Turkish Islamic bank eye PH business

An Islamic bank based in Turkey is exploring ways to put up a subsidiary or unit in the Philippines and could possibly be the first foreign bank to go into Islamic finance here, according to a central bank official.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said late Friday, Feb. 24, that the Turkish bank has been in talks with BSP for some time, however initially, the foreign bank was intending only to assist Islamic banks to set up shop in the country.

Fonacier said she has engaged the bank to consider to locate its own Islamic bank in the country instead.

“They’re doing the scanning of the market,” she said in the sidelines of the BSP’s annual reception for bankers last Friday. “But they’re very much open to helping prospective players outside (and) if they want to come in, they can assist,” she added.

Before the global pandemic was declared on March 2020, the BSP was already talking to two banks interested in setting up either a full Islamic bank or an Islamic Banking Unit (IBU).

Fonacier said the two banks may have pushed back previous plans, and it is only the Turkish bank that is showing active interest at the moment.

If negotiations are successful, the Turkish bank will come in via the Islamic banking platform, and not as a foreign bank entrant. Based on a mid-2022 Fitch Ratings report, Islamic banking business in Turkey is increasing, and its share of the banking system’s assets, loans and deposits have been steadily growing.

Meanwhile, Fonacier said the BSP has not started its review of Islamic bank and IBU capitalization because they are still consulting the banking industry.

The BSP is 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.

She said the focus, for now, is to engage possible Islamic bank or IBU new investors.

During the pandemic, the BSP did not let up on its pursuit to grow Islamic finance in the country. It is currently conducting a pro-active campaign to promote Islamic banking and finance despite that no banks have applied for its license yet.

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.

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 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.

In 2021, the BSP initiated 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.

Republic Act No. 11439 or the Islamic Banking Law was enacted in 2019.