The passage of Republic Act No 11439, otherwise known as ‘An Act Providing for the Regulation and Organization of Islamic Banks,’ was a milestone for Islamic banking and finance in the Philippines. For the longest time, the country had no legislative framework for the establishment of Islamic banks in the country, but this changed with the enactment of the Islamic Banking Law in 2019.

It is true that, in 2018, the ‘Organic Law for the Bangsamoro Autonomous Region in Muslim Mindanao’ (Republic Act No 11054) was enacted and did authorize the parliament in that autonomous region to craft a law for the formation of more Islamic banks, apart from Al-Amanah Islamic Investment Bank which, to date, is the only existing bank of its kind in the Philippines. However, this 2018 statute is regional in scope. The Islamic Banking Law of 2019 is national in scope and application.

Review of 2020
The Bangko Sentral ng Pilipinas (BSP) took steps to implement the Islamic Banking Law. It clarified that indeed it is open to allowing more Islamic banks to operate in the country. Not only that, the BSP will also permit existing universal and commercial banks to open Islamic banking units that are distinct and separate from conventional banking units. Moreover, qualified foreign Islamic banks can operate in the Philippines by (i) establishing a wholly-owned domestic subsidiary bank, (ii) acquiring an existing domestic bank, or (iii) forming a local branch office, in each case with BSP approval.

In addition, the BSP has prescribed a Shariah governing framework (SGF) for Islamic banks and Islamic banking units. The SGF requires the appointment of an independent Shariah Advisory Council that will approve and certify product structures and their documentation, in addition to issuing opinions and clarifications on Shariah compliant matters.

The BSP has even released a primer on Islamic banking fundamentals, to address “the low awareness and capacity on Islamic banking and finance not only for the regulators but also for the industry players and other stakeholders”. The primer, which is in a question-and-answer format, covers the core features of the Islamic Banking Law. It goes into the key distinctions between conventional and Islamic banking, as well as the requirements for establishing Islamic banks or Islamic banking units in the Philippines.

In turn, the Bureau of Internal Revenue (BIR) issued its own regulations implementing the Islamic Banking Law’s “tax neutrality” provision which is designed to provide a level-playing field in terms of taxation between Islamic banking and conventional banking, so that Islamic banking transactions will not be disadvantaged tax-wise in relation to their conventional counterparts. Basically, the BIR ruled that the tax treatment of Islamic banking transactions will be “based on their economic substance rather than their form” and where an Islamic banking transaction is “economically equivalent to a conventional bank product, the tax treatment of the two should be the same.”

All in all, the stage was set for an Islamic banking ascent in the country but for the intervening coronavirus pandemic which has disrupted nations worldwide and adversely affected commerce and industry nationally and internationally.

Preview of 2021
The march toward Islamic banking in the Philippines would depend, in large measure, on the success of the government in curbing and controlling the pandemic. Should the pandemic ease and ebb, the disrupted momentum toward an energized Islamic banking industry in the Philippines would resume.

Assuming this is the case, 2021 will see the opening of Islamic banking units within existing conventional banks, and the filing by foreign Islamic banks of their applications with the BSP and the Securities and Exchange Commission for the establishment of their desired Islamic banking presence in the Philippines (whether via a stand-alone subsidiary which is a separate juridical entity, or a branch office which is an extension of the legal personality of the offshore head office).

In the meantime, the BSP and the banking sector would be expected to continue raising public awareness in Islamic banking and finance, as well as encourage and promote the emergence of a pool of scholars or experts on Shariah law who will make up the Shariah Advisory Council mandated by the SGF.

Conclusion
The future of Islamic banking and finance in the Philippines remains positive, with the requisite legal and regulatory infrastructure already in place. With the economic contraction caused by the pandemic, the government is expected to look for all possible sources of funding its budgetary deficit. For the longest time, a planned maiden Sukuk issue has been on the drawing board. The time has come to refocus earnestly on Islamic banking and finance.

Rafael A Morales is the managing partner of Morales & Justiniano. He can be contacted at [email protected]