With the proposed Bangsamoro basic law (BBL) appearing dead in the water, the government needs to find another legal framework to encourage the growth of Islamic banking.
The BBL would have provided the framework that would encourage the growth of Islamic banking in the country by providing the proposed Bangsamoro government with authority and jurisdiction in promoting Islamic banking, subject to the supervision of the Bangko Sentral ng Pilipinas (BSP).
Under Section 3, paragraph 13 of the draft BBL, one of the exclusive powers of the Bangsamoro government was in banking and the financial system, where the Bangsamoro government works with the BSP, the Department of Finance and the National Commission on Muslim Filipinos to promote the development of
Islamic banking.
According to banking and finance lawyer Rafael A. Morales, the Philippines has to gain back expertise in Islamic banking,
especially with the onset of economic integration under the Asean this year.
“My fearless forecast is that with the Asean economic integration, Philippine banks will be forced to develop expertise in Islamic banking,” Morales said.
Morales is managing partner at SyCip Salazar Hernandez and Gatmaitan, the largest law firm in the country. He used to head the firm’s banking, finance and securities department.
Left behind
IN the 1970s the Philippines was among the first countries in the Asean to recognize the importance of Islamic banking as a tool to promote economic development in mostly Muslim areas, with the enactment of the charter of the Al-Amanah Islamic Investment Bank of the Philippines (AAIIBP), which is the only Shariah-oriented lender in the country today.
But with the apparent lack of a legal framework that will support the growth of Islamic banking activities, the Philippines has become a laggard in the area of Islamic banking.
With a weak Islamic banking sector, the Philippines has not taken full advantage of its own market for Islamic banking and finance products. With the evolving economic integration of the Asean, the largely untapped Philippine market for Islamic banking services could prove an incentive for foreign Islamic banks to come to the Philippines and offer Islamic banking services.
The proposed privatization of the AAIIBP has also been turned down by President Aquino, according to a highly placed source at the Governance Commission for Government-Owned and -Controlled Corporations (GCG), and leave it to the government to encourage the growth of Islamic banking, entice private corporations to come and put up Islamic banks instead of buying into the only Islamic bank in the country.
It remains to be seen what happens to AAIIBP when the merger of the Land Bank of the Philippines and the Development Bank of the Philippines (DBP) is completed. DBP controls 99.9 percent of AAIIBP since the reorganization and recapitalization plan of the Islamic bank in 2008.
Breaking down tax barriers
The BSP said it has pinned hope on the growth of Islamic banking on pending bills filed in Congress that would be deliberated on in the next Congress since there is no more time to pass the measure by June.
The BSP said there are too many obstacles in the form of taxes on Islamic banking practice and transactions preventing investors from coming into the Philippines.
Under proposed legislations in Congress are tax neutrality provisions between conventional banking activities and Islamic banking. The pending bills direct the Bureau of Internal Revenue (BIR) to use its rule-making power to issue policies and guidelines that will implement a tax neutrality “conducive to the growth of Islamic banking and finance in the country.”
The main difference between conventional and Islamic banking is that Islamic banking conforms with the teachings of the Koran that prohibits interest charges.
In Islamic banking, the borrower and the Islamic bank would engage in a risk-participation arrangement or a financial lease to remain faithful to the strictures of the Koran.
Interim measures
Morales urged the BSP to come up with interim measures that will allow Islamic banking activities to flourish, especially in the area of banking per se and not necessarily in the more complex area of selling bonds and other capital market-development activities.
One of the interim measures the BSP envisioned in the past, but has yet to realize, is the opening of Islamic windows in conventional banks currently operating so that commercial lenders may offer Islamic banking services without establishing a new entity catering exclusively to Muslim clients.
Morales pointed out the BSP has the legal footing to come up with this measure since the General Banking Law of 2000 provides the BSP with the regulatory and supervisory powers over all banks, including Islamic banks, as defined in Republic Act 6848, or the charter of the AAIIBP.