Institutionalizing Islamic banking practices

IN August, President Duterte signed into law Republic Act (RA) 11439 or “An Act Providing for the Regulation and Organization of Islamic Banks.” Most of us chose the financial institution that we do business with as a matter of convenience.

We might shop around for the best loan and credit-card terms, but the primary consideration is the location of the bank branch. In fact, a study two years ago showed that one of the biggest hindrances to the average Filipino having a bank account was the scarcity of branches in the more remote areas of the country.

However, a sizable portion of the Philippine population may not have a bank account because of religious concerns.

Islamic banking is a banking system that is based on the principles of Islamic or Shari’ah law and guided by Islamic economics. Two fundamental principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors. Islamic law prohibits collecting interest or riba. Islamic banks make a profit through equity participation, which requires a borrower to give the bank a share in their profits rather than paying interest. Some commercial banks have windows or sections that provide Islamic banking services to customers.

The new law allows the Bangko Sentral ng Pilipinas to follow its regulatory mandate for supervision over the operations of Islamic banks, and to issue the implementing rules and regulations on Islamic banking.

According to BSP Governor Benjamin E. Diokno, “RA 11439 will unlock the full potential of Islamic financing in fostering inclusive economic growth. With a well-defined regulatory framework now in place, the BSP looks forward to seeing greater participation in Islamic financing by both domestic and foreign banks. This is expected to widen opportunities for Muslim Filipinos, including those from the Bangsamoro Region, in accessing banking products and services.”

Currently, the country has only one Islamic bank, Al Amanah Islamic Investment Bank of the Philippines. A subsidiary of the state-owned Development Bank of the Philippines, AAIIBP had total assets of P797.3 million at the end of last year. Oxford Business Group, an economic intelligence firm, recently analyzed this development. “The new law could also help drive investment and diversification in the domestic Islamic banking segment.”

The traditional banking system is simple. A bank “borrows” money from depositors and pays those depositors interest. The bank then loans that money to borrowers and charges interest on the loan, the difference is the bank’s gross profit.

Banks, though, do not only offer deposit and lending services to their clients. Both investments and insurance are a major part of banking services. In Islamic banking, the models of Takāful—a type of Islamic insurance wherein members contribute money into a pool system to guarantee each other against loss or damage—and Quad—commonly defined as an interest-free loan—are basic and critical considerations.

With the BSP now formally able to issue implementing rules and regulations, we should see an increase in the amount of Shari’ah-compliant financial services, therefore more financial inclusion of Filipinos. Further, according to Oxford, “The government has in the past flagged the possibility of using sukuk [Islamic bonds] to diversify its investor base. The development of Islamic finance could attract significant capital from Muslim-majority countries around the world.”