The BSP sukuk framework could make it easier and cheaper for Philippine banks to raise money through Shari’ah-compliant instruments, with the central bank proposing a temporary zero-percent reserve requirement and a simpler issuance process.
Under the proposed BSP rules on sukuk, eligible banks could issue sukuk for funding or operational purposes without securing prior Bangko Sentral ng Pilipinas approval. Instead, banks would comply with prudential requirements and notify the BSP after the transaction.
The proposal goes further by setting the reserve requirement on qualifying sukuk issuances at 0% for their first three years. Sustainability sukuk would receive the incentive for five years, giving banks a longer window for instruments supporting eligible sustainable activities.
BSP wants to lower the cost of issuing sukuk
Under the draft framework, eligible banks issuing sukuk for funding or operational purposes would no longer need prior BSP approval. Banks would instead have to notify the central bank within five banking days after issuance and submit documents covering board approval, regulatory and Shari’ah compliance, and the final transaction.
Prior Monetary Board approval would still be required when an Islamic bank or conventional bank with an Islamic banking unit wants its sukuk to qualify as Additional Tier 1 or Tier 2 capital.
These instruments form part of the regulatory capital banks can use to absorb losses, which is why their treatment remains subject to separate capital requirements.
The draft would also limit conventional banks without an Islamic banking unit or quasi-banking authority to private or equivalent negotiated offerings. A private offering under the proposal would involve no more than 19 investors without a public offering.
Why would BSP let banks keep zero reserves against sukuk funding?
The zero-percent reserve requirement is best understood as a temporary market-development incentive.
Reserve requirements generally determine how much of certain bank liabilities must be set aside rather than made available for lending or other uses. Lowering the reserve requirement attached to qualifying sukuk funding can therefore reduce its regulatory cost and make sukuk more competitive with established sources of bank funding.
The proposal does not mean banks would be allowed to operate without reserves or other prudential safeguards.
The incentive applies specifically to qualifying sukuk issuances. The zero-percent reserve requirement would last three years for regular sukuk and five years for sustainability sukuk.
Banks would continue to operate under the BSP’s broader capital, liquidity, risk-management and other prudential requirements.
The BSP is also proposing additional room equivalent to 15% of a bank’s net worth under the single borrower’s limit for qualifying sukuk-related exposures for five years.
The single borrower’s limit is designed to prevent excessive concentration of a bank’s exposure to a single borrower or counterparty. The temporary additional allowance would give banks more capacity to participate in sukuk investments and financing transactions as the domestic market develops.
Qualifying exposures that remain outstanding when the incentive period ends may continue under their existing terms until maturity.
The draft would also prevent an originator or issuer from holding or acting as market maker for its own listed or traded sukuk, reducing potential conflicts as the market develops.
Sukuk are not simply bonds without interest
Sukuk are often called “Islamic bonds,” but treating them simply as conventional bonds with the interest component removed misses an important distinction.
Under the Philippines’ Islamic banking regulatory framework, sukuk form part of a broader system of financing designed to comply with Shari’ah principles.
A conventional bond generally represents a debt obligation under which an issuer promises to repay principal while providing interest payments to investors.
Sukuk instead represent interests connected to Shari’ah-compliant assets, rights, services, projects or investment activities. Depending on how a transaction is structured, investors may receive distributions generated from leases, profits or other permissible underlying cash flows rather than conventional interest.
That distinction matters because developing a sukuk market requires more than changing the terminology attached to ordinary debt.
Issuers need transaction structures that satisfy financial regulations as well as Shari’ah requirements, while investors need sufficient disclosure on the assets or activities behind an issuance.
The Philippines already has a sukuk foothold
The country is not starting from zero.
The Philippine government raised $1 billion through its maiden sovereign sukuk in 2023, establishing an initial Philippine benchmark in the international Islamic capital market.
The 5.5-year issuance carried a 5.045% profit rate, while investor orders reached about 4.9 times the amount offered.
The transaction also helped the government diversify its investor base toward Middle Eastern and Islamic markets.
The domestic regulatory infrastructure has since expanded. The Securities and Exchange Commission issued Memorandum Circular No. 12 in February 2026, establishing guidelines on the issuance and disclosure of sukuk.
The BSP proposal tackles another part of the market by making it easier for banks themselves to issue and participate in sukuk transactions.
If adopted, the combination of simpler issuance procedures, temporary reserve relief and additional exposure capacity could reduce some of the regulatory costs of entering what remains a developing Philippine market.
Whether sukuk becomes a significant source of Philippine bank funding will ultimately depend on issuers choosing to use the structure, investors providing sufficient demand and an active market developing around the instruments.
The BSP’s proposed incentives are designed to make that initial development easier rather than permanently exempt sukuk from normal banking safeguards.
