Aimed at further developing the Islamic banking system in the Philippines, the Bangko Sentral ng Pilipinas (BSP) recently approved the policy on the modified minimum capitalization requirement for conventional banks with Islamic Banking Unit (IBU).
BSP Circular No. 1173 was signed last April 18, 2023, in an effort to provide more flexibility in licensing an IBU for qualified conventional banks. The policy stated that in applying for an IBU license, a conventional bank must be compliant with the BSP’s prudential criteria.
It also has to have a system for segregating lslamic banking transactions of the IBU from its conventional banking business, as well as establishing an appropriate Shari’ah Governance Framework (SGF).
Guidelines set to ensure safeguards, accountability
The application of BSP’s enforcement framework is also seen to provide prudential safeguards to ensure accountability on the committed business plan and capital build-up plan after the transitory period of covered banks with IBU to promote market discipline in the financial system.
Under the new policy, a bank with just one head office will be required P3 billion capitalization while a bank with 10 branches should have twice that amount, or at least P6 billion capitalization.
If up to 100 branches, the requirement is P15 billion, and P20 billion if more than 100.
Big banks, meanwhile, are required to put up a minimum capitalization between P3 billion to P20 billion depending on the number of branches.
The guidelines also allow conventional commercial banks (KB) or subsidiary banks of a universal bank (UB) or KB, which meet the minimum capital requirement for their respective banking category, to operate an IBU within a transitory period not exceeding five (5) years.
“A conventional bank that is a commercial bank or a subsidiary of a universal or commercial bank (U/KB) that complies with the minimum capital requirements applicable to its respective banking category may be allowed to operate an IBU within a reasonable transitory period not exceeding five (5) years reckoned from the date of BSP’s approval,” the circular stated. “After the transitory period, the conventional bank’s operation of an IBU may be allowed subject to compliance with the minimum capitalization requirement for a big bank.”
Incentivizing conventional banks to develop a market for Islamic banking products
According to the BSP, the capital requirement is one of the reasons why there are few IBU applicants. A hefty capital is also needed to establish an SGF. The SGF ensures that the Islamic bank or IBU adheres to Shari’ah principles and has a Shari’ah Advisory Council.
“The BSP aims to incentivize the conventional banks to test, explore and develop the market for Islamic banking products and services with prudential safeguards to support the entry of a critical mass of Islamic banking players in the country,” said BSP Governor Felipe M. Medalla.
Qualified conventional banks with IBU will be accorded prudential relief in meeting the minimum capital requirement, which shall be based on the actual number of branches/units being used in Islamic banking operations.
Before the global pandemic was declared in March 2020, the BSP was already talking to at least 2 banks interested in setting up either a full Islamic bank or an IBU. It was also reported that in February this year, an Islamic bank based in Turkey has started exploring ways to put up a subsidiary in the Philippines.
Republic Act No. 11439 or the “Islamic Banking Law” was enacted in 2019. But it was only in 2022 that the BSP started the creation of the Shari’ah Supervisory Board SSB in the Bangsamoro Autonomous Region in Muslim Mindanao to promote Islamic finance and Islamic banking in the region.