21/08/2026
# AAOIFI GS 10 — Exam Prep Summary
# # Shari'ah Compliance and Fiduciary Ratings for Islamic Financial Institutions (IFIs)
---
# # 1. Quick Facts
This standard is set out in paragraphs 1–63. It was approved at AGEB's 11th meeting (1–2 May 2019, Bahrain) and issued on 31 December 2019. It is effective for ratings issued on or after **1 July 2021**. GS 10 rates the **institution** (the IFI itself), while GS 17 (issued later) extends the same logic to **instruments** like Sukuk — GS 10 is explicitly the first part of a two-part project, with GS 17 being the second part covering publicly/secondary-market-traded Islamic finance instruments.
Importantly, this standard is **non-mandatory** by design (confirmed in the Basis of Conclusions). It was deliberately issued as a good-practice initiative because the industry is at different stages of maturity across jurisdictions, and because there weren't enough eligible rating agencies at the time. Regulators in individual jurisdictions may choose to make it mandatory locally, but AAOIFI itself does not mandate it.
# # 2. Objectives (Para 1)
The standard exists to: introduce principle-based guidance on Shari'ah compliance and fiduciary ratings; strengthen stakeholder confidence in the Islamic finance industry; and improve transparency by demonstrating an IFI's compliance with relevant standards, regulations, and best practices around Shari'ah principles, governance, values, and fiduciary responsibility.
# # 3. Rationale — Why Rate, and Why Not Just Rely on Shari'ah Audit?
An IFI must show both financial strength AND genuine adherence to Shari'ah in all its operations, acting as a responsible fiduciary. Stakeholders — shareholders, investment account holders, customers, suppliers, employees, regulators, and society — have a right to know how seriously an IFI takes this.
The standard explains clearly why Shari'ah audit alone is not enough (this is a favorite exam point):
- Shari'ah audit looks backward at past compliance; a rating is forward-looking and considers whether governance weaknesses today could create non-compliance risk in the future, even if transactions are currently valid.
- Ratings allow comparability across institutions — something audits, which are institution-specific, don't provide.
- Ratings focus more heavily on process, governance, and its continuity, not just transaction-level historical compliance.
# # 4. Scope and Responsibility (Paras 2–5)
The standard applies to independent rating agencies conducting Shari'ah compliance and fiduciary rating engagements, providing stakeholders an independent, comparable, assessment-based rating of an IFI. Crucially, assessment is performed **at the institutional level** (contrast this with GS 17, where assessment is primarily at the instrument level).
IFIs are encouraged — not required — to obtain such ratings **at least once every three years, preferably annually**, and to publicly announce the results.
# # 5. Key Definitions (Para 6)
An **IFI** includes standalone branches, divisions, and windows of conventional institutions offering Shari'ah-compliant products — not just fully Islamic institutions. A **rating agency** is the firm assigning the rating. The **rating committee** is the body formed per paragraphs 40–42. The **rating scale** is the hierarchical, alpha-numeric/symbolic/numeric summarized output. A **rating service (engagement)** is the accepted assignment to produce the rating. The **Shari'ah compliance and fiduciary rating** itself is a combined assessment across six areas: (a) Shari'ah principles/rules compliance, (b) Shari'ah governance framework, (c) corporate governance related to Shari'ah governance, (d) transparency and disclosure, (e) ethics and values, and (f) fiduciary responsibilities and performance.
# # 6. Eligibility & Compliance Requirements for Rating Agencies (Paras 7–17)
# # # General rule (Para 7)
A rating agency **cannot claim compliance** with this standard for a rating service unless it has satisfied **all** of the standard's requirements — no partial compliance claims allowed.
# # # Who is eligible (Para 😎
Either: (a) a licensed credit rating agency that has built the necessary capacity/methodology in line with this standard, OR (b) a dedicated Shari'ah compliance and fiduciary rating agency (with genuine involvement of credit-rating-experienced experts).
# # # Further eligibility conditions (Para 9)
The agency must meet ethical and quality control requirements (paras 10–13), follow the engagement acceptance requirements (paras 14–17), and satisfy the regulator's "fit and proper" criteria (Appendix 😎.
# # # Ethical requirements (Para 10)
Must comply with AAOIFI's relevant code of ethics (currently, given no dedicated code yet exists, the "AAOIFI Code of Ethics for Accountants and Auditors of Islamic Financial Institutions" applies) plus other relevant codes of ethics.
