Bangko Sentral ng Pilipinas (BSP) officials promised to lay down the red carpet for Islamic banks in the Middle East, in particular from the United Arab Emirates (UAE), in a bid to expand the country’s Islamic banking and finance sector.

This was the same invitation extended earlier to Islamic banks based in Saudi Arabia.

“You know the approach of the Philippine government in terms of Islamic banking and finance is very flexible in that it can be in the form Islamic banking unit (IBU) or a full-pledged Islamic bank,” said BSP Assistant Governor Atty. Arifa A. Ala in a Philippine Economic Briefing (PEB) forum in Dubai, UAE, on Tuesday, Sept. 12.

Ala, the lead advocate on Islamic banking and finance and the Chairperson of the Islamic Finance Coordination Forum, is with the rest of the government’s economic team for the country’s first-ever PEB in the Middle East.

Ala informed UAE investors attending the briefing that the BSP and the Philippine government will provide an enabling environment wherein Islamic banks can offer competitive banking products and services alongside conventional banks or non-Muslim banks.

“There are 115 million Filipinos and 10 percent are Muslims in the BARRM (Bangsamoro Autonomous Region in Muslim Mindanao). And, around 34 percent of cities and municipalities in the Philippines are unbanked so there is definitely a market, she said.

Ala added that since the passage of the Islamic banking law in 2019, shortly before the pandemic, the BSP has received a lot of feedback from both local and foreign banks.

“We’ve seen a surge in the number of inquiries. We hope to see an investor from UAE,” she said.

Ala reiterated that the government is also keen on issuing its first sovereign Sukuk bonds. “This can expand our engagements with Islamic financial markets,” she said.

Ala emphasizes that in the Philippines, the Islamic banking and finance business model adheres strictly to Shari’ah governance and risk sharing principles. This will provide both Muslims and non-Muslims more choices in terms of risk appetite and financial needs.

In August, the BSP approved the Philippines’ first IBU since Republic Act No. 11439 or the Islamic banking law was enacted four years ago. The BSP issued the IBU license to a conventional or non-Muslim bank.

At the moment, there are at least five foreign banks that are currently exploring the establishment of either a stand-alone Islamic bank or an IBU.

Before the first IBU license, the Philippines only has one Islamic bank 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.

The country’s Islamic banking and finance market is expected to attract more investors from Muslim nations in the Riyadh-based Gulf Cooperation Council region and also non-Muslim countries looking for diversified investments.

The BSP expects more banks and Muslim investors will approach the BSP and this bodes well for the government’s plan to issue its first sovereign Sukuk bonds.

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 IBU.

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 has adopted 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 SGF ensures that the Islamic bank or IBU adheres to Shari’ah principles and has a Shari'ah Advisory Council.