Islamic banking options await Filipinos as lenders filing soon

FILIPINOS could soon have more Islamic banking options as two banks are already in advanced stages of discussions to secure their Islamic banking licenses, according to the Bangko Sentral ng Pilipinas (BSP).

In a briefing last Wednesday, BSP Assistant Governor Arifa A. Ala told reporters that given that the two banks are already in the advanced stages of these discussions, they could file their applications soon.

Ala said Maybank Philippines Inc. is one of these banks and could file their application within the month. Currently, apart from Al Amanah Islamic Investment Bank of the Philippines, Card Bank Inc. recently set up its own Islamic Banking Unit (IBU).

“I would like to highlight that Islamic banking is not exclusive to Muslims. It’s actually for all Filipinos,” Ala said. “From the point of view of the Muslim Filipinos, we’re very much looking for combined facilities. And this is part of the promotion of financial inclusion in China. But for the non-muslims, Islamic products can be an alternative investment option.”

Financial inclusion is one of the major benefits of Islamic banking in the Philippines. BSP Governor Eli M. Remolona Jr. said in the same briefing that 92 percent of those in the Bangsamoro Autonomous Region of Muslim (BARMM) are unbanked.

While the BSP does not yet have a financial inclusion target with regard to Islamic banking, the financial inclusion target nationwide is 70 percent.

“By introducing Islamic banking, we can bring more people into the formal banking system and the most attractive banking instruments in the region would be Islamic banking,” Remolona said.

Proof that Islamic banking is a worthwhile investment is the government’s recent effort to float $1 billion worth Sukuk bonds in the international debt market. It was considered a successful issuance given that the bonds were five times oversubscribed.

This, Remolona said, could be replicated at the local retail level and in smaller quantities. However, he said, the government still has no solid plans to have sukuk (Islamic bond or “Shariacompliant” bond) offerings at the local debt market.

Ala said when it comes to Islamic banking, the underlying principle is the sharing of profits and losses. She said money is not considered a commodity such that profits and returns on financial investments should always be linked to productive underlying assets.

“We see that promoting Islamic banking and finance can generate more investments. And it is also a form of diversification of sources of funding that can be used by the Philippines for different infrastructure projects,” Ala said.

These assets, however, should not be associated with the production of alcohol or gambling. The way Islamic banks work is through the selling of assets to borrowers at a given premium, which is sometimes similar to an interest.

What is important for Islamic banking to work, Ala said, is the concept of tax neutrality. Given that extending financing requires two transactions, both transactions cannot be taxed twice.

“The Islamic bank will ask, what do you need the funds for? (The borrower will say) I’d like to buy a car. So one popular or common product used by the Islamic bank is for the Islamic bank to buy that car and sell it to the borrower at a markup. So in that sense, the return of the Islamic bank is in the form of a profit for the markup portion,” Ala said.

“So if I may put this further, they need tax neutrality because if you look at that structure, there are actually two transactions. The buying of the car and the selling of the car. And if you tax both transactions, they will become more expensive. And so that’s the problem,” she added.

The Philippines can now have more Islamic banks given the passage of Republic Act (R A) 11439 (Islamic Banking Law). The law is the legal basis for the establishment of Islamic banks and IBUS.

This is complemented by three laws, namely the RA 11054 or the Bangsamoro Organic Law; RA 11211 or the Amendments to the BSP Charter; and RA 11840 or the Amendments to the Philippine Deposit Insurance Corp.