Assessing Shariah compliance: an analysis of Ijarah financing practices in Sri Lanka's Islamic banking sector against AAOIFI standards

Abstract

This study critically examines the extent to which Ijārah nancing practices in Sri Lanka's Islamic banking sector conform to the principles delineated in the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standard No. 9. Employing a qualitative, descriptive, and exploratory methodology grounded in a comprehensive literature review, this study synthesises information from peer reviewed journals, regulatory reports, and institutional documents. It establishes AAOIFI standards as the benchmark for compliance and systematically analyzes Sri Lankan practices, identifying key areas of convergence and divergence. The findings reveal a significant reliance on institutional-level Shariah governance, in the absence of a robust national regulatory framework. The analysis further uncovered critical gaps, particularly in the operational mechanics of Ijārah products, which may functionally resemble conventional nancing in some instances, thereby raising concerns about adherence to the higher objectives of Islamic law (Maqāṣid al-Sharīʿah). This study provides a comparative perspective on international best practices. It offers strategic recommendations for policymakers and financial institutions to enhance Shariah compliance, strengthen transparency, and foster sustainable growth in the Sri Lankan Islamic nance industry.