BSP Proposes New Law on Islamic Banking in the Philippines

Bangko Sentral ng Pilipinas (BSP) is drafting rules that will allow Islamic banks to operate without the use of interest rates – the main activity of non-Islamic banks that are prohibited under the Shariah law. This proposed rule is expected to bring in a new era of Islamic finance in the Philippines. The BSP anticipates an influx of fresh foreign investment as well as the creation of new jobs particularly in the Muslim areas of Mindanao.

Authorities are considering whether to include this proposal in the new Bangsamoro Law or to create a new one that would focus solely on the creation of Islamic banks. The advantage of having this piece of legislation inserted in the Bangsamoro Law is that it will be marked as urgent as opposed to the creation of a separate law.

One of the major hurdles in doing business in the Muslim areas of Mindanao is the lack of access to banks which impedes the growth of these areas particularly the Autonomous Region in Muslim Mindanao (ARMM). This is particularly true due to the lack of Islamic banks in the area which will serve those who are practicing the faith based on Shariah. Currently, there is only one Islamic bank in the Philippines the Al Amanah Islamic Bank which is owned and operated by the Development Bank of the Philippines (DBP).

What sets apart Islamic banks from its non-Islamic or Western counterparts is their compliance with the Shariah law which prohibits lenders from charging loans. What Islamic banks do instead in order for them to profit from their business is to take part in the risk in the venture of the borrower. Thus, the Islamic bank becomes a business partner of the borrower.

Another major difference is the requirement that the loan must be supported by a genuine economic activity and in compliance with the edicts of the Islamic faith. Thus loans for investment in alcohol, tobacco and gaming industries will not be allowed by Islamic banks.

The proposed law is expected not only to cover banking but will also provide rules for insurance and securities transactions that will comply with the Shariah law.

It was further noted that the Philippine government is interested in the establishment of shukuk issuance, which refers to Shriah-compliant bonds, as the country seeks addition foreign direct investment.

The British Embassy in Manila noted that Shariah-compliant investments may top $1.3 billion this year.


Photo Copyright: Al Amanah Bank

Author: Atty. James Biron
Atty. James S. Biron is a corporate lawyer specializing in foreign investments, trade, mergers and acquisitions, planning and financing of projects and capital raising. Clients served include real estate, construction, energy, information technology, agriculture, education, medical and casino gaming companies.

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