Lidasan: What we need to know about Islamic banking and finance in the Philippine setting

AL QALAM Institute of the Ateneo de Davao University has conducted intensive research and study on Islamic finance in the past three years. We have partnered with Islamic universities in Malaysia and Indonesia in order to understand what Islamic finance is all about. As we wait for the establishment of the Bangsamoro political entity, we invest our time and effort in building the social capital for the setting up of Islamic finance in Mindanao.

We have hosted seminars, fora, and international study tours to understand the principles on Islamic finance. As part of the academe, it is our mandate to generate knowledge and wealth for both Muslims and non-Muslims in the Philippines.

The following Q&A are the key points we need to understand regarding Islamic finance.

1. What is Islamic finance?

Finance is described as Islamic when it complies with sharia, a set of moral laws laid out in the Holy Qur'an and the Hadith or writings about the prophet Muhammad (SAW). In its simplest definition, Sharia forbids making money from money.

In another definition, “Islamic Banking is about the conduct of Banking and Finance operations in consonance with Shariah principles. It prohibits Riba and financing of anti-social and unethical services. It requires compliance with Shariah. It’is the fastest growing component of financial services industry. The growth rate is ranging from 15-20 percent. Right now, there are 600 financial institutions operating in more than 75 countries.”

Moreover, Islamic finance is all about sharing risk between financial institutions and the individuals that avail the principles of shariah. Thus, the two parties are tied into a longer-termrelationship with each other will the goal of sharing the risks and benefits of the particular financial transaction. 

What are the current statistics on Islamic finance?

275: The number of Islamic financial institutions in the world.

75: The number of countries where they have a presence.

US$1.357 trillion: The value of the global Islamic finance services industry by the end of 2011.

US$4 trillion: The projected value of the global Islamic finance services industry by 2020.

£200m: The value of the planned Islamic bond being unveiled by David Cameron today.

11th: The ranking of the UK (up 4 places from 2011) in the Global Islamic Finance Report which weighs up variables like the number of institutions involved in Islamic finance industry, the size of the Islamic financial assets and the regulatory and legal infrastructure.

Is it for Muslims only?

No. It is a system of financial transactions. It is open for anyone who wants to avail himself/herself of its principles.

What is the current status of Islamic finance in our country?

In a series of meetings organized by Al Qalam Institute with Bangko Sentral ng Pilipinas, Development Bank of the Philippines, Al Amanah Islamic Bank, Muslim Chamber of Commerce, Mindanao Business Council, people's organization and cooperatives that are engaged in Islamic finance, we have learned the following:

According to Atty. Arifa A. Ala, Director–Supervision Department II, Bangko Sentral ng Pilipinas: “The BSP has been very supportive on initiatives that promote Islamic Banking and Finance in the country.” 

Ala added, “We have the Al Amanah Islamic Bank, the one and only Islamic Bank in the Philippines. The growth of Islamic Banking and Finance in the Philippines is quiet very slow. These are the challenges that have seen:

a. Lack of legal and regulatory framework for Islamic Banking and Finance;

b. Tax laws and regulation; 

c. Lack of secondary market. Al Amanah is the only Islamic Banking player in the system, it has no counterpart to place its excess funds; 

d. Low investor awareness on acceptance of Islamic Banking and Finance;

e. Lack of clear information on Islamic Banking and Finance"

 

What are the challenges and what have we done so far?

The challenge now is how to promote Islamic Banking and Finance in our country? Many Muslims do not understand and appreciate the essence and value of Islamic finance. This is based on the fact that we lack local experts. We lack religious leaders who are knowledgeable of this field. Aside from this, we need to establish a clear and workable legal framework.

We need to understand that Al Amanah Bank is the first known and only Islamic Bank in the country mandated by law. It is licensed to do commercial and investment banking similar to a universal bank. Bank’s mission is to provide Islamic Banking products and services that adhere to the principles of Shariah. At present, the bank offers deposits and investments like savings, current and general investments under the Wadiah principle for safe keeping. They offer financing under Ijarah, Murabahah, and Bai' Bithaman Ajil. While the bank is not yet a full pledge Islamic Bank, they are allowed to do conventional banking thereby offering conventional deposits and loans.

However, Al Amanah Islamic Bank also faces several challenges in terms of legal framework, laws on taxation, and they are limited in offering Islamic Capital Market and Islamic Securities.

(Sun Star / 07 July 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Philippines to Draw Up Shariah-Compliant Stocks List

The Philippine Stock Exchange (PSE) is drawing up a list of Shariah-compliant equities to attract the nation’s Muslim investors and $1.2 trillion of investible funds in the Middle East.

The exchange is holding consultations and workshops with the Al-Amanah Islamic Investment Bank of the Philippines, government agencies and the Asian Development Bank on standards for Shariah-compliant stocks, Leo Quinitio, head of the bourse’s capital-markets development division, said in an interview.

“There’s a large pool of investible funds in the Middle East that invest only in Shariah-compliant stocks or companies that meet Muslim doctrines,” Quinitio said in Manila yesterday. “We are working on this and hopefully by the first half we will have a list.”

