Philippines: Islamic financing possibilities

ISLAMIC banking and financing as it is introduced in the Philippines opened a lot of inquiries and challenges. Both Muslims and non-Muslims have their own version of apprehension and contesting ideas.

In the previously held Forum on Islamic Banking and Financing by the Mindanao State University–Iligan Institute of Technology, in partnership with Anak Mindanao and National Commission on Muslim Filipinos last September 2 at MSU IIT Campus, Iligan City, participants from different sectors especially the future accountants of the university, both Muslims and non-Muslims, were given the basics of such concepts by the resource persons.

The resource speakers were Ms. Nataliya Mylenko, the Senior Financial Sector Specialist from the World Bank Group, Congresswoman Sitti Djalia A. Tubarin-Hataman of AMIN, Atty. Maisara Dandamun-Latiph, the senior state solicitor of the office of the Solicitor General and Ms. Maharlika Alonto, an expert on Islamic Banking and Finance from University of Reading, United Kingdom.

From the inputs of the resource speakers, many of the usual controversies regarding Islamic Finance were discussed and given further explanations. Among these issues include the concepts of "interest free," "shari’a banking," "no-loan policy," etc.

However, do we really need Islamic Banking and Financing here in the Philippines? Is this for the Muslim communities in the country only?

The answer is No. This is a system that can be adopted by all.

Let us know the basics of Islamic financial system. As a concept, Islamic economic principles offer the individual the freedom to produce and create wealth, while surrounding the individual with an environment controlled, not by human rulers, but by Divine Guidance. The underlying principles that govern Islamic banking are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.

In the website of Islamic Banking and Insurance, the concept was further discussed according to the essential guidance enshrined in the Qur’an and the Sunnahs (practices) of the Prophet Muhammad (pbuh). Among these are "Trusteeship," which introduces a moral and spiritual element as men perform economic engagements, and "Care for others," which introduces the concept of serving others as part of spiritual teachings in Islam.

Another interesting concept is the idea of "productive effort" as a means of serving God. In this concept, Islam requires wealth to be spent in the cause of God. This realization moves Muslims to greater efforts in their economic activities.

Indeed, if Islamic banking and finance will be well established in this country, we will not only be stronger as a nation but we can be at par with other progressive countries around us like Malaysia. This is probably because of the basic practice of mutual risk and profit sharing between parties that assures fairness for all.

In Malaysia, as narrated by one of the resource speakers, the country’s economy became stable because of the Islamic banking and finance system adhered to by most of the country’s banks. There is this Islamic Banking and Takaful in Malaysia that complies with the Islamic law or Shari’a.

They practice the use of various Islamic finance concepts such as ijarah (leasing), mudharabah (profit sharing), musharakah (partnership). As a country of both Muslims (Malays) and non-Muslims (dominantly Chinese), we have witnessed how the country became united on the matters of Islamic banking and financing.

This concept of Islamic Banking and Finance may be new to us Filipinos but it is known already to other countries and is even practiced since the 70’s. Let us give the concept a chance to be understood by laymen and make our people realize that there is advantage in this principle for a better economy.

(Sun Star / 13 September 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

BSP in talks with Malaysia counterpart to craft Islamic banking framework for Philippines

Malaysia, home to the one of the world’s largest Muslim populations, has expressed interest in helping develop the Islamic banking industry in the Philippines, the Department of Finance said Sunday.

Finance Undersecretary Jose Emmanuel Reverente said the Bangko Sentral ng Pilipinas has been holding talks with Bank Negara, Malaysia’s central bank, regarding the creation of a framework for Islamic banking in the country.

"There has been strong interest from Malaysia in terms of assisting us develop a strong Islamic banking framework… We are working closely with them," he said.

In a forum held last March, BSP Governor Amando Tetangco Jr. lamented the scarcity of Islamic banks in the Philippines, particularly in the Autonomous Region in Muslim Mindanao (ARMM), despite the vast business opportunities available in the region.

At present, only 20 banks operate across five provinces in ARMM, with Al-Amanah bank being the only Islamic financial institution. The bank is a subsidiary of the Development Bank of the Philippines.

Malaysia, meanwhile, has 16 Islamic banks.

Reverente said the growth of Islamic banking industry in the Philippines has been stunted by the absence of a framework to guide the creation of laws that recognize the particular manner by which Muslims transact and do business.

Under traditional Islamic banking, loans to clients or customers must not carry interests. Because of this condition, Islamic banks in the Philippines serve more as an equity partner than a deposit-taking and lending institution, Reverente said.

