In a virtual briefing on 7 April 2022, Noel Tianela, the deputy director and head of the Islamic Banking Supervision Group of the Bangko Sentral ng Pilipinas (“BSP” or the Central Bank of the Philippines), announced that the BSP is looking into relaxing the capitalisation requirements for Islamic banks (“IB”) and Islamic banking units[1] (“IBU”) in the hopes of further developing the Islamic banking and financing landscape in the Philippines.[2]

Present landscape of Islamic banking in the Philippines

Since the notable enactment of the Islamic Banking Act in 2019, the Philippines has yet to see the establishment of a new IB or IBU. The local Islamic banking market remains occupied by a single IB entity that has been operating since 1973, the Al-Amanah Bank, which is a subsidiary of the Development Bank of the Philippines (“DBP”). BSP Governor Benjamin E. Diokno noted that while the BSP has received multiple inquiries relating to the establishment of an IB or IBU in the Philippines, no concrete steps to execute such plans have been seen from such inquirers.[3]

In the 2022 S&P Global Inc.’s Islamic Finance Outlook report, it was reported that the Al-Amanah Bank would likely remain as the sole IB in the Philippines over the next few years.[4] This notwithstanding, experts agree that the market remains filled with potential.[5]

Capitalisation requirements for IBs

Under the Islamic Banking Act of the Philippines, entities wanting to set up an IB or an IBU are required to comply with the minimum capital requirements prescribed by the BSP for universal banks. Currently, the minimum capital requirement for a universal bank ranges from PHP 3 billion to PHP 20 billion,[6] depending on the number of branches that the universal bank intends to open. This hefty capitalisation requirement has been opined by the BSP to be the primary obstacle for entities in setting up an IB or IBU in the country.

Relaxation of capitalisation requirements for IBs

In the same virtual briefing, the BSP reported that policy studies are being conducted to determine the propriety and implications of lowering the capitalisation requirements for IBs and IBUs.[7] The BSP expects to complete its review of the current capitalisation requirements and to introduce an improved and liberalised approach to such requirement before the end of the year. In this regard, the BSP hopes to create a more enabling environment for the entry of IBs and IBUs.

Implications for business in the Philippines

The lowering of the capital requirement for IBs and IBUs would work to encourage IB and IBU players to enter the Philippine market. The addition of IBs and IBUs in the Philippines could lead to an influx of investments and profits from both local and foreign investors and consumers.

It should be noted that under Philippine laws, Islamic banking is not exclusive for investors and clients of the Islamic faith. On the contrary, innovative Shari’ah-compliant products and services are made available to all persons regardless of their religion. If the addition of IBs and IBUs in the country is coupled with the proper dissemination of information on Islamic banking products, then the Philippines can expect to build a strong Islamic banking sector that can significantly contribute to the growth of the Philippine economy.

Conclusion

Despite the low turnout of IB and IBU entities in the market since the enactment of the Philippine Islamic Banking Act, the BSP remains confident that the prospects for Islamic banking in the country look promising. Thus, the BSP stands committed with its aim of continually working to develop the emerging sector, with the ultimate goal of achieving financial inclusivity and economic development, especially in the Bangsamoro Autonomous Region in Muslim Mindanao (“BARMM”) in southern Philippines.

If you have any questions or require any additional information, please contact Felix Sy, Reeneth B. Santos and Dane M. Estepa of Insights Philippines Legal Advisors (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.

[1] IBU refers to a division, department and business with objectives and operations that do not involve interest (riba) as prohibited by Shari’ah law and which conducts its business transactions in accordance with Shari’ah principles.

[2] BusinessWorld, BSP looking to ease Islamic banks’ capital requirements, available at https://www.bworldonline.com/banking-finance/2022/04/08/441048/bsp-looking-to-ease-islamic-banks-capital-requirements/ (last accessed 11 April 2022).

[3] Id.

[4] Ronnel W. Domingo, BSP pushes for more Islamic banking reforms, available at https://business.inquirer.net/345503/bsp-pushes-for-more-islamic-banking-reforms (last accessed 11 April 2022).

[5] Id.

[6] approximately USD 60 million to USD 400 million.

[7] BusinessWorld, supra note 2.