BSP: Islamic finance may be key to Mindanao dev’t

Islamic finance may prove to be a boon for the Philippine economy, particularly in Mindanao—a geographically significant part of the country that has unfortunately lagged in terms of development.

The Bangko Sentral ng Pilipinas (BSP) has made it clear that it is high time for the country to develop the Islamic banking sector and maximize Muslim Mindanao’s vast resources.

“Although Islamic banking could also cater to those outside the Islamic faith, we can begin looking at market needs and opportunities … of Muslims in the Philippines today,” BSP Governor Amando M. Tetangco Jr. said last week.

Conventional banks have barely penetrated the country’s Muslim population, most of whom are residents of the Autonomous Region in Muslim Mindanao (ARMM), Tetangco said during a closed-door workshop on Islamic finance hosted by the central bank.

The BSP is now drafting a proposal to Congress for the creation of a new regulatory framework to cover Islamic finance in the country.

The BSP, as part of the proposed amendments to its charter, also asked Congress for the authority to craft rules on Islamic banking.

Unlike conventional banking, Islamic banks comply with the Shariah law, which prohibits lenders from charging interest for loans. Instead, Islamic banks rely on the principle of risk-sharing, which forces borrowers to take banks in as partners when taking out loans.

Another key trait of Islamic finance is that financial transactions should be supported by genuine productive economic activity that subscribes to the ethics of the Islamic faith.

This limits the industry’s participation in financial markets dominated by conventional banks and financial institutions.

“Notably, this principle can serve to reinforce links between finance and the real sector, reducing the perils of unbridled innovation and excessive risk taking,” Tetangco said. “In this context, it contributes to the financial stability of the system.”

With just 20 banks and 28 automated teller machines present in the region, only 8 percent of the municipalities in the ARMM have access to banking services.

This is an unfortunate state of affairs, considering that the ARMM is a resource-rich area with vast potential.

“It is one of the country’s top sources of marine and fish products. It also holds large mineral deposits, including copper and gold,” Tetangco said.

“There is therefore a significant untapped market opportunity, not just for conventional banking, but also and more importantly for Islamic banking.”

Data from 2012 showed that ARMM’s economy grew by just 1.2 percent that year. This was much slower than all of Mindanao, which grew by 8.2 percent. The entire country also grew by 6.8 percent in 2012.

Tetangco said the Islamic banking industry may take several forms. He said new Islamic banks could be established by the private sector. Existing banks in the country may also choose to put up separate subsidiaries or affiliates that specialize in Islamic finance.

Currently, the country only has one Islamic bank, Al-Amanah Investment Bank, which was established in 1973. The bank is currently owned by state-run Development Bank of the Philippines (DBP).

The prevailing General Banking Law passed in 2000 prohibits the creation of any other Islamic bank in the country—a limitation the BSP wants to address, first through amendments to the central bank’s charter and, eventually, with the passing of a new law focusing only on Islamic finance.