This, in turn, puts the banks at a disadvantage when it comes to fulfilling tax obligations, he said.

The government earlier said it hopes to develop a market for the Islamic banking industry in preparation for the ASEAN economic integration in 2015.

(GMA News Online / 20 April 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Philippines: Bangko Sentral sees great potential for Islamic banking

The Bangko Sentral ng Pilipinas sees great potential for Islamic banks in the Philippines, especially in the Autonomous Region in Muslim Mindanao, which only has 20 banks across five provinces.

 

ARMM is a top source of fish and marine products and has large mineral deposits but conventional banking has been slow in coming to the region.

 

"This is an unfortunate state of affairs, considering that the ARMM is a resource-rich area with vast potential," BSP Governor Amando Tetangco Jr. said in his speech at the recent Islamic Banking Finance Workshop at the BSP.

 

"The latest available regional GDP data [2012] puts the real GDP growth in the ARMM at only 1.2 percent. But when we consider broader Mindanao, the number rises about sevenfold to 8.2 percent. This tells us that there is an enormous potential in the Mindanao region in general, and the ARMM in particular," he said.

 

Tetangco said although Islamic banking can also meet the banking needs of non-Muslim depositors, banks must also look at the market needs and opportunities in the millions of Muslims in the country.

 

He said the public must be provided with appropriate choices to suit their risk appetite and financial needs.

 

He said the regulatory and supervisory framework must bring about a level playing field for the Islamic banking system.

 

"In other words, the privileges that are available for conventional banks must also be available to Islamic banks.  In the same vein, the prudential requirements that cover conventional banks, must also apply to Islamic banks.  The design and implementation of standards, of course, would need to take into account, the particular characteristics of Islamic finance," he said.

 

He also said that the regulatory environment should encourage banks to come out with products and services to address the distinctive needs of Islamic finance.  He said Islamic financial players should be encouraged to introduce Islamic finance products.

 

Tetangco also said that since the BSP wants to promote more Islamic banks to operate alongside conventional banks, it is also looking at an open approach that will allow conventional banks to operate Islamic banking windows.

(GMA News Online / 16 March 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Philippines: Islamic banking and finance anyone?

DURING our overview conference on the business and investment climate in Bangsamoro held in Davao last November, critical thematic areas surfaced as priority for the Bangsamoro as well as for the private sector. The concerns ranged from human and physical infrastructure, access to capital and credit, to security. Of these myriad issues, the conference organizers, the Foundation for Economic Freedom (FEF) and the Philippine Center for Islam and Democracy (PCID), have opted to focus on the areas that have not been adequately addressed: banking and finance, business and labor regulations, land and property rights, and revenue generation and fiscal management.

   On March 11 and 12, FEF and PCID, in partnership with the Bangko Sentral ng Pilipinas (BSP) and the Bangsamoro Development Agency (BDA), organized the Banking and Finance (BAF) Workshop at the beautifully appointed Executive Business Center of the BSP. The workshop is part of a series organized by the FEF and PCID to bring key stakeholders together to help strengthen the business and investment climate for the Bangsamoro. The success of the workshop we owe in large measure to FEF’s Cesar Virata (former Prime Minister and RCBC Vice-Chair), Tom Allen (former World Bank Director), Cayetano Paderanga, Jr. (former National Economic and Development Authority Secretary) and Gary Olivar (Consultant, BDO Risk Management Unit). 

The Bangsamoro now have a partner in BSP Governor Amando Tetangco, Jr. and Deputy Governor Nestor Espenilla, Jr., whose strong support for the workshop was key to gathering, in one forum, the key stakeholders from both regulatory and private sectors.

Autonomy for the Bangsamoro, the cornerstone of the peace process with the Moro Islamic Liberation Front (MILF), will be meaningless if business and investment continue to stay away from the region. The present Autonomous Region for Muslim Mindanao (ARMM) has suffered from this neglect, as shown by economic indicators. ARMM contributes less than 1% of the country’s GDP and poverty incidence there has worsened. The region’s rich natural resources are undeveloped due to armed conflict and lawlessness, the dearth of educated and skilled manpower, and inadequate infrastructure. 

In his overview of the banking and finance situation in the ARMM, Mindanao State University Professor Acram Latiph cited the dismal profile of the region -- lowest levels of investment and domestic trade, lowest number of private firms, commercial floor area, banks and other financial institutions. The region’s economy is dominated by the informal sector where informal lending is a major source of financial intermediation. Further, as confirmed by a 2011 JICA study, 83% of entrepreneurs use their own money as a source of finance. Pawnshops and moneylenders have proliferated, in spite of Islamic prohibitions of usury or "riba." If there are no other sources of financing, what choice do Muslims have?

