2 banks eye Islamic banking units

Published August 4, 2022, 1:58 PM

by Lee C. Chipongian

At least two banks are currently in talks with the Bangko Sentral ng Pilipinas (BSP) to explore putting up either an Islamic bank or Islamic banking unit (IBU) to pursue their previous plans, which were put on hold due to the pandemic.

BSP Deputy Governor Chuchi G. Fonacier said the two banks are the same foreign and local financial institutions that approached the regulator in 2019, pre-Covid-19 crisis. He did not identify these banks.

Muslim Filipinos will soon avail of Islamic finance in the Philippines

“Pre-pandemic, there were two interested. At the moment, they are still reviewing their timelines,” Fonacier said in a text message.

The BSP entertained exploratory talks with three conventional banks to set up IBUs but these inquiries did not advance to the application stage because the pandemic happened in 2020.

The BSP is currently preparing a new rule for the required minimum capital level for non-Islamic banks or conventional banks planning to establish IBUs.

The proposed capital requirement for Islamic banks are the same as conventional banks which is a range of P3 billion to P20 billion depending on how many branches will be put up.

Fonacier said last month that a conventional bank that does not meet the minimum capital of a universal bank, but is a subsidiary of a universal bank or commercial bank, may be allowed to operate an IBU within a reasonable transitory period of five years.

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.

The BSP said it will provide relevant flexibility in the entry of new Islamic banking players and that it will keep an open line of communication with market players and new entrants in the Islamic banking system to ensure a competitive level playing field.

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).

The capital requirement is one of the reasons 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.

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.

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

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.

Meanwhile, BSP issued a memo last July 20 detailing the guidelines for the submission of the supplemental report to the Financial Reporting Package or FRP on Islamic banks and IBUs.

However, there is only one Islamic bank in the country at the moment, which is the state-owned Al Amanah Islamic Investment Bank. It is a subsidiary of the Development Bank of the Philippines and created by a presidential decree in 1973.

“It’s just Al Amanah Bank for now. None yet for both IBUs and Islamic banks,” said Fonacier.

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 set up, 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”.