Still no applicant for Islamic banks, IBUs

Despite the central bank’s pro-active campaign to promote Islamic banking and finance in the country, no banks have applied for its license yet.

In an update, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said that at the moment, the two inquiries from way back in 2019 – before the pandemic – are still the only interested parties that are closely talking with the BSP.

The two financial institutions, one a domestic bank and the other foreign, have not advanced to the actual submission of requirements, but are exploring to set up an Islamic banking unit (IBU) in the country.

“No additional bank so far,” said Fonacier, referring to inquiries for both Islamic bank and IBU plans. Meanwhile, the two banks that are in talks with the BSP are “not yet in the application stage,” she added.

The Philippines currently has one Islamic bank, 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.

Last week, BSP Assistant Governor Arifa A. Ala in a TV interview was expounding on the advantages of Islamic finance for both Muslims and non-Muslims.

Ala said the BSP has been on a course since 2019 of leveling the playing field for all investors of IBUs and Islamic finance. The BSP has a system-wide effort of establishing a sustainable Islamic finance ecosystem in the country.

She said the Islamic banking law “is very flexible” and allows investors a wider choice of investment products.

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”.

The BSP entertained exploratory talks with three conventional banks to set up IBUs but these inquiries were not elevated 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.

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.

The BSP was even willing to adopt a modified minimum capitalization for conventional or non-Islamic banks planning to set up an IBU and will allow for a five-year transitory period.

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 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.

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.

Republic Act No. 11439 or the Islamic Banking Law was enacted in 2019. In 2021, 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 area. The SSB’s primary function is to issue Shari’ah opinions on Islamic banking transactions and products in the BARMM.