On 22 August 2019, Republic Act No. 11439 (“Islamic Banking Act”) was signed into law. The Islamic Banking Act provides for the organisation, regulation and powers of Islamic banks to be established in the Philippines.
While there are millions of Filipinos practicing the Islamic faith in the Philippines, Islamic banking system is not a widely known banking concept in the country. In fact, there is only one Islamic bank in the Philippines, which has been operating since 1973.
Now that a well-defined policy has been set, the Bangko Sentral ng Pilipinas (“BSP” or the Central Bank of the Philippines) is confident that domestic and foreign financial institutions, even those not operating under Islamic principles, will be encouraged to invest in Islamic banking operations. Further, the passage of the law will entice Muslim business owners and entrepreneurs in the Philippines and abroad to enter the Philippine market now that they have the option to transact with, and entrust their investments in, Islamic banks.
Islamic banks operate differently from conventional banks, in that, they conduct their business in accordance with Shari’ah, or a set of laws and rules based on Islamic texts. A notable feature of Islamic banks is the prohibition against the imposition of interest (riba) on any of their services or products as it is prohibited by Shari’ah.
Islamic banks, which shall be under the regulatory supervision of the BSP, will be licensed and regulated like a universal bank. In line with this, and before they can be licensed to operate, Islamic banks should meet the capitalisation similar to that being required from a universal bank. Currently, the minimum capital requirement for a universal bank is PHP 3 billion to PHP 20 billion, depending on whether the universal bank would be establishing a main office alone or would be including branches as well.
The Islamic Banking Act is also keen on encouraging existing conventional banks to participate in Islamic banking through their respective Islamic banking units, with the condition that the conventional banks should create and maintain a system that would allow them to separate their conventional banking business and Islamic banking transactions. Accordingly, the Philippine government shall strive to obtain a neutral tax treatment between Islamic and conventional banking transactions under the amended National Internal Revenue Code of the Philippines.
Foreign banks are also authorised to conduct Islamic banking business in the Philippines through the modes of entry allowed under Republic Act No. 7721, as amended, or the Liberalisation of Entry and Operations of Foreign Banks. Thus, a foreign bank may enter the Islamic banking system in the Philippines by owning up to 100% of the voting stocks of an existing Islamic bank, by establishing an Islamic bank subsidiary organised under Philippine laws, or by establishing a branch with full banking authority to conduct its Islamic banking operations.
Pursuant to the Islamic Banking Act, and in addition to the general powers granted to corporations and universal banks, Islamic banks are authorised to exercise the following powers and functions, as long as they conform to Shari’ah principles:
In order to ensure that the banking arrangements of Islamic banks are Shari’ah compliant, Islamic banks are required to organise Shari’ah Advisory Councils whose task is to render advice and to review applications of Shari’ah. The council shall be composed of persons who are qualified in Shari’ah or who have knowledge or experience in Shari’ah and in banking, finance, law or such other related disciplines.
With the aim of animating Islamic banking system in the Philippines, the Islamic Banking Act is seen as a positive step towards inclusive economic growth, complementing the organisation of the Bangsamoro Autonomous Region in Muslim Mindanao in the southern part of the Philippines. If implemented well, the law is also expected to create more opportunities for the public in general, and for enterprise owners in particular, to explore financial contracts and services that comply with Shari’ah principles.
This alert is for general information only and is not a substitute for legal advice.