# # # Quality control (Paras 11–13)
The agency must follow professional quality control requirements, particularly the IOSCO principles (IOSCO's September 2003 statement on credit rating agencies). It must maintain adequate resources and knowledge, including involving Shari'ah scholars with expert knowledge of the benchmarked parameters. At minimum, quality control must include: written, adopted, and adhered-to benchmarked parameters/procedures/methodologies to ensure fair and thorough analysis; adequate documentation supporting rating opinions; and rating committees/staff who are professional, competent, high-integrity, and act with fairness and equity. The agency must also build a **self-assessment mechanism** to continually check its own quality control and fitness to perform.
# # # Accepting an engagement (Paras 14–17) — important prohibition
A rating agency **must NOT accept** a rating service unless ALL of the following are true:
- It is independent of the IFI client (no conflicts of interest — see below);
- It has performed a self-assessment of its capacity to serve this specific client; and
- It has developed and made public a consistent rating methodology.
**Independence and conflict-of-interest rules (Paras 15–16) — key prohibitions:**
- A rating agency must NOT accept an engagement if there are existing or potential financial/business conflicts of interest with the client — including business, investment, or management relationships.
- The agency must have written independence policies at institutional, management, rating committee, and rating team levels, with a mechanism to ensure adherence.
- The rating agency, its committee, management, and staff must NOT engage in business, advisory, or consultancy relationships with the IFI being rated, and must NOT invest in or deal with that IFI's securities/instruments — **except arm's-length over-the-counter transactions**.
- If a conflict of interest situation exists, the agency may still accept the engagement only **after eliminating all independence threats**, subject to a **12-month cooling-off period**.
**Self-assessment of capacity (Para 17):** before accepting any engagement, the agency must assess, on an ongoing basis: availability of methodology/knowledge base; strength of its rating committee; and availability of appropriately qualified staff (including subject-matter/Shari'ah experts) in terms of both capability and time allocation.
# # 7. Assessment Scope and Benchmarked Parameters (Paras 18–26)
# # # Assessment scope (Para 18)
Covers the IFI's state of affairs as of a specific date, and its activities over a period of **not more than one year** ending on that date, across the same six areas listed in the definitions section above.
# # # Sources/hierarchy for each benchmarked parameter (Paras 19–26) — memorize these hierarchies:
**Shari'ah principles and rules (Para 20):** AAOIFI Shari'ah Standards → jurisdiction regulator's Shari'ah-related regulations → Central Shari'ah Board rulings (if one exists) → AAOIFI Financial Accounting Standards (Shari'ah-related requirements) → the IFI's own Shari'ah Supervisory Board approvals/rulings.
Importantly (Para 21), assessing Shari'ah compliance requires looking at **material instruments/products** — both financially material and qualitatively significant ones — even though the rating is not meant to be an opinion on any single instrument. Overall institutional compliance simply cannot be judged without looking at the instrument level for material items.
**Shari'ah governance framework (Para 22):** AAOIFI governance standards → IFSB Shari'ah governance standards → jurisdiction regulator's Shari'ah governance regulations.
**Corporate governance related to Shari'ah governance (Para 23):** IFSB corporate governance standards → AAOIFI governance standards → jurisdiction regulator's corporate governance regulations.
**Transparency and disclosure (Para 24):** AAOIFI Financial Accounting Standards (transparency/disclosure requirements, including those relevant to Zakah and charity funds) → IFSB transparency/disclosure standards → jurisdiction regulator's regulations.
**Ethics and values (Para 25):** AAOIFI codes of ethics + IFSB code of conduct/ethics standards → jurisdiction regulator's ethics/conduct regulations.
**Fiduciary responsibilities and performance (Para 26):** developed considering governance/management practices for fair and equitable stakeholder treatment; the institution's financial performance in its fiduciary capacity (as Wakeel, Mudarib, partner, etc.); and asset management quality.
# # 8. Tiered / Jurisdiction-Specific Ratings (Paras 27–28)
Ratings can be given on an international basis or tiered to reflect a jurisdiction-specific benchmark, serving jurisdiction-bound stakeholders differently from international ones. If a rating agency changes or ignores parts of the standard hierarchy of sources for a tiered/jurisdiction-specific rating, it must: document and publicly announce the changed hierarchy, and **never claim** that tiered/jurisdiction-specific rating is in line with AAOIFI's Shari'ah and governance standards "in general."
# # 9. Relative Weightage of Benchmarked Parameters (Paras 29–30)
The rating agency must define and publicize consistent weightings for each of the six components. Suggested ranges (Para 30): compliance with Shari'ah principles and rules 30–35%; Shari'ah governance framework 15–20%; corporate governance practices related to Shari'ah governance 10–15%; transparency and disclosure 10–15%; ethics and values 10–15%; fiduciary responsibility and performance 15–20%.
