First Islamic banking unit in Philippines set to open

First Islamic banking unit in Philippines set to open

By Keisha B. Ta-asan, Reporter

THE PHILIPPINES’ first Islamic banking unit will soon be operational this month in Cotabato City, an official from the Bangko Sentral ng Pilipinas (BSP) said.

BSP Deputy Governor Chuchi G. Fonacier said there are a lot of players, both foreign and domestic, that are interested in setting up an Islamic bank or an Islamic banking unit (IBU) in the Philippines.

“(The BSP) already granted an Islamic banking license to a particular branch that will open soon in Cotabato. I think, within this month, it will open,” she said, adding that the bank will be releasing more details soon.

In July last year, Ms. Fonacier said one traditional lender has been given license to do Islamic banking for a particular branch in Mindanao.

Before the Monetary Board gave its first IBU license, the Philippines only had one Islamic bank. This is the state-owned Al Amanah Islamic Investment Bank, which is a subsidiary of the Development Bank of the Philippines and created by a presidential decree in 1973.

At the same time, Ms. Fonacier said a branch of a foreign bank is also interested in doing Islamic banking in the Philippines to cater to the unserved Muslim market in Mindanao.

The central bank has been encouraging lenders to get into Islamic banking after the sector was opened to new players.

In April 2022, the BSP issued Circular No. 1173, which approved the modified minimum capitalization requirement for conventional banks with an IBU.

The goal of the circular was to provide flexibility in licensing an IBU of qualified traditional banks and give more Filipinos access to Shari’ah-compliant banking products and services.

Under the guidelines, conventional commercial banks or subsidiary banks of a universal bank that meet the minimum capital requirement for their respective banking category are allowed to operate an IBU within a transitory period not exceeding five years.

BSP Deputy Governor Francisco G. Dakila, Jr. earlier said there are at least five foreign banks that are exploring the establishment of either a stand-alone Islamic bank or an IBU in the Philippines.

Amendments and reforms to Islamic banking licensing, Shari’ah governance, and taxation have been instrumental in attracting more players into the sector.

The government also issued policies to implement the Islamic Banking Law and the provisions on Islamic banking under the Bangsamoro Organic Law.

Last month, the Shari’ah Supervisory Board (SSB) in the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM) conducted its first board meeting to discuss how to further promote Islamic banking transactions and products in Mindanao and in the rest of the country. 

The SSB was formed to implement the shared mandate under Republic Act No. 11054, or the Bangsamoro Organic Law, to boost Islamic banking and finance in the BARMM and to complement the BSP’s Shari’ah Governance Framework for Islamic banks and Islamic banking units

“The SSB is a convergence of expertise in Islamic jurisprudence and contemporary finance. It will strengthen Shari’ah oversight on Islamic banking and finance while complementing existing conventional governance frameworks,” BSP Governor Eli M. Remolona, Jr. earlier said. 

Islamic banking is based on the principles of Shari’ah Law. In Islamic banking, interest is prohibited, while in conventional banking, interest is the main source of income.

Products from Islamic banks or IBUs are usually asset-backed and involve trading or renting of assets, while conventional banking treats money as a commodity and lend it against interest as its compensation.

In 2022, the Bureau of Internal Revenue issued Revenue Regulation 17-2020, which states that Islamic banking transactions and other conventional transactions should be taxed equally.

“By applying the same regulations to conventional and Islamic banks — with supplemental guidelines for the unique features of Islamic banking — the BSP enables a level playing field that allows Islamic banks to thrive and serve all Filipinos,” the central bank had said.