Despite the ongoing COVID-19 pandemic, at least three Islamic banks based outside the Philippines have expressed interest in applying to the Bangko Sentral ng Pilipinas (BSP) for a license to conduct their operations in the Philippines under Republic Act No 11439 or the Islamic Banking Law. It is anticipated that actual applications will be submitted to the BSP when the pandemic is definitively controlled and normality sets in. In the meantime, the BSP has issued and will be issuing regulations pertaining to Islamic banking in the Philippines.
To be sure, these regulations are not presently being issued in a vacuum, because they are intended not only for stand-alone Islamic banks that will be licensed to operate in the Philippines but also Islamic banking units of existing conventional banks in the Philippines.
Review of 2021
The BSP disseminated a draft circular on the guidelines for reporting Islamic banking and financial transactions. The guidelines require that funds received by an Islamic banking unit of a conventional bank must “not be invested in, or commingled with other funds held by, the conventional bank”.
Consistent with this segregation rule, the books and records of the Islamic banking unit must be “kept separate and distinct from the books and records of transactions performed by the other departments/units of the conventional bank”.
The BSP also circulated a revised set of regulations governing the Foreign Currency Deposit System aimed at promoting effective risk management in banks including Islamic banks. Apart from explicitly recognizing that Islamic banks have the necessary powers to engage in the business of banking in accordance with Shariah principles, the regulations confirm that Islamic banks have the authority to “accept foreign currency deposits” as provided in the Foreign Currency Deposit Act of the Philippines.
This is the law that authorizes conventional banks to accept deposits not in pesos but in any foreign currency that can form part of the international reserves of the BSP. The BSP regulations now extend that authorization to Islamic banks. It is understood, however, that unlike their conventional counterparts, Islamic banks will not be able to pay interest (Riba) on the deposits, since this is not allowed under Shariah principles.
In this regard, the insurance coverage of interest-bearing deposits in conventional banks under the Charter of the Philippine Deposit Insurance Corporation (PDIC) is not extended to Islamic deposits. To remedy this, Bill No 2089, pending in the Senate of the Philippines, seeks to allow the PDIC to “establish separate insurance funds, and insurance arrangements or structures or Takaful that take into consideration the peculiar characteristics of Islamic banking”.
Other regulations previously applicable only to conventional bank are now to be read as covering Islamic banking as well. Thus, with regards to anti-money laundering measures, the BSP issued Circular Letter No CL-2021 requiring BSP-supervised financial institutions (including Islamic banks) to disseminate the amendments to the registration and reporting guidelines of the Anti-Money Laundering Council composed of the BSP governor, the chairman of the Securities and Exchange Commission and the Insurance commissioner.
In addition, BSP Circular No 1117 (Series of 2021) implementing the Financial Institutions Strategic Transfer (FIST) Act would cover not only conventional banks but also their Islamic counterparts. This is the law that allows the establishment of entities (called FIST corporations) whose purpose is to acquire non-performing assets of the banking sector.
Preview of 2022
As the pandemic continues to subside, 2022 will see renewed interest from foreign banks in entering the banking sector of the Philippines. In turn, the BSP, as the supervisor of all banking and financial institutions in the Philippines, will be issuing more circulars pertaining to the activities of Islamic banks.
In fact, the BSP is mandated under its amended charter to “formulate rules and regulations for the extension of financial facilities to Islamic banks” but “taking into consideration the peculiar characteristics of Islamic banking”.
The prospects of Islamic banking in the Philippines remain bright despite the challenges posed by the pandemic. As recounted previously, there has been no resulting standstill in terms of regulatory issuances from the BSP. This will provide operational clarity to banks seeking entry into the Islamic banking sector of the Philippines.
Rafael A Morales is the managing partner of Morales & Justiniano. He can be contacted at [email protected]