Purpose This study aims to consider the implications of the newly devised financial accounting Standard No. 62 by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) on green finance. Design/methodology/approach This study performs a normative regulatory analysis of AAOIFI’s Standard No. 62 with specific reference to the current structural construct of Sukuk – a pivotal financial instrument of green finance, and converses about its adaptation across jurisdictions with the underlying complexities and how they propagate the trillion-dollar global Sukuk market. Findings The proposed standard aims at limiting “asset-based Sukuk” in favour of “asset-backed Sukuk,” thereby reducing the propinquity of Sukuk to a conventional bond: Standard 62 mandates Sukuk issuers to transfer the legal ownership of the assets that underpin them to the investors. The standard promulgates an unequivocal normative framework that engenders regulatory harmonisation across transnational Islamic financial institutions. Its prescriptive elucidation of partnership parameters and profit–loss sharing mechanisms confers doctrinal clarity, thereby mitigating interpretative heterogeneity and fostering investor confidence. The “exposure draft” of the standard reasons that this uniformity is instrumental in attenuating the epistemological divergence that has hitherto beleaguered the sector, and it underpins the legitimacy of Shari’ah-compliant financial products by aligning them with traditional jurisprudential precepts. However, the prescriptive rigidity inherent in the standard has precipitated critiques of its inflexibility in accommodating the diverse traditions endemic to Islamic jurisprudence. The one-size-fits-all approach may inadvertently circumscribe innovative financial engineering, as it imposes normative constraints that can be at odds with localised socio-economic exigencies. Such a static regulatory apparatus risks engendering asymmetrical risk allocation, thereby subverting the dynamic equilibrium sought by profit-and-loss sharing arrangements. Practical implications The proposal represents a seismic change that would add huge legal complexities and raise transaction costs for Sukuk, thereby disrupting issuance, especially the prevalent Green/ESG-Sukuk, which are at the core of green finance. Essentially, there are over 200 instruments, and the standard is going to change their credit profile from being a “senior and secured” to an “asset-backed” securitisation, which is an actual transformation of the debt class. Although Islamic banks are predominantly deposit-funded, a Sukuk halt would affect their overall funding and liquidity profiles to boot. Originality/value AAOIFI Standard No. 62 may ostensibly serve as an essential corrective to align financial practice with Sharī’ah jurisprudence, but its harmonisation is likely to engender both salutary reforms and transitional challenges that will require careful regulatory calibration and market adaptation.
Tasawar Nawaz (Tue,) studied this question.