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Overview

Policies

In general terms, what policy has your jurisdiction adopted towards Islamic finance? Are Islamic finance products regulated differently from conventional instruments? What has been the legislative approach?

The Philippines officially recognised Islamic finance 40 years ago when a legislative charter was granted to Al Amanah Bank, the first Islamic bank in the country established to cater to the banking requirements of the Muslim population. That bank was eventually reorganised and phased out in 1990 with the establishment of Al-Amanah Islamic Investment Bank of the Philippines. However, since then no significant steps have been taken by the Philippine government to encourage Islamic banking and finance in the country. In general terms, therefore, the Philippines has relinquished its leadership in this field and has watched its neighbours in the region surpass it.

However, there is no prohibition against the entry of shariah-­compliant investments. Further, foreign banks with Islamic windows in Muslim countries, as well as a foreign Islamic bank, have been operating in the Philippines, although their current activities are confined to conventional banking.

Market development

How well established is Islamic finance in your jurisdiction? Are Islamic windows permitted in your jurisdiction?

The General Banking Law of 2000 recognises ‘Islamic banks’ as a category of banking institutions, but the Central Bank of the Philippines (BSP), the regulator of the banking industry, has yet to issue a circular allowing local banks (including local branches of foreign banks) to establish Islamic windows, even if this measure is within the broader power of the BSP to make ‘other classifications of banks’ as it may deem appropriate. To date, no conventional banks have introduced Islamic windows.

Therefore, there are no Islamic investment products offered by any of the banks and financial institutions in the Philippines, aside from the Al-Amanah Islamic Investment Bank. There was a plan by the Philippine government to offer sukuk to finance Islamic pilgrimages, but this plan has never been implemented.

Legislation

What is the main legislation relevant to Islamic banking, capital markets and insurance?

The Congress of the Philippines has yet to enact a general framework for Islamic banking, capital markets and insurance in the country, apart from the legislative charter of Al-Amanah Islamic Investment Bank. In the absence of this law, the existing laws applicable to conventional banking, capital markets and insurance would have to be considered. Fortunately, article 1306 of the Civil Code of the Philippines allows contracting parties to ‘establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy’. This autonomy in contract-making would allow the adoption of terms and conditions acceptable or suitable to Islamic banking, capital markets and insurance, with the approval of the BSP for banking, the Securities and Exchange Commission (SEC) for capital markets, and the Insurance Commission (IC) for insurance.

Supervision

Principal authorities

Which are the principal authorities charged with the oversight of banking, capital markets and insurance products?

The principal authorities are the BSP for banking, the SEC for capital markets, and the IC for insurance products. However, Al-Amanah Islamic Investment Bank is not covered by all laws regulating insurance companies in the Philippines.

Guidance

Identify any notable guidance, policy statements or regulations issued by the regulators or other authorities specifically relevant to Islamic finance.

The regulators have not issued any notable guidance, policy statement or regulation specifically relevant to Islamic finance, except for the rules issued by the BSP to implement the Charter of Al-Amanah Islamic Investment Bank of the Philippines.

Central authority

Is there a central authority responsible for ensuring that transactions or products are shariah-compliant? Are IFIs required to set up shariah supervisory boards? May third parties, related parties or fund sponsors provide supervisory board services or must the board be internal?

There is no such central authority in the Philippines. However, within Al-Amanah Islamic Investment Bank, there is a five-member Advisory Council whose function is ‘to offer advice and undertake reviews pertaining to the application of the principles and rulings of the Islamic shariah to the Islamic bank’s transactions’. Third parties cannot provide supervisory board services to Al-Amanah Islamic Investment Bank, as its Advisory Council is integral to it.

Board approval

Do members of an institution’s shariah supervisory board require regulatory approval? Are there any other requirements for supervisory board members?

There is no requirement for regulatory approval for a shariah supervisory board. In the case of the Advisory Council of Al-Amanah Islamic Investment bank, the only requirement is for its members to be Islamic scholars and jurists of comparative law, and for them to be elected by the general shareholders every three years. The board of directors of that bank prepares a list of qualified persons from which the shareholders elect the five-member Advisory Council.

