The Bangko Sentral ng Pilipinas (BSP) has proposed requiring Islamic banking units (IBUs) operated by conventional banks to either transition into full-fledged Islamic banks or comply with universal bank capital requirements within five years.

Under a newly proposed circular, the central bank has set a five-year transitory period for conventional big banks, which refer to commercial banks or subsidiaries of universal or commercial banks, to meet capitalization standards if they maintain an Islamic banking unit.

After this period, these commercial banks must either convert the IBU into a stand-alone Islamic bank or ensure it complies with universal bank capital thresholds. This means banks will need to invest more money to continue offering Islamic banking services in the long run.

Banks must submit a board-approved capital build-up plan at least six months before the end of the five-year transition period. The plan should outline the IBU’s strategy, financial projections, and how it will meet the capital requirements of a universal bank based on its branch network.

They must also provide regular updates on their progress to the BSP. Failure to comply may lead to regulatory action from the central bank.

Aside from capitalization, the draft also encourages Islamic banks to list their shares on a registered stock exchange—a measure aimed at increasing transparency, improving governance, and expanding capital-raising capabilities.

Meanwhile, banks seeking to open IBUs must meet several minimum requirements, according to the proposed rules.

They must comply with prudential standards under the BSP’s manual of regulations for banks and submit proof that Islamic banking transactions will be kept separate from their conventional operations. Banks are also required to commit to setting up a Shari’ah governance framework.

Applicants must submit a corporate plan detailing how they will deliver Islamic financial products and services. The license to operate an IBU will fall under a Type A classification and will be subject to the corresponding processing fees based on the bank’s category.

While opening new IBU branches will incur fees, banks can open IBUs within their existing branches or branch-lite units without charge, provided they notify the BSP at least 10 banking days in advance.

However, if the approved IBU does not begin operations within one year, the BSP will automatically revoke its operation authority.

Banks have until May 28 to submit their feedback. If finalized, the policy is expected to take effect 15 days after publication in the Official Gazette or a newspaper of general circulation.