New lease on life

Back in 1973, there was an attempt by government to engage in Islamic banking with the establishment by presidential decree of the Al-Amanah Islamic Bank of the Philippines, the only bank in the country that conforms with the Islamic religious principle prohibiting riba or the receipt and payment of interest in bank lending and borrowing as well as currency exchange.

Unfortunately, Al-Amanah failed to keep up with the phenomenal growth of Islamic banks all over the world and suffered from huge losses. As mentioned in a Reuters article published in 2014, the bank posted a P30.6 million loss in 2012, although this was an improvement from the P124.3 million loss incurred in 2008. Al-Amanah, the same article pointed out, struggled despite a five-year rehabilitation plan started in 2009 by its parent, the Development Bank of the Philippines.

In 2008, DBP took over Al-Amanah Bank after acquiring 90.6 percent of the country’s sole Islamic bank. Under Islamic banking laws, Al-Amanah had to operate as an Islamic bank but the Bangko Sentral ng Pilipinas allowed it to retain conventional banking in order to improve its financial standing. As an Islamic bank, it was prohibited from charging interest on loans but under its regular banking function, it was allowed to realize income from interests. Under the Shariah laws, loans are arranged as profit-sharing transactions.

Al Amanah was doomed to fail from the beginning due to its faulty charter and given that it is operating in a predominantly Catholic country, that it is regulated by regulators who may have little knowledge of what it takes to grow Islamic banking in this country, and that there is no law that specifically addresses the requirements of the Shariah when it comes to Islamic banking.

But even in Pakistan and Indonesia which are among the world’s largest Muslim countries, Islamic banking penetration has been low at around nine and four percent, respectively.

In Malaysia which is considered the world’s most successful Islamic banking market, Islamic banking accounted for 7.1 percent of the country’s financial sector. By 2016, this grew to 28 percent and the Malaysian government is hoping to further increase this to over 40 percent by this year.

One reason cited for the success of Islamic banking in Malaysia is the important role played by the country’s central bank in not only developing a roadmap for growth but also working closely with banks to facilitate the journey. While Malaysia had its purely Islamic bank, conventional banks also carried out Islamic banking but in accordance with Shariah compliance regulations. There is a Shariah Advisory Council which was established to harmonize views among Islamic financial institutions. A dedicated Muamalat court was also set up to handle Islamic finance cases, among others.

Shariah, as defined by our recently enacted Islamic banking law, refers to the practical divine law deduced from its legitimate sources such as the Quran, Sunnah, consensus of Muslim scholars, analogical deduction and other approved sources of Islamic law.

An article by The Malaysian Reserve pointed out that Islamic banking is becoming a part of the mainstream. As early as 2012, Islamic banking assets already reached more than $1 trillion. Even conventional banks, in a bid to retain their Muslim customers and make the most of the Islamic opportunity, have joined the fray and helped to grow the total market around the world, it emphasized.

The article further noted that with around 1.6 billion Muslims worldwide, the upside for Islamic banking is huge and the best is yet to come.

Hopefully, with the passage of Republic Act 11439 or the New Islamic Banking Law in August of last year, this neglected sector of our banking industry will be given a much-needed push.

Rep. Lawrence Fortun of Agusan del Norte recently said that 2020 will mark the start of a surge in finance and banking in Mindanao with the BSP approval of the initial regulations implementing the new law, adding that with the new law and rules, Islamic banks can soon reach out to millions of unbanked Filipinos.

According to Fortun, most of the unbanked towns are in Mindanao. He emphasized that foreign and local investors eyeing new investments in Islamic banking and finance now have the go-signal to move forward with their plans for Mindanao and cities where there are concentrations of Filipino Muslims and Muslim expatriates.

The Monetary Board last December approved the Shariah Governance Framework for Islamic banks and banking units, as part of BSP’s strategic policy to strengthen corporate governance in its supervised institutions. The SGF shall ensure an effective independent oversight of Shariah compliance over various structures and processes within the Islamic bank or banking unit.

Under the SGF, it is the board of directors which is ultimately responsible and accountable for ensuring full conformity of the Islamic bank or banking unit with the Shariah principles.

Meanwhile, under the guidelines issued by the Monetary Board, it is provided that domestic Islamic banks, foreign Islamic banks, and Islamic banking units may be allowed to operate in the country with prior BSP approval.

Islamic banks will also be subject to the same stockholding limits and minimum capitalization requirements as those imposed on conventional universal banks.

Under RA 11439, conventional local banks may be allowed to engage in Islamic banking arrangements provided that said conventional bank has a system for segregating the transactions of the Islamic banking units from its conventional banking business.

The law defined Islamic banking business as banking business with objectives and operations that do not involve interest or riba as prohibited by the Islamic or Shariah law and which conducts its business in accordance with the principles of the Shariah.

RA 11439 also mandates the government to achieve neutral tax treatment between Islamic banking transactions and equivalent conventional banks.

Earlier, government revealed that several banks have expressed interest to open their branches in the Philippines once a law on Islamic banking is signed. These include CIMB, Islamic Development Bank, Qatar Bank, Credit Investment Bank of Malaysia, and a Saudi Bank.

Also, in order to achieve the objectives of Islamic banking, RA 11439 made certain laws not applicable to Islamic banks. These include the provisions of the General Banking Law on the determination of bank interest rates, loans and discounts, and interest-bearing instruments or charge; PD 1445 or the Government Auditing Code of the Philippines; and the Philippine Deposit Insurance Corporation Charter and all laws regulating insurance companies. But the law also said that these do not preclude the development of an appropriate framework for the auditing of Islamic banks and the Islamic banking system as well as the establishment by Islamic banks of contemporary Islamic takaful or solidarity services free of riba, premiums, or interests.

With these new Islamic banking law and rules and regulations now in place, Islamic banking may finally have a chance to prosper in this country.

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