March 28 (Reuters) - Pakistan's central bank has updated guidance on sharia governance for Islamic finance institutions, expanding the scope of external audits to help mitigate conflicts of interest and increase transparency.

There are growing calls across the Islamic finance industry to strengthen the certification process of Islamic banks and their products to improve the consumer appeal of the sector.

Religious scholars who members of an Islamic bank's sharia board are now barred from serving in any external audit firm, the State Bank of Pakistan said in a circular that complements original guidance from 2015.

External sharia audits, which review operations to determine whether Islamic banks are operating in accordance with Islamic principles, would also have to cover pool-management practices and technology systems.

This includes the way Islamic banks calculate distribution of profit and loss to depositors, the tracking of assets, and the allocation of income and expenses.

The move is designed to separate the verification of profit and loss distribution between the banks and the external auditors, in contrast to the joint verification that was allowed under earlier guidance.

Fit and proper criteria must also be applied to scholars serving as part of an external audit, the central bank said.

While Pakistan is the world's second most populous Muslim nation, its Islamic finance sector is struggling to gain market share from conventional peers despite double digit growth.

The sector includes five full-fledged Islamic banks and 16 conventional banks offering Islamic financial products, which held a combined 1.85 trillion rupees ($17.7 billion) of total banking assets as of December, reflecting an annual growth rate of 15.1 percent.

This gave Islamic finance a market share of 11.7 percent of total banking assets versus the 11.4 percent the sector held a year earlier.

($1 = 104.6500 Pakistani rupees)

(Reporting by Bernardo Vizcaino; Editing by Eric Meijer) ((Bernardo.Vizcaino@thomsonreuters.com; Telf: +61293218168; Reuters Messaging: bernardo.vizcaino.thomsonreuters.com@reuters.net))

Keywords: ISLAMIC FINANCE/PAKISTAN