Authorisation

What are the requirements for Islamic banks to be authorised to carry out business in your jurisdiction?

Under the existing regulatory framework, an Islamic bank must be licensed by the BSP and SEC to carry out business in the Philippines.

Foreign involvement

May foreign institutions offer Islamic banking and capital markets services in your jurisdiction? Under what conditions?

There is no law prohibiting foreign institutions from offering Islamic banking and finance products in the Philippines. However, they must be licensed by the SEC and the BSP for that purpose.

Takaful and retakaful operators

What are the requirements for takaful and retakaful operators to gain admission to do business in your jurisdiction?

They must be licensed by the SEC and the BSP, and possibly by the IC too, to do business in the Philippines.

Foreign operators

How can foreign takaful operators become admitted? Can foreign takaful or retakaful operators carry out business in your jurisdiction as non-admitted insurers? Is fronting a possibility?

There are no applicable rules at present.

Disclosure and reporting

Are there any specific disclosure or reporting requirements for takaful, sukuk and Islamic funds?

Currently, there are no applicable rules on the matter.

Sanctions and remedies

What are the sanctions and remedies available when products have been falsely marketed as shariah-compliant?

There is no generally applicable law or regulation on the matter at present. However, if the offence is committed by Al-Amanah Islamic Investment Bank, its responsible directors, officers, employees or agents may, upon conviction, be punished by a fine not exceeding 10,000 Phillipine pesos or imprisonment of not more than five years.

Jurisdiction in disputes

Which courts, tribunals or other bodies have jurisdiction to hear Islamic finance disputes?

There is no specific court or tribunal that has exclusive jurisdiction to hear Islamic finance disputes. Regular courts retain jurisdiction over these disputes. However, disputes between Al-Amanah Islamic Investment Bank and its investors or shareholders or among its shareholders are resolved by its board of directors, acting as an arbitrator.

Contracting concepts

Accommodation of concepts

Mudarabah - profit sharing partnership separating responsibility for capital investment and management.

This type of arrangement is feasible in the Philippines, considering the freedom or autonomy granted to contracting parties under article 1306 of the Civil Code of the Philippines. Thus, current rules would allow risk-sharing rather than risk-transfer elements. In particular, Al-Amanah Islamic Investment Bank is authorised by its charter to ‘carry out financing and joint operations by way of mudarabah purchasing for others on a cost-plus financing arrangement, and to invest funds directly in various projects or through the use of funds whose owners desire to invest jointly with other resources available to the Islamic Bank on a joint mudarabah basis’.

Murabahah - cost plus profit agreement.

Murabahah is permitted. Therefore a bank in the Philippines can buy an asset and resell it in instalments to a buyer at a profit. There are no transfer and documentary stamp taxes if the asset is personal or movable property. The asset may be used as collateral for the outstanding obligations of the buyer.

In the case of Al-Amanah Islamic Investment Bank, it is specifically authorised to provide financing with or without collateral by way of leasing, sale and leaseback, or cost-plus-profit sales arrangement. However, given the strict avoidance of interest in shariah, any bank engaging in murabahah must take at least constructive possession of the property subject of the cost-plus-profit agreement before selling it to the buyer so that the transaction can be said to be based on trade and not merely a financing transaction.

Musharakah - profit sharing joint venture partnership agreement.

This type of agreement is feasible. In particular, Al-Amanah Islamic Investment Bank is expressly authorised to carry out ‘musharakah joint venture or decreasing participation’. In this regard, a special power of attorney may be required for the appointment of a managing partner of the profit-sharing partnership. Further, there appears to be no issue in respect of fair and equal treatment of partners or shareholders.

Ijarah - lease to own agreement.

Al-Amanah Islamic Investment Bank is specifically authorised to engage in lease to own arrangements. Conventional banks, on the other hand, may enter into ijarah agreements as there is no law that prohibits them from doing so. In practice, however, most conventional banks undertake leasing activities through their leasing companies.

Wadiah - safekeeping agreement.

