Bahrain's central bank is finalising rules for the supervision of sharia-compliant advisory firms, part of a wider overhaul of standards as the Gulf state steps up its efforts in Islamic finance.

Having been a pioneer of the sector, Bahrain is now competing with other centres such as Dubai, London and Kuala Lumpur for Islamic finance business.

The rules would help small Islamic finance institutions and fund managers to outsource the process of reviewing whether their activities are compliant with Islamic principles, said Abdul Rahman Mohammed Al Baker, executive director of financial institutions supervision at Bahrain's central bank.

This would "enhance their operation and reduce the costs of such services," according to the text of a speech Al Baker delivered to an industry conference in Manama on Monday.

Traditionally, Islamic banks have set up their own internal sharia boards and appointed sharia scholars to rule on whether activities and products follow religious principles such as bans on interest payments and monetary speculation.

However, the outsourcing concept has gained traction in recent years as the process has become more commoditised and with scholars setting up advisory firms of their own.

The central bank is also set to release a new regulatory framework for Islamic insurance, and is studying changes to rules for sharia-compliant financing arrangements which can be offered to accredited investors.

In December, the central bank formally combined existing rules for issuing and listing financial securities, including sukuk, in an effort to make the process more efficient.-Reuters