Islamic banking challenges | Inquirer Business
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Islamic banking challenges

The signature of President Duterte is all that remains before Islamic banking is institutionalized in this predominantly Christian country.

The initial effort to engage in Islamic banking in the Philippines was made in 1973 with the establishment, by presidential decree, of the Al-Amanah Islamic Bank of the Philippines.


The operations of Al-Amanah did not live up to expectations due to some deficiencies in its charter and the lack of legal framework for its operation. As a result, the Development Bank of the Philippines took over in 2008.

Learning from the lessons of Al-Amanah, Congress recently approved House Bill No. 8281, which provides for the organization and regulation of Islamic banks in the country.


The bill authorizes the conduct of banking transactions “with objectives and operations that do not involve interest (riba) as prohibited by the Shari’ah” and in accordance with Shari’ah principles.

Shari’ah refers to “the practical divine law deduced from its legitimate sources: the Qur’an, Sunnah, consensus of Muslim scholars,  analogical deduction and other approved sources of Islamic law.”

To avoid varying interpretations about the meaning of riba (a contentious issue among Muslim scholars), the bill defines it, in the context of banking business, as “the receipt and payment of interest, including in the various types of lending and borrowing and in the exchange of currencies on forward basis.”

Consistent with Shari’ah, Islamic banks can’t invest in businesses forbidden by Islamic law (or haraam), such as those selling pork or alcohol.

The Monetary Board (MB) will have the responsibility of promulgating the rules for the establishment of Islamic banks or for conventional banks engaging in Islamic banking transactions through a designated Islamic banking unit within their organization.

In the latter case, these banks are obliged to come up with a system for segregating the transactions of the Islamic banking unit from conventional banking business.

Islamic banks shall be licensed and regulated by the MB in the same manner as universal banks and have to comply with existing banking requirements on, among others, capital adequacy, liquidity, corporate governance and risk management.


In addition, the bill prohibits acquisition in an Islamic bank that will result in ownership, directly or indirectly, of more than 10 percent of the voting stock of such bank without obtaining the prior approval of the MB.

Prior to such approval, no such transfer or acquisition of shares shall have legal effect nor shall it be recognized in the stock and transfer book of the Islamic bank or in the records of any government agency.

To be consistent with Islamic banking rules, the bill exempts Islamic banks from the provisions of the following laws:

(a) the General Banking Law of 2000 with regard to the determination by the Bangko Sentral ng Pilipinas (BSP) of bank interest rates, loans and discounts, and interest-bearing instruments or charges;

(b) the General Auditing Act and other related laws insofar as they run counter to the auditing procedures of Islamic banks and Islamic banking system; and

(c) the provisions of the Philippine Deposit Insurance Corporation Act and all laws regulating insurance companies, although the bill does not bar Islamic banks “from the establishment of contemporary takaful (solidarity services) free of riba, premiums or interests.”

BSP Governor Benjamin Diokno has expressed optimism Islamic banks will boost the government’s financial inclusion program, especially in the recently organized Bangsamoro Autonomous Region in Muslim Mindanao.

With the exemption of Islamic banks from the provisions of some banking laws and the need to make sure Shari’ah-based rules are complied with, the MB and other government offices that would have to deal with Islamic banks have their work cut out for them.

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TAGS: Duterte, Islamic banking, monetary board
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