Audit on Account Holder & Investment Pools

One of the unique features of Islamic finance is the presence of risk-sharing stakeholders such as account holders* in Islamic banks and the insured participants in Islamic insurance companies. These participatory stakeholders have a quasi-equity contractual arrangement to share the profits and losses in the net assets of the underlying business. This is why, to ensure fair and equitable treatment, AAOIFI and IFSB recommend an independent external audit (see article 277 under Special Treatment for Participatory Stakeholders) to provide Sharia assurance on the most critical functional areas of pool creation and management such as equity computations, distributional policies, efficacy of Sharia compliance systems, risk mitigation measures to safeguard stakeholders, implementation of Sharia requirements required by the regulator and Sharia Board.

*Refer to AAOIFI’s Conceptual Framework for Financial Reporting (Revised 2020)

How we can help

Licensed by the Central Bank of Bahrain, we have been serving the Islamic banking and insurance companies for nearly two decades. We understand first-hand the uniqueness of risk sharing in pool management and this is why we have developed our Sharia audit practice specifically focusing on risk sharing of pool management for participatory holders.

Knowing the ins and outs of AAOIFI and IFSB standards you can count on us to deliver cost-efficient, tailored services designed to address the unique Sharia non-compliance exposures that your entity’s participatory stakeholders face. We service large, medium sized, growth-oriented and complex Islamic financial banks, takaful and cooperative insurance companies based on our expertise and a truly international mindset and network. We also continue to work hard to be at the forefront of Islamic financial industry Sharia governance standards, new Islamic accounting rules, and IFSB guiding factors that impact pool operations.

Key Dimensions of our Sharia audit

We focus on Sharia compliance risks that have material impact on pool creation, management and distribution. To this end, we evaluate the following:

  • The objectives, investment strategy, limits and delegation of authority for each pool; 
  • The approval and process for pool establishment and donation (hiba) policy;
  • Profit and loss distribution policies and procedures, including ratio and weightages, and the basis thereof, for all accounts.
  • Policy and procedures for asset allocation and deployment of funds;
  • Rights and obligations of the mudarib (asset manager) or wakeel (agent);
  • Basis for allocating different types of investment holder’s funds to different pools;
  • Basis for assigning weightages to each investment account category within a particular pool;
  • Basis of allocation of income and direct expenses between account holder and financial institution;
  • The treatment and remuneration basis for early encashment/withdrawal of funds by participatory stakeholders;
  • A defined mechanism for inter-pool transfer of assets, with appropriate senior-level approval and SSB’s approval;
  • Profit equalization reserve (PER) and investment risk reserve (IRR), and procedures for their utilisation;
  • Policies for charity account allocations and local & foreign currency deposits;
  • Charges and expenses of the investment pool along with entity’s own equity in the pool;
  • Mechanism of separation between restricted and unrestricted Mudaraba pools;
    management of tagging assets with more than one pool simultaneously;
  • And negligence / breach containment process

We are committed to developing a Sharia assurance engagement that provides you with a thorough, industry-specific, efficient and tailored to your particular operational size.

Contact us and start a conversation today!