Islamic banks (including the AIIBP) have flexibility in structuring their shariah-compliant products and services, considering that they can 'undertake various investments in all transactions allowed by the Islamic shariah in such a way that shall not permit the haram (forbidden), nor forbid the halal (permissible)'.i Consumer finance
In consumer finance, for instance, the AIIBP is authorised to 'provide financing with or without collateral by way of al-ijarah (leasing), al-bai ul takjiri (sale and leaseback) or al-murabahah (cost-plus-profit sales arrangement)'. Other Islamic banks can provide similar consumer finance.
In al-ijarah, the fund owner (such as a bank) purchases the asset required by the fund user (the consumer), who then acquires the right to use the asset through a lease for a fixed period, subject to the payment of rentals to the fund owner. Al-bai ul takjiri is similar to al-ijarah except that the fund user will, at a point in time, purchase the leased asset at an agreed price with all the previously paid lease rentals considered as part of the purchase price. In al-murabahah, the fund owner purchases the asset required by the fund user and then sells the same at an agreed mark-up to the fund user. In this arrangement, the fund user may be required to place a margin deposit, which will be used to pay part of the purchase price.
Even under existing law, the prohibition against charging or collection of interest (riba) from consumers is not a problem, because Article 1956 of the Civil Code of the Philippines provides that: 'No interest shall be due unless it has been expressly stipulated in writing.' Thus, to comply with shariah principles, all that the contracting parties must do is not to stipulate any interest in their agreement.ii Home finance
Al-murabahah can be used in home finance. Here, a bank can buy a house and resell the same in instalments to a buyer for profit. Given the strict avoidance of interest in shariah, the bank must take at least constructive possession of the house before reselling it to the buyer that the transaction can be characterised as an authentic asset-based trade rather than a conventional financing arrangement.iii Insurance
There is as yet no takaful market in the Philippines. Further, there are no conventional insurance companies that can be adapted to be shariah-compliant. It remains to be seen how the Insurance Commission will address or react to the introduction of the takaful concept in the local insurance market.iv Private equity investments
Islamic banks can invest in equities of warehousing companies, leasing companies, storage companies and companies engaged in the management of mutual funds but not in mutual funds themselves. Moreover, they can accept placements from a customer for investment, together with their own funds, in shariah-permissible transactions on a participation basis. Here, participation means 'any agreement or arrangement under which the mode of joint investments of specific transactions shall not involve the element of interest charge other than as percentage share in profits and losses of business'.v Real estate investments
Financing fixed-asset acquisitions (such as buying real estate) may be effected through al-bai bithaman ajil (deferred payment sale), pursuant to which the ownership of the asset is immediately transferred to the buyer but the purchase price is collected later, usually in instalments.
Real estate investment trusts (REIT), designed to promote the development of the capital market by broadening the participation of Filipinos in the ownership of real estate in the Philippines, have yet to take off in the Philippines because of problems in implementation, although the REIT Act was passed as early as 2009.vi Investment funds
Under BSP rules, Islamic banks can issue investment participation certificates, muquaradah bonds and debentures to fund projects that will promote the economic development primarily of the autonomous region in southern Philippines. Broadly, they can undertake various investments in all transactions that are halal and not haram.
One other arrangement is al-mudarabah (trust financing), wherein the fund owner provides full financing to the fund user, who contributes only his or her entrepreneurship and labour. The profit is shared by them at a pre-agreed rate or ratio, but if the venture fails, the fund owner bears all the losses even if the fund owner is not involved at all in the management of the venture.vii Other areas
Islamic banks can open savings accounts for safekeeping or custody with no participation in profits or losses, unless the funds are otherwise authorised by the account holders to be invested.
An Islamic bank can also act as an agent for another for a fee, under an al-wakalah arrangement. Here, the bank may issue a letter of credit for an importing customer, who is required to place a 100 per cent margin deposit on an al-wadiah (safe custody) basis wherein the bank has full discretion to use the deposit to meet its obligations under the letter of credit.
On the other hand, in an al-kafalah (guarantee) arrangement, an Islamic bank can issue a standby letter of credit in respect of the performance of a task or the settlement of an obligation. Where a security deposit is required, it will be taken on an al-wadiah basis.
Furthermore, an Islamic bank can take security for an outstanding obligation, based on the al-rahan principle. Although Islamic banks extend financing through partnership and trading assets, security may be taken as a precaution under that principle.
Under the Islamic Banking Law, the government is mandated to provide 'neutral tax treatment between Islamic banking transactions and equivalent conventional banking transactions'. This is aimed at providing a level playing field in terms of taxation between Islamic banking and conventional banking, so that Islamic banking transactions will not be disadvantaged tax-wise compared with their conventional counterparts.
It is noteworthy that, during its first eight years of operation, the AIIBP was exempted from all taxes under the National Internal Revenue Code. This tax exemption has lapsed. There appears to be no plan to have this exemption restored.