By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) said one of the challenges of developing Islamic banking in the country is that there are not enough Shari’ah scholars or Islamic finance experts to make this happen as soon as possible.
Shari'ah, which defines a set of rules and the lslamic financial system, refers to the practical divine law deduced from its legitimate sources such as the Qur'an, Sunnah, consensus of Muslim scholars, analogical sources of lslamic law.
The BSP also noted the lack of tax neutrality.
“The biggest challenge is the low awareness and capacity on lslamic banking and finance not only for the regulators but also for the industry players and other stakeholders,” according to the BSP. “For this reason, the law mandates the government to provide programs for increased consumer awareness and capacity building required by the expanded lslamic banking system.”
Some of the BSP effort to increase consumer awareness on Islamic banking is to have a clear information campaign such the latest issued FAQs or “Frequently Asked Questions”.
In a memo signed by BSP Deputy Governor Chuchi G. Fonacier, she said the latest information drive is to address common questions about Republic Act No. 11439 (“Act Providing for the Regulation and Organization of Islamic Banks" approved last August 2019) and the implementation of its two preliminary policy issuances on the IRR or BSP Circular Nos. 1069 and 1070 (December 2019) which covered the guidelines on lslamic Banks and lslamic Banking Units and the Shari'ah Governance Framework (SGF).
Fonacier said they have issued “simplified and concise discussions on lslamic banking fundamentals” that cover the following major points: core features of the lslamic banking law; accessibility of lslamic banking to both Muslims and non-Muslims; key distinctions between conventional and lslamic banking; and requirements for establishing lslamic banks or lslamic banking units (IBUs) in the Philippines.
Fonacier said that besides the “scarcity of Shari'ah scholars” there is also another challenge on tax neutrality or its absence.
As explained by the BSP, the tax neutrality provision in Section 14 of the law, provides that the government “shall endeavor to achieve neutral tax treatment between lslamic banking transactions and equivalent conventional banking transactions” within the provisions of the National Internal Revenue Code of 1997 (Republic Act No, 8424), as amended.
“Tax neutrality means that lslamic finance products have parity of tax treatment with conventional finance products, such that lslamic finance transactions are taxed no more heavily (and no more lightly) than conventional finance transactions. The aim is to create a level-playing field for lslamic banking products and services and foster an open and competitive financial system,” said the BSP.
The key difference between an Islamic bank and a conventional bank is that depositors are “investors rather than lenders” in the former and they are just lenders in the latter.
In a conventional bank, the BSP said the bank pays fixed interest on deposit liabilities and charges interest on loans while an Islamic bank has risk sharing (or profit and loss sharing). A non-Muslim bank is also “exposed to assets and liabilities mismatch risk” while an Islamic bank’s assets and liabilities are “better matched”.
As of January this year, BSP Governor Benjamin E. Diokno said there are at least three banks that are interested in establishing an Islamic bank in the country. These are all conventional banks with established banking experience in the Philippines and they are exploring IBUs.
The regulations set by the BSP is designed to have Islamic banks operating alongside the conventional banks and basically, both are under the same regulatory and supervisory approach, except that Islamic
banking operations are guided by the SGF.
The SGF ensures that the Islamic bank or IBU adheres to Shari’ah principles and each Islamic bank or IBU must include a Shari'ah Advisory Council that will include “persons who are competent in the field of Shari'ah and banking, finance, law or such other related disciplines,” according to the BSP circular.