BSP to adopt ‘modified’ bank capitalization with Islamic unit

Published June 22, 2022, 12:20 AM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) will be adopting a “modified” minimum capitalization for conventional or non-Islamic banks planning to set up an Islamic banking unit (IBU) and will allow for a five-year transitory period.

The BSP did not indicate the proposed modified capital requirement for IBUs in the draft circular currently being circulated among banks. The current minimum capital requirement for Islamic banks or IBUs is the same as the universal banks.

Based on the draft circular, in establishing Islamic banks and IBUs, the BSP plans to impose the same minimum capitalization for a universal bank to apply to an Islamic bank or a conventional bank with an IBU. A universal bank’s capital requirement is P3 billion up to P20 billion if branches exceed 100.

“The Bangko Sentral recognizes the importance of continued consultative engagement with stakeholders in promoting Islamic banking in the country. By providing relevant flexibility in the entry of new Islamic banking player, the Bangko Sentral will continue to review and keep an open line of communication with market players and new entrants in the Islamic banking system to foster growth and to ensure competitive level playing field of IBU operations with the conventional banking,” said BSP Governor Benjamin E. Diokno in the proposed circular.

The central bank wants banks with IBUs to “afford flexibility in the entry of IBUs and expand access to Shari’ah-compliant banking products and services for all Filipinos.”

Based on the proposed circular, an exception to rule and subject to prior BSP approval, is a conventional bank which is a subsidiary of a universal or commercial bank which “may be allowed to operate an IBU within a reasonable transitory period.”

Meantime, in applying for an IBU license, the BSP will require an applicant to comply with the following minimum requirements: must be compliant with the BSP’s prudential criteria and has a system for segregating the lslamic banking transactions of the IBU from its conventional banking business as well as establishing an appropriate Shari’ah Governance Framework (SGF).

“To afford flexibility in the required minimum capitalization, a conventional bank which is a subsidiary of a U/KB (universal/commercial bank) may be granted a reasonable transitory period, not exceeding five years, to operate an IBU,” said the BSP.

The draft circular is also proposing that an applicant IBU should submit a corporate plan of its organizational and business model to be used in delivering Islamic banking products and services to its clients.

“The U/KB-subsidiary conventional bank allowed to operate an IBU under a transitory period shall submit an acceptable capital build-up plan within 90 days prior to the end of the transitory period,” said the BSP.

It said that the “capital build-up plan will contain – at a minimum — strategies, financial projections (including underlying assumptions), and other relevant information to ensure viability of the Islamic banking operations and compliance with the minimum capital requirement.”

Last April, Diokno said the BSP is planning to reduce the required capital to set up an IBU to encourage local and foreign banks in the country to go into Islamic finance.

He said the capital requirement is one of the reasons why there are few IBU applicants. A hefty capital is needed to establish an SGF. The SGF ensures that the Islamic bank or IBU adheres to Shari’ah principles and has a Shari’ah Advisory Council.

Diokno said besides the capital requirement, another concern for the low turnout of inquiries to establish Islamic banks or IBUs is lack of information or understanding, especially for the Shari’ah. It is one of BSP’s many challenges that there are not enough Shari’ah scholars or Islamic finance experts in the country.

Pre-pandemic, the BSP entertained exploratory talks with at least three conventional banks to set up IBUs but these inquiries did not advance to the application stage.

Republic Act No. 11439 or the Islamic Banking Law was enacted in 2019. But it was only this year that the BSP started the creation of the Shari’ah Supervisory Board (SSB) in the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM) to promote Islamic finance and Islamic banking in the region.

Last April 18, a joint circular and a memorandum of agreement with the Department of Finance, the National Commission on Muslim Filipinos, and the Bangsamoro Government on the establishment of the SSB was signed.

The SSB’s primary function is to issue Shari’ah opinions on Islamic banking transactions and products in the BARMM, said the BSP.