A study conducted by the Institute for Development and Econometric Analysis for the FEF-PCID initiative revealed that the number of banks actually declined from 26 to 19 (2006 to 2012). Imagine, as of 2012, there were only 25 ATMs in ARMM (0.2% of the more than 12,000 ATMs in the Philippines). 

The JICA study also showed that only 32% of ARMM residents kept their cash in banks. As a consequence of the lack of access to banks, the majority keeps their money at home (under the mattress?) and in their stores/offices.

Prof. Acram clearly notes that the ARMM is "disconnected" from the rest of the country in terms of economic linkages.

The BAF workshop brought together more than 70 participants from major Philippine banks, government regulatory agencies, and Bangsamoro participants from the BDA (led by its Chair, Dr. Safrullah Dipatuan), Bangsamoro Transition Commission (BTC), ARMM regional government and private sector. As Mr. Dipatuan said, the Bangsamoro cannot develop its economy without the support of the country’s banking and finance sector.

The workshop was structured not just to address the region’s lack of access to banking and finance services and products, but also to gather support for developing a regulatory framework that would allow for Islamic banking and finance. Why Islamic banking and finance? 

For the Bangsamoro, it is a requirement that all our dealings in life be "halal," or legal and permissible under Shariah or Islamic law. In Islam, what is legal must be moral. In most Islamic countries, Shariah guides government, industry and business, setting the criteria for what is halal and what is haram (illegal, prohibited). Some actions that businesses must avoid in order to be considered halal or Shariah-compliant will be considered extreme, by conventional standards. For instance, funding that comes fromharam sources such as gambling is also haram. Thus, the Bangsamoro really cannot accept funding from the Philippine Charity Sweepstakes Office, which draws its funds from casinos and the lotto.

Given that Muslims in this country are a small minority (less than 10% of the population), why would Philippine banks be interested in investing capital, time and effort to be Shariah-compliant?

The surge in capital from oil rich economies has spurred activity in the ASEAN for Islamic banking and finance, export of goods, health and education services. However, this phenomenon has not catalyzed growth in the provision of those products and services from the Philippines. The Philippines is one of the first countries to open an Islamic bank -- the Philippine Amanah Bank, now the Al Amanah Islamic Investment Bank. Supported by then Finance Secretary Cesar Virata, Amanah Bank was established in 1973 by virtue of Presidential Decree No. 264, to provide banking services to Muslim Mindanao, which would accommodate the religious requirements of the Muslim population.

However, Amanah is in limbo. Ikram Tawasil (National Commission for Muslim Filipinos, formerly with the Amanah Bank) described how Amanah is unable to move from conventional banking services to the Islamic due to many problems, including government regulations that prevent it from offering Islamic financial products and services. Current legal and regulatory infrastructures that would enable -- given the right conditions -- the flourishing of Islamic banking and Shariah compliant microfinance and other financial institutions in the region are glaringly absent. (However, Rafael Morales -- Managing Partner of Sycip, Salazar, Hernandez and Gatmaitan Law Firm -- said that we may not need to amend laws. Securities and Exchange Commission Commissioner Manuel Gaite echoed that idea. More on this interesting line of thinking next week).

Meanwhile, other countries -- the United Kingdom, Malaysia and Singapore, for instance -- have aggressively run after the capital of the oil-rich Middle East by offering a wide range of Islamic banking and finance products and services. The Philippines still has not tapped the opportunities of different types of financial products, which would allow for a shift from a debt and interest-based financial system to one based more on equity and partnership. If we did, we could entice more foreign deposits and investments from the Muslim countries. 

Why should our banks consider opening up to Islamic systems? My question is this: is conventional banking so profitable that we don’t need to look at other opportunities? Is the pain of learning a new system not worth gaining new markets? 

Islamic banking and finance is still a young sector. The first Islamic bank was established in Egypt in 1963. Since then, Islamic finance has grown tremendously. Global Islamic banking assets held by commercial banks were set to cross $1.8 trillion in 2013, up from the $1.3 trillion of assets held in 2011 (Ernst & Young’s World Islamic Banking Competitiveness Report 2013). 

