Undoubtedly, the COVID-19 pandemic disrupted the development of Islamic finance in the Philippines in 2022, particularly in stalling the aimed-for expansion of market players in the Islamic banking sector. The anticipated entry of foreign Islamic banks into the country failed to materialize as business expansion outside one’s jurisdiction was generally at a standstill. However, the Bangko Sentral ng Pilipinas (BSP) was unfazed as it continued to issue circulars that provide further guidelines in the area of Islamic banking, not to mention the BSP’s entry into cooperative arrangements with pertinent institutions in the field.
Review of 2022
2022 welcomed the signing of an MoU between the BSP and AAOIFI as part of the BSP’s program to promote Islamic banking in the Philippines.
The MoU envisages the adoption of relevant AAOIFI standards by the local banking and finance industry, as well as AAOIFI’s cooperation in capacity-building and technical matters.
The MoU dovetails the associate membership of the BSP in the IFSB which issues global prudential standards for the Islamic financial services industry not only in banking but also in capital markets and insurance.
After months of consultation with the local banking sector, the BSP issued Circular No 1139 (Series of 2022) titled ‘Guidelines for Reporting Islamic and Finance Transactions/Arrangements’.
Under the circular, the rules on reporting and standards of conduct prescribed by the BSP for conventional banks are made applicable to Islamic banks as well as Islamic banking units of conventional banks. The circular clarifies that the funds of the Islamic banking units must not be invested in or commingled with the other funds of the conventional bank of which the Islamic banking unit is a part.
Equally important, Islamic banks and Islamic banking units must always consider “the substance and economic effects of their transactions (rather than their form)” albeit the guidelines on the treatment of specific accounts unique to Islamic banking operations must be considered.
Earlier, the BSP issued Circular No 1134 (Series of 2022) which confirms that Islamic banks can accept foreign currency deposits in accordance with Shariah principles. For this purpose, an Islamic bank must apply to the BSP for a ‘Type C license’ that will allow it to establish an Expanded Foreign Currency Deposit Unit (EFCDU) in which the deposits will be made. Deposits in the EFCDU will bear no return. Savings and current deposits may be based on Qard (loan) or Wadiah (safe custody) while time deposits may be structured as commodity Murabahah (Tawarruq).
One other significant development is the mandate to the Philippine Deposit Insurance Corporation (PDIC) under its amended legislative charter to “establish separate insurance funds and insurance arrangements or Takaful that take into consideration the peculiar characteristics of Islamic banks”.
Equally important is the issuance by the Bureau of Internal Revenue of more detailed guidelines on the tax treatment of Islamic banking arrangements. This is in line with the tax-neutrality principle whereby Islamic banking transactions are not to be taxed more heavily or more lightly than their conventional counterparts.
Preview of 2023
2023 will see renewed efforts on the part of the BSP to welcome the entry of foreign Islamic banks into the Philippine banking sector. In addition, the BSP will continue to provide enabling guidelines on the operations of Islamic banking.
Further, 2023 will witness the implementation of the mandate of the PDIC to provide insurance cover to Islamic banking products and arrangements classified as deposits by the BSP. Hopefully, there will be more clarity on the long-awaited issuance of sovereign Sukuk.
Conclusion
As the pandemic continues to subside, the momentum toward a viable Islamic banking and finance system will hopefully be rekindled. Currently, there is only one Islamic bank in the Philippines. Before long, more participants are expected to enter the system, as the BSP is ready for this development.
Rafael A Morales is the managing partner of Morales & Justiniano. He can be contacted at [email protected].