Islamic Banking in Philippines has a long way to go

Mohammad Arifeen

Islamic Banking plays a vital role in Asean trading, especially for Philippines, which has good business relationship with Indonesia and Malaysia.
Islamic banking a system is based on the principles of Islamic law, also known as Shariah, and guided by Islamic economics. Two fundamental principles behind Islamic banking are the sharing of profit and loss and, importantly, the forbiddance of the collection and payment of interest.
Since this system of banking is based on Islamic principles, all the task of the banks follows Islamic morals. Therefore, investments involving alcohol, gambling, pork, etc. are not allowed.
 Significantly the lack of legislative and regulatory infrastructure in the Islamic finance market significantly adds to the cost and complexity of Shariah-compliant operations.
One of these is the absence of Shariah advisers in the field of economics, banking and finance. In the Philippines, the function of an Islamic finance institution is to provide developmental projects in the country. One of the developmental projects is the improvement of the tuna industry in General Santos City.
To date, there survives only one bank engaged in Islamic finance, the Al-Amanah Islamic Investment Bank, a subsidiary of the Development Bank of the Philippines.
It has been in existence for about 40 years and had to be taken over by the DBP, which infused P1 billion of fresh capital. Amanah Bank started with a small capital of P50 million.
The Al-Amanah Islamic Investment Bank of the Philippines (abbreviated AAIIBP) or Al-Amanah Islamic Bank is the first and only Islamic bank in the Philippines.
Al-Amanah Islamic Bank traces its roots to the Philippine Amanah Bank, established by President Ferdinand Marcos in 1973 by virtue of Presidential Decree No. 264, [1] with an initial capital of 100 million pesos. Its charter originally allowed it to open in the provinces of Basilan, Cotabato, Lanao del Norte, Lanao del Sur, Palawan, Sulu, Tawi-Tawi, Zamboanga del Norte and Zamboanga del Sur, where there are large, if not predominant, Muslim populations. Its charter was amended in 1974, allowing it to open branches in Maguindanao and Sultan Kudarat.
In 1989, the bank was re-chartered and re-capitalized pursuant to Republic Act No. 6848, and was subsequently renamed the Al-Amanah Islamic Investment Bank of the Philippines, with a capital of one billion pesos.
The bank was sold to another government-owned bank, the Development Bank of the Philippines in 2008.
  "Considering that there's market potential ... We can look into the possibility of allowing conventional banks to provide Islamic banking products," central bank Deputy Governor Nestor A. Espenilla, Jr said.
"However, we have not received any proposal so far," he added.
"Perhaps the problem is a dearth of providers with sound Islamic banking business models," Mr. Espenilla noted.
Bankers have quoted the absence of a regulatory framework as the main hindrance in implementing Islamic finance in the country.
This was noted by Malayan Banking (Maybank) President and CEO Dato' Sri Abdul Wahid Omar, who said: "We (Maybank) have to expand the current offering that we have ... but the current regulations do not allow that."
"Currently, there is no framework to operate Islamic banking in the Philippines. I guess we need to study the market first, look at the Islamic banking model that will be acceptable for the market and see how it can be implemented in the Philippines," he added.
Philippines is struggling to develop Islamic financing. "Mindanao is resource-rich, and when peace settles it would be a natural market that Islamic players would look at."
It took Malaysia, a global hub for financing along religious guidelines, 30 years to develop into what it is today, Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd., a unit of CIMB Group, said.
"The Philippines has a long way to go," said Mohamed Azahari Kamil, CEO of Asian Finance Bank, the Malaysian unit of Qatar Islamic Bank SAQ. "How fast the Philippine government will be able to implement Shariah rules and the levels of acceptance are some of the challenges that it will have to face."
"There's no notable growth in assets or improvement in deposits because of the limitations in Islamic investments," she said. "We hope there will be renewed interest in Islamic banking with the latest peace treaty. Al-Amanah can be an instrument to introduce economic development in the area following the Shariah principles."Islamic banking in the Philippines
Early Islamic doctrines emphasize interest as a surplus value without an equivalent real value, thus making it unacceptable. Sukuk, as an example, is an Islamic financial instrument. It is the counterpart of bonds, but differing in the aspect that these types of bonds are non-interest-bearing and is utilized without fixed income.
Islamic banking also prohibits transactions related to alcohol and pork, in deference to common Islamic doctrine. Ethics and morality are at its pedestal; thus, gambling and other games of chance are also restricted.
In the Philippine case, Al-Amanah is continually in existence due to the unique services that it provides to Muslim brothers and sisters, thus easing the banking process and including them in the financial scene and game.
"Perhaps the problem is a dearth of providers with sound Islamic banking business models," Mr. Espenilla noted.
Philippine is struggling to develop Islamic financing. This is how Kuala Lumpur-based Asian Finance Bank Bhd. and CIMB Group Holdings Bhd foresees the Philippine Islamic finance sector.
"The Philippines can successfully open up its Islamic finance market once it puts in a place a broader and deeper infrastructure framework," said Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd.