BSP pushes for more Islamic banking reforms

Bangko Sentral ng Pilipinas. (File photo / Philippine Daily Inquirer)

The Bangko Sentral ng Pilipinas (BSP) is looking at further reforms of regulations on Islamic banking to enable and encourage the entry of more players and ramp up efforts to establish an inclusive and sustainable Islamic finance ecosystem.

In particular, the BSP is studying policies on profit sharing investment accounts, minimum capital requirement of Islamic banking units, and capital adequacy ratios of Islamic banks and Islamic banking units.

“We aim to provide a supportive and enabling environment for Islamic banking that can operate alongside the conventional banking system,” BSP Governor Benjamin Diokno said in a press briefing.

Diokno explained that the main difference between conventional banking and Islamic banking is that the latter does not involve interest, which is prohibited by Shari’ah law. Instead, Islamic finance is founded on risk sharing.

In the 2022 edition of their Islamic Finance Outlook report, S&P Global Inc. said state-owned Al Amanah Islamic Investment Bank of the Philippines, a subsidiary of Development Bank of the Philippines, was likely to remain the sole Shari’ah specialist over the next few years.

The United States-based research firm noted that about 5 percent to 6 percent of the Philippine population is Islamic, and residing in highly underbanked regions of the country.

Potential market

Thus, there is a potential market to capture and S&P Global thinks that Al Amanah was likely to lead development initiatives including opening of branches or Islamic finance windows.

“We don’t expect material progress from other banks given they have not shown much interest in serving this market,” S&P Global said, citing the high cost of setting up branches as well as potentially higher credit risk due to the low-income profile of the borrowers.

Still, the BSP has issued Circular No. 1139, which spells out the BSP’s prudential regulatory reforms on Islamic banking. These cover licensing, Shari’ah governance, liquidity risk management as well as reporting guidelines. Further, the BSP is working with the Bangsamoro government, National Commission on Muslim Filipinos and the Department of Finance on establishing a Shari’ah Supervisory Board in the Bangsamoro Autonomous Region in Muslim Mindanao.

The BSP is also preparing the conduct of workshops on Islamic banking and finance with international organizations such as the Islamic Financial Services Board and the Islamic Finance Advisory Assurance Services.

“The continuous conduct of capacity building programs for stakeholders remains a priority of the government, considering the benefits and untapped potential of Islamic banking and finance in promoting greater financial inclusion,” Diokno said.