Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said they will pro-actively approach banks – especially the large lenders both local and foreign – if they are interested in establishing an Islamic bank or an Islamic banking unit (IBU).

So far, Diokno said the BSP is entertaining “a number of queries” for either Islamic bank or IBUs.

“We have received a number of queries on how to establish an Islamic bank in the Philippines which include one query on how an Islamic foreign bank can establish an Islamic bank or IBU in the country,” he said.

In January last year, before the World Health Organization declared a global COVID-19 pandemic on March 12, there were three banks – two local big banks and one foreign bank – already talking with BSP for IBU plans.

Diokno said the IBU queries are mostly in the exploratory stage. But he wants it emphasized that existing foreign and local banks have the option to operate IBUs.

“We plan to ask them on their future plans,” he said during his regular “GBED Talks” briefing. “With the streamlined and flexible licensing framework, aligned with the ease of doing business, we anticipate new players to enter the Philippine banking system.”

Diokno said the Philippines has an open, competitive and Shari’ah-compliant  financial system. The BSP since 2019 with the passage of Republic Act No. 11439 (Islamic Banking Law) has also issued several policies based on the law and the provisions on Islamic banking under the Bangsamoro Organic Law. He said local laws dealt with the “constraints” Islamic banking such as: inadequate legal and regulatory framework; lack of tax neutrality; low investor and consumer awareness;

and absence of supportive infrastructure for an expanded Islamic banking industry.

He said the BSP, basically, because of the Islamic Banking Law was able to create an “enabling environment that will allow Islamic banks to operate alongside conventional banks, while considering the unique features of Islamic banking operations.”

“Islamic banking is for Muslims and non-Muslims alike, as it is seen to appeal to investors who may want to diversify their portfolios,” said Diokno.

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 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 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”.