Issues and Challenges 385
them as a basis for national standards, or integrating them into existing
accounting and auditing standards. AAOIFI standards ensure that only the
best accounting and auditing practices are used. They allow comparability
across Islamic banks in different jurisdictions, although they may limit com-
parability between Islamic and conventional banks. Stakeholders involved
in Islamic fi nance will fi nd it easier to gain familiarity with a single account-
ing framework, rather than having to deal with multiple national stand-
ards. Simply extending International Financial Reporting Standards (IFRS)
or national conventional standards is not likely to bring the same clarity,
because it may not allow the disclosure of relevant information.
Poor corporate governance imposes heavy costs, but the mere extension
of international standards to Islamic banks may not be suffi cient to com-
bat this. The principles and practices of Islamic fi nancial services require a
thorough review: sound corporate governance requires the formulation of
principles and enforcement (for more, see van Greuning and Iqbal 2007).
In many countries where Islamic fi nance is developing, regulators often lack
the power to enforce rules, private actors are non - existent, and courts are
“underfi nanced, unmotivated, unclear as to how the law applies, unfamil-
iar with economic issues, or even corrupt” (Fremond and Capaul 2002).
Furthermore, a “law habit” culture — that is, a propensity to abide by the
law — must be rooted in society. While the ability to enforce regulations is
inextricably coupled with the overall process of development, legislation
enabling transparency, private monitoring initiatives, and investments in
the rule of law by willing authorities can pave the way to the emergence of
regulatory frameworks.
The regulation of Islamic fi nancial institutions is one area in which there
have been substantial developments in recent years and the progress in this
respect is worth appreciating. Credit for this goes to the collective efforts in
setting up such organizations as the Accounting and Auditing Organization
of Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services
Board (IFSB), with the help of multilaterals such as the IMF and Islamic
Development Bank (IDB). In its short life, the IFSB has made a notice-
able mark on international fi nancial circles in promoting Islamic fi nance
and developing standards and regulatory frameworks. If this trend contin-
ues, there is reason for optimism about the further globalization of Islamic
fi nance. However, more work needs to be done.
Whereas the current fi nancial crisis has highlighted vulnerabilities in
fi nancial systems, it has also recognized new challenges facing the regulation
of cross - border and highly integrated fi nancial markets. Prior to the crisis,
the emphasis was on market discipline and on promoting standardization
and harmonization of rules and practices. International fi nancial interme-
diation was subject to a growing set of standards and codes, such as the
Basel Core Principles on Banking Supervision, transparency and monetary
management guidelines, IOSCO capital markets standards, corporate -
governance rules, anti - money laundering (AML), and combatting the
fi nancing of terrorism (CFT). The objective was to enhance the effi ciency of