Wednesday, 24 July 2024

BSP’s Ala: “Revising Islamic banking framework to bridge the underserved market in the Philippines”

5 min read

By Arifa Ala

Arifa Ala, managing director of the Bangko Sentral ng Pilipinas, talks about the provisions of the new Islamic banking law in the Philippines and how this will address the lack of regulatory framework and low customer awareness, in order to provide better banking services to a significant number of underserved Muslims in the country.

  • The government shall provide programs that will increase customer awareness and capacity building
  • A broader set of regulations is set to stretch the coverage of the Philippine financial system
  • The regulatory framework will be adjusted to accommodate Islamic banking’s unique requirements, particularly the Shari’ah compliance

Islamic banking and finance is quite a mystery, especially in the Philippines. We have many of us who have a clear understanding of what Islamic banking is all about. For this reason, the Islamic banking law mandated the government to provide programmes that will increase customer awareness and capacity building on Islamic banking and finance.

We have an ongoing capacity building for the government regulatory agencies, such as the Bangko Sentral ng Pilipinas (BSP), Philippine Deposit Insurance Corporation, Department of Finance, Bureau of Internal Revenue, Insurance Commission and even the National Co               mmission. Most of the Filipinos are benefiting from that capacity building that is ongoing under the technical assistance of the Asian Development Bank.

To many, who are more familiar with conventional banking, the concept of no interest paid or received is quite difficult to comprehend. There may be no opportunity to giving or to create wealth in such an arrangement. However, this is far from the principles of Islamic banking and finance. In fact, Islamic banks or financial institutions take a more active role in creating wealth and opportunities by ensuring that the financial transactions are supported by genuine economic activity. Hereby, providing real linkage between the finance and the real economy. Such an arrangement would discourage unbridled innovation and excessive staking and it promotes financial stability.

The question is, is there a place for Islamic banking in the Philippines? Obviously the answer is yes. That’s why we have the law in place. The perception of many is that Islamic banking would cater to Muslims, but this is not the truth. The truth of the matter is that it’s also an alternative financing product for all, whether Muslims or not. In the Philippines, we know that about 10% of the population are Muslims, and most of them are residing in the Bangsamoro region in the South. Assuming based on the data of all the 118 citizen municipalities in that region, only about 8% have banking presence. Imagine, 92% of those citizen municipalities have no banks.

That’s an opportunity that can be tapped. Not only for the conventional banks but also for Islamic banks. This is an unfortunate affair, considering that the Bangsamoro area is quite rich in terms of natural resources. However, it is unfortunate that conventional banking is quite slow in penetrating those areas. For many reasons, this is an opportunity for Islamic banking players in the future.

Issuing a broader set of regulations for Islamic banking

Before the passage of Republic Act 11439, there were many constraints. In fact, this is the reason why there is only one Islamic bank here in the country, the Al-Amanah Islamic Investment Bank of the Philippines, which was created way back in 1973, more than 40 years ago.

The passage of the new law has addressed many of those constraints. The BSP has the authority to issue a broader set of regulations for Islamic banking and finance. Hopefully, that would prompt the applicants to approach the BSP. In terms of the regulatory framework, the BSP is looking at a single regulatory framework for both conventional and Islamic banks. But we would tweak the regulations, taking into consideration the unique characteristics of Islamic banking.

What is the difference between conventional banking and Islamic banking? The basic difference is the Shari’ah compliance, and that is where the regulatory framework has to be tweaked in order to accommodate that particular requirement. On the part of the BSP, we currently have credit facilities but these are not Shari’ah compliant. We have also ensured that we get authority in the recent amendment of the “New Central Bank Act”. We have included a provision that has provided the BSP with authority to design facilities, taking into consideration the unique characteristics of Islamic banking.

The law talks about the Islamic banking windows. The approach is whether the domestic banks or foreign banks can operate their Islamic banking window or Islamic banking unit and can establish a subsidiary or a full-pledged Islamic bank. The BSP is adopting another open approach, whereby the players are given the flexibility to determine the kind of design that can suit their respective business model.

The Bureau of Internal Revenue and the Department of Finance are closely coordinating with us in terms of issuing and implementing rules and regulations that would ensure that the Islamic bank would have a level playing field when it operates in the Philippines, because without addressing the issue on taxation, they know how Islamic banking products are being structured, the tax implications would be higher, so the Islamic banking products would be more costly.

Stretching the coverage of the Philippine financial system

We have the law and the authority to issue rules and regulations, but we do not stop there. We know for a fact that the awareness of Islamic banking is very low, so that is why there is reason to hold as many capacity building programs, not only for the regulatory agencies but also for the bankers.

The capital requirement for Islamic banks, whether Islamic banking window or full-pledged Islamic bank, is similar to the capital requirement for universal banks. The law has addressed many of the constraints mentioned, particularly the lack of regulatory framework. We have more work to do. We need the strong partnership between the government and the private stakeholders.

The BSP believes that a well-crafted framework of Islamic banking and finance system would ensure the goal of stretching the coverage of our financial system. In addition, Islamic finance with the past opportunities, could be deployed in the system, infrastructure and other projects to accelerate and sustain economic growth.

The Bureau of Treasury is also looking at the possibility of issuing a Sukuk (Islamic financial certificate). If that happens, that would send a strong signal to the market of how the Philippine government is accommodating the Islamic banking and finance in the country.

Attorney Arifa Ala, managing director of Financial Supervision Subsector III of the Bangko Sentral ng Pilipinas delivered her keynote speech at the Islamic Finance 2019 on 08 November 2019.



Keywords: Islamic Banking, Islamic Finance, Wealth, Alternative Financing, Regulations, Regulatory Framework, Shariah, Sukuk, Banking Infrastructure
Institution: BSP, Banko Sentral Ng Pilipinas, Philippine Deposit Insurance Corporation, Philippine Department Of Finance, Bureau Of Internal Revenue, Insurance Commission, National Commission, Asian Development Bank, Al-Amanah Islamic Investment Bank Of The Philippines
Country: Philippines
Region: South East Asia
People: Arifa Ala
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