**Critical exam point:** although these weightings are independent of one another, a **failure in a significant category — especially compliance with Shari'ah principles and rules — is treated as an overall failure**, regardless of how well the institution scores elsewhere.
# # 10. Limitations of Scope and Suitability of Parameters (Paras 31–34)
The rating agency must continuously assess whether any significant scope limitation could affect the quality of the rating; if such a limitation cannot be resolved despite due effort, the agency **should consider withdrawing** from the engagement.
Similarly, the agency must assess whether the benchmarked parameters are actually suitable for the specific IFI, documenting the details. For any missing Shari'ah-related parameters, it must coordinate with Shari'ah supervisors to develop them. If the agency simply cannot conclude the parameters are suitable, it **must withdraw** from the engagement.
The agency must identify the relevant Shari'ah supervisor(s) — normally the IFI's own Shari'ah Supervisory Board or its nominee (unless regulation mandates otherwise, e.g., regulators or a Central Shari'ah Board) — for Fatwa requests, rulings, and discussion of observations.
# # 11. Rating Scale (Paras 35–36)
A rating scale should span **5–10 stepped grades**, with a clear explanation of what each grade means in terms of Shari'ah compliance and fiduciary responsibility. The illustrative scale in the standard runs from **iAAA (90%+, excellent compliance, top fiduciary performance)** down through iAA, iA, iBB, iB, to **iC (below 50%, unsatisfactory compliance, low fiduciary performance, with unresolved non-compliance instances)**. Each grade's description addresses: dependence on preferred vs. less-preferred/controversial options, presence/materiality of non-compliance instances, overall governance environment, and level of fiduciary performance.
# # 12. Principal Procedures — The Rating Process Flow (Paras 37–54)
The standard lays out a sequential process, each stage tied to specific paragraphs:
1. **Rating service acceptance (Para 38):** must be under a formal contract/letter of engagement, only after satisfying paragraphs 14–17 (independence, capacity self-assessment, published methodology).
2. **Team deployment (Paras 39–42):** the rating committee and rating staff are deployed. Rating agencies may keep a **permanent rating committee** or form a **separate one per engagement**. A rating committee generally has **five members, never fewer than three**, and **at least 33% must be independent of the rating agency**. Adequate subject-matter experts, including qualified Shari'ah experts, must be represented.
3. **Benchmarked parameters' assessment (Para 43):** before starting work, the agency re-assesses and customizes the benchmarked parameters (per paras 18–28) to fit the specific IFI.
4. **Initial information (Paras 44–45):** the agency identifies and communicates its initial information needs to IFI management, then assesses the suitability and impact of what it receives.
5. **Initial analysis (Paras 46–47):** desk review of internal/public information, possibly including preliminary meetings/interviews/surveys; time allocated must be proportionate to the engagement's complexity.
6. **Due-diligence meetings (Paras 48–49):** the agency shares initial output with IFI management and holds meetings to confirm analysis, gather supporting evidence, resolve identified issues, and understand management's (and where necessary, Shari'ah supervisors') perspective.
7. **Rating committee meetings (Paras 50–52):** conclusions are discussed and finalized here, with adequate notice and quorum. All committee members must be given the opportunity to be heard; **decisions are by majority vote**, with dissents recorded. **For Shari'ah compliance matters specifically, the majority view of the Shari'ah experts on the committee prevails** — this overrides a simple general majority.
8. **Rating report (Para 53):** prepared per paragraphs 61–62 (see reporting section below).
9. **Subsequent update (Para 54):** the rating agency is **not responsible for events occurring after** the rating service delivery date. However, if it later becomes aware of facts that — had they been known at the time — would have changed the outcome, it should consider issuing a **revised rating and report**.
# # 13. Documentation, Archiving, and Confidentiality (Paras 55–60)
Documentation of the engagement and supporting evidence must follow global best practices, and must be sufficient (quantitatively) and appropriate (qualitatively) to demonstrate the procedures performed, results achieved, and conclusions reached — including support for the professional judgments applied. Observations, conclusions, and comments from management, Shari'ah supervisors, and other parties must be documented along with their impact on the final report. Minutes of rating committee meetings must be kept as part of the documentation.
The agency must adopt internal procedures to protect confidential, non-public information received during the engagement, ensuring adherence by management, staff, and the rating committee alike. A consistent archiving policy — covering completion of documentation and any subsequent changes — must also be developed and applied.
# # 14. Reporting (Paras 61–62)
On completing a rating service, the agency must issue a rating report with **three components**: the rating score itself; a **full version report** (to IFI management); and a **public report/press release**.
