3:00 am | Monday, October 27th, 2014
A proposed law is in the works that is expected to usher in a new era of Islamic finance in the Philippines.
The new law will help facilitate the entry of fresh investments into the country and create new jobs for those in the predominantly Muslim south.
The Bangko Sentral ng Pilipinas (BSP) is currently drafting the rules that will allow Islamic banks to function without the use of interest rates—the centerpiece of western finance that the Muslim world’s Shariah law bans.
Authorities are also mulling over options on how to push these new rules through Congress—either by inserting it in the Bangsamoro Basic Law already being deliberated, or by filing a more comprehensive bill with the help of willing members of the House and Senate.
“There are pros and cons. If it’s under the Bangsamoro bill, it will be certified as urgent,” said lawyer Prudence Kasala, head of the BSP Supervision and Examination Sector’s Legal Service Unit.
One of the challenges that need to be hurdled is the lack of access to capital for businesses and consumers, which hinders the development of Mindanao, particularly the Autonomous Region in Muslim Mindanao (ARMM). This in part is due to the lack of Islamic banks in the country that may cater to Muslims seeking to do business in accordance with the rules of their faith.
Unlike conventional banking, Islamic banks comply with the Shariah law, which prohibits lenders from charging interest for loans. The religion sees it as a form of profiteering. Instead, Islamic banks rely on the principle of risk-sharing, which means borrowers may take banks in as partners when taking out loans.
Another key trait of Islamic finance is that financial transactions must be supported by genuine productive economic activity that subscribes to the ethics of the Islamic faith. Investing in tobacco, alcohol and gaming industries is banned under Shariah law.
This limits the industry’s participation in financial markets dominated by conventional banks and financial institutions.
“We need an all-encompassing law,” Kasala said, noting that incentive structures under current rules have constricted the growth of Islamic finance.
Currently, the country has only one Islamic bank, Al-Amanah Investment Bank, which was established in 1973. The bank is currently owned by state-run Development Bank of the Philippines (DBP).
Apart from allowing the entry of more foreign players familiar with the Shariah rules—something most local firms are not—the new law will allow existing lenders to put up their own Islamic windows if they wish to do so.
Kasala said the new law, if passed, would create regulatory structures not just for banking, but for insurance and securities transactions that comply with Shariah laws.
Regulators will also have specific rules for providing liquidity for Islamic banks that do not make use of interest rates, she added.
National Treasurer Rosalia de Leon last May said the Philippine government was interested in establishing its own sukuk issuance—industry speak for Shariah-compliant bonds—as it seeks to tap additional sources of funding, if and when rules make it possible.
The country would follow in the steps of the United Kingdom, for instance, which launched its first sukuk bond last year.
The British Embassy in Manila last July noted that Shariah-compliant investments may top $1.3 trillion this year.
BSP Governor Amando M. Tetangco Jr. earlier noted that only 20 banks and 28 automated teller machines could be found in the ARMM. Also, only 8 percent of the municipalities in the region had access to banking services.
Data from 2012 showed that the ARMM’s economy grew by just 1.2 percent that year. This was much slower than all of Mindanao, which grew by 8.2 percent. That same year, the entire country also grew by 6.8 percent.
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