(A broker monitors share prices during a trading session inside the Karachi Stock Exchange July 5, 2010. REUTERS/Athar Hussain)

Islamic finance may face its biggest shake-up in years as a top standard-setting body seeks to reform the way the industry does business, including the role of highly paid scholars in enforcing religious principles. Khaled Al Fakih, the new secretary-general of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), outlined plans for a sweeping review of its guidelines in an interview with Reuters.

Some of AAOIFI’s reforms may prove controversial by challenging entrenched interests in the fast-growing business. Islamic financial assets hit $1.3 trillion globally last year, a 150 percent rise in the past five years as the industry expanded beyond core markets in the Middle East and Malaysia, financial lobby group TheCityUK estimates.

“We would like to see insightful debate…that can help us develop standards that can benefit the industry,” Fakih said by email from Bahrain, ahead of AAOIFI’s annual meeting there on May 7 and 8. His organisation plans to start consultations on reforming the operations of sharia boards, the groups of Islamic scholars which rule on whether financial institutions’ activities and products are religiously acceptable, by the middle of this year. A final draft of the reforms is not expected to be ready before the end of next year at the earliest.

The sharia board system is open to accusations of conflict of interest because scholars are paid handsomely – in some cases, with hourly fees of $1,000 or more – by the very firms whose behaviour they are supervising. The ambiguity in regulation has let some Islamic financial institutions, such as Kuwait’s Investment Dar, argue in court that contracts into which they had entered were not valid because they were not sharia-compliant in the first place.