The standard prescribes minimum content requirements for both the full and public versions, covering: title; addressee (management for the full report; management/stakeholders/potential stakeholders for the public report); identification of benchmarked parameters (full detail vs. summary); brief about the IFI and its activities; statement of respective responsibilities and scope (full detail vs. summary); a statement that the engagement was performed per this standard (including compliance, quality assurance, and ethical standards); summary of principal procedures performed (reasonably detailed vs. shorter summary); statement on involvement of subject-matter experts including Shari'ah scholars; the rating score; limitations of the report and guidance on interpreting the score; key issues/significant matters/risks/observations (full report only — not applicable to the public report); suggestions for improvement (full report only, and only "without impairing independence of the rating agency" — not applicable to the public report); and the date of the report.
# # 15. Effective Date (Para 63)
This standard applies to Shari'ah compliance and fiduciary ratings **issued on or after 1 July 2021**.
# # 16. Appendix Highlights Worth Knowing
**Appendix B — Fit and Proper Criteria for Rating Agencies:** the agency should be recognized/licensed by at least one regulator in its primary jurisdiction (a general credit rating license plus a specific fiduciary rating license); preferably structured as a limited liability company with a board of directors following corporate governance practices, including external audit; must have a properly constituted rating committee; must be financially viable; must meet the ethical/quality control requirements (paras 10–13); staff and subject-matter experts must be professional, competent, high-integrity, and well-versed in the standard; methodologies must be publicly available free of charge; and adequate documentation (paras 55–60) must be maintained. A footnote adds specific board criteria: at least one director should have financial/markets/legal/risk/ratings background, at least one director should have ~10 years of rating experience, and at least one director should be independent.
**Appendix C — Rating Committee Terms of Reference (illustrative):** five members generally, minimum three, at least 33% independent; must include subject-matter/Shari'ah experts; sufficient quorum and adequate notice periods for meetings; members should have relevant qualifications/experience in ratings, Sukuk, and Islamic finance/financial institutions, with **at least one member qualified in Shari'ah compliance and review**; decisions by majority vote, with the Shari'ah experts' majority view controlling on Shari'ah matters; full committee access to all relevant IFI information; documented minutes and reasons for scores; a rating **reconsideration/appeal process** is available for strong committee disagreement or new material information; **12-month minimum cooling-off period** for conflict-of-interest situations; and a rule that the agency must give issuers a **minimum of 24 hours' notice** before rating assignments/changes to allow provision of new material information.
# # 17. Basis of Conclusions — Reasoning Worth Remembering for Exam "Why" Questions
- Ratings differ from Shari'ah audit because audit is retrospective while rating is forward-looking, comparable across institutions, and process/governance-focused.
- The term "rating" was deliberately used (rather than an alternative) to give the service credibility and market recognition on par with credit ratings.
- The term "fiduciary" was chosen deliberately, reflecting the trust relationship between investor and investee that is fundamental in Islamic finance, especially where formal legal obligations may be limited.
- The board explicitly rejected raising the independent-member threshold on the rating committee above 33%, reasoning that the rating agency itself bears the risk and accountability, while the committee's role is to enhance process and quality assurance.
- The board explicitly confirmed that ratee-pays-rating-agency remuneration does **not** compromise independence, drawing a parallel to how external auditors and Shari'ah scholars are also paid by the entities they review.
- AAOIFI does **not** take on the role of approving/licensing rating agencies — that responsibility sits with each jurisdiction's regulator.
- The standard was deliberately kept **non-mandatory**, left to individual regulators to decide whether to impose it as mandatory in their own markets.
# # 18. Common Exam Traps / Comparison Points with GS 17
- GS 10 assesses at the **institutional** level; GS 17 assesses primarily at the **instrument** level.
- GS 10 has **no instrument classification system** (equity/quasi-equity/liability/asset types) — that's introduced later in GS 17.
- GS 10's rating scale uses **iAAA/iAA/iA/iBB/iB/iC** (no trailing "s"); GS 17 introduces "iAAAs/iAAs..." for instruments — don't mix them up.
- GS 10 recommends ratings **once every three years, preferably annually**; GS 17 recommends **annual** updates for instruments.
- Both standards share the same core hierarchy logic for benchmarked parameters and the same principle that Shari'ah non-compliance failure overrides any weighted score.
- Both are **non-mandatory** AAOIFI standards.
![Import LC Risk Supervision Checklist -Commercial Bank Oversight A. Credit Risk- [ ] Importer's creditworthiness assessed...](https://img4.schoolandcollegelistings.com/640/600/122161975256406009.jpg)
