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September 29, 2023

BSP grants first Islamic banking unit license to conventional Bank

The Bangko Sentral ng Pilipinas (BSP) has issued the Philippines’ inaugural Islamic banking unit (IBU) license to a conventional bank, marking a significant step in the country’s financial landscape. BSP Deputy Governor Francisco G. Dakila Jr. made the announcement during a Philippine Economic Briefing (PEB) held in Davao, refraining from disclosing the specific conventional bank’s identity and origin.

Dakila mentioned that there are currently at least five foreign banks in the exploration phase of establishing either independent Islamic banks or IBUs in the country.

“Recently, the Monetary Board has approved the first Islamic banking unit license issued to a conventional bank. This has brought the number of Islamic banking players in the country to two,” the bankero revealed.

He also expressed anticipation for further applications as the BSP continues to promote Islamic banking and finance.

Prior to this IBU license issuance, the Philippines had a single Islamic bank, Al Amanah Islamic Investment Bank, which operates under state ownership and was created through a presidential decree in 1973 as a subsidiary of the Development Bank of the Philippines.

Dakila highlighted the potential for investments in this sector of banking and finance, particularly the attraction it holds for investors from Muslim nations within the Gulf Cooperation Council region and non-Muslim countries seeking diversified investments adhering to sustainable frameworks. He noted that aside from conventional banks, foreign banks, foreign government institutions, and foreign embassies have displayed interest in supporting new Islamic banking players.

The BSP’s efforts to promote Islamic banking and finance gained momentum following the enactment of Republic Act No. 11439 in 2019. Dakila noted that this legislative move led to increased market interest from both local and foreign investors.

Dakila projected that the issuance of the Philippines’ inaugural sovereign Sukuk bonds, planned by the government, will significantly mark the country’s presence in the global Islamic finance industry, expanding its engagement within the global Islamic financial markets.

The key distinction between an Islamic bank and a conventional bank lies in the role of depositors as “investors” rather than lenders in the former, fostering risk sharing or profit and loss sharing instead of fixed interest payments on deposit liabilities and loans. While IBUs are gaining momentum, the requirement for a substantial capitalization to establish a Shari’ah Governance Framework remains a hurdle for potential applicants.

The BSP has introduced a modified minimum capitalization and a five-year transition period for non-Islamic banks planning to establish an IBU. Applicants must fulfill BSP’s prudential criteria and establish a system for segregating Islamic banking transactions from conventional banking operations while implementing an appropriate Shari’ah Governance Framework.


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