The move by the Bahrain-based AAOIFI, one of the main standard-setting bodies in Islamic finance, suggests it is responding to the same kind of pressure to tighten standards that has been seen in the conventional finance industry since the global financial crisis erupted in 2008.
The new real estate standards focus on valuation methodology, clarifying the differences between mark-to-market values and book values, and specifying how to treat buildings that are still under construction. Disclosure requirements are increased.
“Complex accounting issues have evolved in line with the expansion of the real estate sector,” AAOIFI said, making the current standards look “very basic.”
Islamic investment houses across the Gulf have been under increased investor scrutiny over their exposure to the real estate sector and their approach to valuing those assets.
Bahraini investment house Arcapita, a major real estate investor, filed for U.S. bankruptcy protection last month ahead of the maturing of a $1.1 billion Islamic facility. AAOIFI standards are applied in Bahrain and used as guidelines in many other national jurisdictions.
AAOIFI also proposed merging two of its existing standards for Islamic banks' investment accounts, saying it wanted to eliminate “accounting arbitrage.” The investment accounts are the equivalent of deposit accounts at conventional banks, and are a major source of funds for Islamic banks.
Current requirements for banks to disclose risks surrounding the accounts are insufficient, considering the risk that investors are taking, AAOIFI said.