Al-Amanah Islamic Investment Bank is authorised to engage in a wadiah transaction where a gift (hibah) in lieu of interest is paid. Given that the bank is just a trustee under a wadiah arrangement, ownership of the property or fund deposited with it is not transferred to it. In the case of breach of fiduciary duty or misuse of funds, the trustee will be liable to the trustor, in accordance with the Civil Code of the Philippines.

Products

Securities structuring

Sukuk - Islamic securities. Have sukuk or other Islamic securities been structured and issued in your jurisdiction to comply with Islamic principles, such as the prohibition of interest?

There have been no sukuk issuances in the Philippines. In any case, the prohibition against interest (riba) does not pose a problem in the Philippines, because of article 1956 of the Civil Code of the Philippines, which states: ‘No interest shall be due unless it has been expressly stipu­lated in writing.’ This means that the contracting parties can exclude interest by not stipulating anything about it in their contract.

Legal position

What is the legal position of sukuk holders in an insolvency or a restructuring? Are sukuk instruments viewed as equity or debt instruments? Have there been any court decisions or legislation declaring whether sukuk holders are deemed to own the underlying assets?

There is no jurisprudence or legislation declaring sukuk holders as owners of the underlying assets of the issuer.

Insurance

Takaful - Islamic insurance. Are there any conventional cooperative or mutual insurance vehicles that are, or could be adapted to be, shariah-compliant?

There are no conventional cooperative or mutual insurance vehicles that are or could be adapted to be shariah-compliant.

Which lines of insurance are currently covered in the takaful market? Is takaful typically ceded to conventional reinsurers or is retakaful common in practice?

There is none yet in the Philippines.

Miscellaneous

Regulatory obstacles

What are the principal regulatory obstacles facing the Islamic finance industry in your jurisdiction?

The inability of the Congress of the Philippines to pass a general legislative framework for Islamic finance is the main obstacle facing Islamic finance in the Philippines. Even without that general framework, however, the BSP is in a position to promote Islamic finance, particularly in the area of banking. As noted earlier, the General Banking Law of 2000 grants the BSP sufficient flexibility to authorise local banks (other than Al-Amanah Islamic Investment Bank) to open Islamic windows. Given the relative inaction of the Congress of the Philippines, this BSP regulatory initiative would jump-start Islamic banking on a national scale.

In line with the call of the Islamic Development Bank for a global shariah board to provide greater uniformity in Islamic finance, there is a need to develop in the Philippines a core of shariah scholars who could validate proposed transactions as compliant with shariah principles and rulings. In this connection, the Philippine Stock Exchange has published a list of companies that passed according to the AAOIFI shariah rulebook.

Shariah law

In what circumstances may shariah law become the governing law for a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of shariah or the conflict of shariah and local law relevant to the finance sector?

Shariah law generally applies only to Muslims in the Philippines, and only insofar as family relations are concerned. Commercial transactions by Muslims are still covered by the general law, except that the requirement of consent of the Muslim wife in a conventional loan transaction between a bank and a Muslim borrower may not be required given that separate property regime governs Muslim marriages in the Philippines.

Jurisprudence on shariah is still in its infancy. Most cases resolved by the Supreme Court of the Philippines on shariah relate to family issues, and do not concern the financial sector.

Institutional takeover

Are there any special considerations for the takeover of an Islamic financial institution, outside the requirements of the general merger control regime?

There are no special rules governing the takeover of an Islamic financial institution. Accordingly, the merger and takeover provisions applicable to conventional banks and financial institutions, as stock corporations, would also apply to Islamic financial institutions.

The Charter of Al-Amanah Islamic Investment Bank specifically provides that the subscription to and ownership of the shares of the bank, including the transfer thereof to third parties, will be limited to persons and entities who subscribe to the concept of Islamic banking. There is no requirement, however, that the owner be engaged in halal business only or that a certain proportion of its business is halal. In fact, the Al-Amanah Islamic Investment Bank is 99.9 per cent owned by a conventional bank.

Other notable features

Are there any notable features of the Islamic finance regime and markets for Islamic finance products in your jurisdiction not covered above?

The foregoing covers the state of the Islamic finance regime and markets in the Philippines and the more notable features thereof.