Citibank, Hongkong Shanghai Banking Corp., Standard Chartered Bank and other international banks have opened Islamic banking windows and subsidiaries. There are more than 300 Islamic financial institutions worldwide across 75 countries. The world’s 100 largest Islamic banks have set an annual asset growth rate of 26.7% and the global Islamic finance industry is experiencing average growth of 15-20% annually (Asian Banker Research Group).

At our BAF workshop, senior officials of Philippine banks -- BPI, PNB, DBP, RCBC, LBP, BDO, Amanah -- listened intently as CEOs of the Islamic bank groups of Malaysia’s top two banks shared their experiences on the growth and profitability of Islamic banking. Muzzafar Hisham (Maybank) and Badisyah Abdul Ghani (CIMB), gave valuable suggestions on how the Philippines can develop its own Islamic banking and finance sector. 

Perhaps our bankers will now be more encouraged to consider the opportunities available and provide Islamic banking services and products not just for the Bangsamoro but also the entire country. Certainly BSP Governor Amando Tetangco, Jr. and Deputy Governor Nestor Espenilla, Jr. are very supportive. 

(Business World Online / 13 March 2014)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Philippines to Draw Up Shariah-Compliant Stocks List

The Philippine Stock Exchange (PSE) is drawing up a list of Shariah-compliant equities to attract the nation’s Muslim investors and $1.2 trillion of investible funds in the Middle East.

The exchange is holding consultations and workshops with the Al-Amanah Islamic Investment Bank of the Philippines, government agencies and the Asian Development Bank on standards for Shariah-compliant stocks, Leo Quinitio, head of the bourse’s capital-markets development division, said in an interview.

“There’s a large pool of investible funds in the Middle East that invest only in Shariah-compliant stocks or companies that meet Muslim doctrines,” Quinitio said in Manila yesterday. “We are working on this and hopefully by the first half we will have a list.”

The Philippine Stock Exchange has sought to introduce new products, including real estate investment trusts and exchange traded funds, to boost trading in Asia’s 12th-largest stock market. The nation’s equities have a market value of $209 billion, or about equal to Nestle SA (NESN)’s capitalization, according to data compiled by Bloomberg,

Trading on the Philippine stock exchange has averaged 5.86 billion pesos ($141 million) a day this year, 22 percent more than 2011’s average, the data show. The Dow Jones Islamic Market World Index (DJIM) of companies that meet Islamic guidelines has surged 13 percent this year, outpacing an 8.3 percent gain by the MSCI Asia Pacific Index.

NO ALCOHOL

Quinitio said Muslims are restricted from investing in companies that violate Shariah doctrines, which forbid the engagement in activities deemed unethical such as gambling, production of alcohol and armaments. There are also restrictions on interest-related income, he said.

Apple Inc., Exxon Mobil Corp. and PetroChina Co. are the three biggest Shariah-compliant companies by market value that Muslims can invest in, according to data compiled by Bloomberg.

Drawing up a list of Shariah-compliant stocks can be “very difficult,” according to Abdul Jalil Abdul Rasheed, chief executive at Kuala Lumpur-based Aberdeen Islamic Asset Management.

“One of the challenges is how detailed do they want the standards to be and this can make the work intensive,” Rasheed said. “Do you want it to be 100 percent compliant or have a tolerance level of say 5 percent of earnings come from non-halal business? The other challenge is do you want the financing of the business to be shariah-compliant as well?”

OVERSEAS BUYING

The Philippine exchange is working with the National Commission for Muslim Filipinos to form a Shariah advisory council, Quinitio said.

“There are no signs so far that investors’ interest in the Philippines has waned,” he said. “The market is enjoying a good momentum.”

Overseas investors bought a net $2.19 billion of Philippine equities this year to Sept. 20, compared with $1.33 billion of purchases for all of 2011. The benchmark Philippine Stock Exchange Index (PCOMP) has rallied 21 percent this year and closed at a record on July 5 amid optimism about the nation’s economic growth prospects.

The $1.3 trillion Shariah-compliant finance industry is expanding globally at an average annual rate of 15 percent, according to a June report from Malaysia’s Securities Commission. The Islamic Financial Services Board in Kuala Lumpur predicts the market will reach $2.8 trillion by 2015.

Islamic assets account for about 1 percent of global financial market, according to a March 2012 publication of the UK Islamic Finance Secretariat. The largest centers remain concentrated in Malaysia and the Middle East, including Iran, Saudi Arabia, United Arab Emirates, Kuwait, Bahrain and Qatar, according to the report.

(Bloomberg / 21 Sep 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com