islamic Insurance) Undertakings (IFSB-14)
  15. Revised Capital Adequacy Standard (IFSB-15)
  16. Revised Guidance on Key Elements in the Supervisory Review Process (IFSB-16)
  17. Core Principles for Islamic Finance Regulations (IFSB-17)
  18. Guiding Principles for Retakāful (Islamic Reinsurance) (IFSB-18)
  19. Recognition of Ratings on Sharī`ah-Compliant Financial Instruments (GN-1)
  20. Guidance Note in Connection with the Risk Management and Capital Adequacy Standards: Commodity Murābahah Transactions (GN-2)
  21. Guidance Note on the Practice of Smoothing the Profits Payout to Investment Account Holders (GN -3)
  22. Guidance Note in Connection with the IFSB Capital Adequacy Standard: The Determination of Alpha in the Capital Adequacy Ratio (GN-4)
  23. Guidance Note on the Recognition of Ratings by External Credit Assessment Institutions (ECAIS) on Takāful and ReTakāful Undertakings (GN-5)
  24. Quantitative Measures for Liquidity Risk Management (GN-6)
  25. Development of Islamic Money Markets (TN-1)
  26. Stress Testing (TN-2)
  27. Guiding Principles on Disclosure Requirements for Islamic Capital Market Products (IFSB 19).


This paper discusses the important role of AAIOFI and IFSB to ensure that the whole activities of financing activities are in line with the Shari’ah. Also the paper including comparison between AAIOFI and IFSB, the country that host it , objectives, members, standards ,rules and regulation.




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Kingdom, U. (2012). AAOIFI – Governance and Auditing Standards, (September).

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