The Monetary Board, the policy-making arm of the Bangko Sentral ng Pilipinas (BSP), is proposing that capital requirements for Islamic banks be made similar to conventional banks. Once approved, this figure could range between P3 billion to P20 billion, depending on how many branches would be put up.
“No final decision yet. Consultations are ongoing,” a Monetary Board member said in a press release.
The BSP’s proposal is meant to encourage more banks to go into Islamic finance. At the moment, the Philippines only has one Islamic bank, the state-owned Al Amanah Islamic Investment Bank, which is a subsidiary of the Development Bank of the Philippines. It was created by a presidential decree in 1973.
Consultations ongoing for IBU’s modified minimum capitalization
The Philippine central bank is also currently consulting with industry experts on how best to implement a workable capital level for non-Islamic banks or conventional banks willing to establish Islamic Banking Units (IBUs).
Since releasing the draft circular in mid-June, a member of the Monetary Board explained that the BSP is still discussing the proposed modified minimum capitalization for conventional banks that are planning to set up in the Philippines as IBUs.
In a statement, BSP Deputy Governor Chuchi G. Fonacier said conventional banks that do not meet the minimum capital of a universal bank but are a subsidiary of a universal bank or a commercial bank, may be allowed to operate as an IBU within a reasonable transitory period. In the BSP circular, this is a five-year transitory period.
“The capital that such banks need is eventually the same range that is being applied to universal banks, depending on the number of its branches,” Fonacier explained.
The recently exposed draft circular had a feedback deadline of July 8, but since banks had a lot of concern about Islamic finance, the consultations have been extended.
In applying for an IBU license, the applicant must be compliant with the BSP’s prudential criteria. It also has a system for differentiating an IBU’s Islamic banking transactions from its conventional banking business, as well as establishing an appropriate Shari’ah Governance Framework (SGF).
The capital requirement is one of the reasons why there are only a few IBU applicants. A hefty capital is 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.
Prior to the COVID-19 pandemic, the BSP entertained exploratory talks with at least three conventional banks willing to set up IBUs. These inquiries, however, did not advance to the application stage.
Republic Act No. 11439 or the Islamic Banking Law was enacted in 2019. But it was only this year that the BSP started the creation of the Shari’ah Supervisory Board (SSB) in the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM). The goal is to promote Islamic finance and Islamic banking in the region.
The SSB’s primary function is to issue Shari’ah opinions on Islamic banking transactions and products in the BARMM.
A joint circular and a memorandum of agreement with the Department of Finance (DOF), the National Commission on Muslim Filipinos, and the Bangsamoro Government on the establishment of an SSB have since been signed last April 18.
Islamic finance is seen as one of the fastest-growing financial segments
In its report, the Asian Development Bank (ADB) noted that Islamic finance is one of the fastest-growing financial segments in the global financial system, with industry assets amounting to about $2 trillion in 2015. In Asia, the ADB said Islamic finance has a 15 percent market share in the domestic banking sectors of Muslim nations such as Malaysia, Brunei, and Bangladesh.
Global Islamic finance is also expected to grow from 10 percent to 12 percent or an estimated $2.2 trillion by the end of this year.