MANILA, Philippines — Islamic banking in the Philippines is expected to gain ground, especially in Mindanao, as the sector benefits from a strong regulatory push, S&P Global Ratings said.
However, Islamic banking is projected to have a small share of total banking sector assets, and operations will likely be limited to the Muslim-majority region of Mindanao, Nikita Anand, an analyst at S&P said in an interview.
“Our view is that there is a lot of regulatory push and support in the Philippines in order to improve financial inclusion,” Anand said.
”The launch of new Islamic banks will improve financial access for underserved regions and segments such as small businesses,” she added.
Maybank Philippines and a foreign company have expressed interest in going into Islamic banking in the country, according to the Bangko Sentral ng Pilipinas.
READ: Maybank Philippines eyeing Islamic banking license from BSP
There are only two players in this sector at present: Al-Amanah Islamic Investment Bank of the Philippines and the Islamic branch of the Center for Agriculture and Rural Development (CARD) Bank Inc.
READ: Duterte signs law regulating Islamic banking in PH
In 2019, former President Rodrigo Duterte signed Republic Act 11439 which mandates the BSP to exercise regulatory powers and supervision over the operations of Islamic banks.
Targeting unbanked areas
Islamic banking, as defined in RA 11439, refers to a banking business with objectives and operations that do not involve interest (riba) that is prohibited by the Islamic or Shari’ah Law, and which conducts its business following the principles of the Shari’ah.
The lack of a legal framework and necessary infrastructure in the past had hampered the development of a vibrant Islamic banking ecosystem in the Philippines, where the Muslim population accounts for about 10 percent of Filipinos.
BSP data showed that 29 percent of the cities and municipalities in the Philippines remain unbanked, with the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM) being the most unbanked region.
Islamic banking and finance can promote inclusive finance by making it available to groups that avoid using existing conventional banking facilities due to their faith.
It can also be attractive to non-Muslims, particularly investors within or outside the Philippines who may be looking for new asset classes, instruments, and products to diversify their portfolios.
“Malaysian banks that already operate in the Philippines could also be interested in extending their products and services to this area. Their expertise in this field and search for higher profitability segments in the region support our view,” S&P’s Anand said.