The Philippine Stock Exchange has sought to introduce new products, including real estate investment trusts and exchange traded funds, to boost trading in Asia’s 12th-largest stock market. The nation’s equities have a market value of $209 billion, or about equal to Nestle SA (NESN)’s capitalization, according to data compiled by Bloomberg,

Trading on the Philippine stock exchange has averaged 5.86 billion pesos ($141 million) a day this year, 22 percent more than 2011’s average, the data show. The Dow Jones Islamic Market World Index (DJIM) of companies that meet Islamic guidelines has surged 13 percent this year, outpacing an 8.3 percent gain by the MSCI Asia Pacific Index.

No Alcohol

Quinitio said Muslims are restricted from investing in companies that violate Shariah doctrines, which forbid the engagement in activities deemed unethical such as gambling, production of alcohol and armaments. There are also restrictions on interest-related income, he said.

Apple Inc., Exxon Mobil Corp. and PetroChina Co. are the three biggest Shariah-compliant companies by market value that Muslims can invest in, according to data compiled by Bloomberg.

Drawing up a list of Shariah-compliant stocks can be “very difficult,” according to Abdul Jalil Abdul Rasheed, chief executive at Kuala Lumpur-based Aberdeen Islamic Asset Management.

“One of the challenges is how detailed do they want the standards to be and this can make the work intensive,” Rasheed said. “Do you want it to be 100 percent compliant or have a tolerance level of say 5 percent of earnings come from non-halal business? The other challenge is do you want the financing of the business to be shariah-compliant as well?”

Overseas Buying

The Philippine exchange is working with the National Commission for Muslim Filipinos to form a Shariah advisory council, Quinitio said.

“There are no signs so far that investors’ interest in the Philippines has waned,” he said. “The market is enjoying a good momentum.”

Overseas investors bought a net $2.19 billion of Philippine equities this year to Sept. 20, compared with $1.33 billion of purchases for all of 2011. The benchmark Philippine Stock Exchange Index (PCOMP) has rallied 21 percent this year and closed at a record on July 5 amid optimism about the nation’s economic growth prospects.

The $1.3 trillion Shariah-compliant finance industry is expanding globally at an average annual rate of 15 percent, according to a June report from Malaysia’s Securities Commission. The Islamic Financial Services Board in Kuala Lumpur predicts the market will reach $2.8 trillion by 2015.

Islamic assets account for about 1 percent of global financial market, according to a March 2012 publication of the UK Islamic Finance Secretariat. The largest centers remain concentrated in Malaysia and the Middle East, including Iran, Saudi Arabia, United Arab Emirates, Kuwait, Bahrain and Qatar, according to the report.

(Bloomberg / 21 Sep 2012)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Philippine: Islamic Finance - what next?

Almost exactly one year ago, Noel Bonoan and Aaron Lim published an article entitled “Why not Islamic finance?” in this KPMG CORNER. The article summarizes the potential opportunities of Islamic finance while at the same time mindful of the hurdles currently in the Philippine fiscal and regulatory regime.

In trying to understand and flesh out some of these hurdles, Manabat Sanagustin and Co., CPAs (MS&Co.), the Philippine member firm of KPMG International, partnering with the British Embassy in Manila organized a forum on Islamic finance entitled “Enabling Islamic Finance in the Philippines” on March 8, 2012. The forum was well-attended by over 50 participants from diverse background including the banking industry, Muslim organizations, members of the academe, the Philippine government represented by the Department of Finance, Bureau of Internal Revenue (BIR) and the Bangko Sentral ng Pilipinas (BSP) as well as global experts in this arena.

The general consensus during the RTD was that now is a good time for the Philippines to start considering Islamic finance – and any necessary changes are achievable! Neil Miller, KPMG global head of Islamic finance and a UK national, emphasized that similar struggles existed when the UK attempted to introduce Islamic finance and it took the Bank of England over a period of more than six years to introduce Islamic finance – clearly not a short timeframe. Comparison with the UK is relevant as it was able to position itself as the global Islamic center without compromising on its state and religious identity – something the Philippines can aspire to, as well. Neil was one of the initial members of a working group tasked with establishing Islamic finance in the UK.

Being a member of the UK Treasury Committee of Islamic Finance Experts and Financial Services Authority Committee on Islamic Finance, Neil worked closely with the Muslim Council of Britain and other bodies to promote and develop Islamic finance in the UK. The message was clear – UK was able to successfully introduce Islamic finance because of the presence of a driving political will, most crucially demonstrated by the then governor of the Bank of England (the late) Sir Eddie George. Identifying such a person who embraces and understands Islamic finance will be key to achieving the same development in the Philippines.

Such person will also need to have a strong understanding of Philippine tax, often mentioned as one of the main hurdles to Islamic finance in the Philippines. Noel Bonoan, former undersecretary of Finance and current vice chair of MS&Co.’s tax division, compared the possible taxes likely to be incurred on conventional bonds and Sukuk bonds. As an example, consider a three-year conventional bond that pays interest at five percent annually, and a typical Ijarah or lease-type Sukuk with face value of P1 million. Other assumptions include a fair market value of P1 million for a real property and a three-year lease agreement with an annual payment of P50,000.

(PhilStar.com / 10 April 2012)

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Alfalah Consulting - Kuala Lumpur:
www.alfalahconsulting.com
Islamic Investment Malaysia:
www.islamic-invest-malaysia.com