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Legislative and regulatory framework

The Philippines officially recognised Islamic banking and finance some 40 years ago, when a legislative charter was granted to Al-Amanah Bank, the first Islamic bank established in the country to cater to the banking requirements of the Muslim population. In 1990, that bank was reorganised and replaced with the Al-Amanah Islamic Investment Bank of the Philippines (AIIBP).

Although Islamic banks are recognised as a distinct category of banking institutions under the General Banking Law of 2000, the AIIBP remains to date the only bank of its kind in the country. Also, within conventional banks, there are no Islamic windows or units. However, under the General Banking Law of 2000, the Bangko Sentral ng Pilipinas (BSP), if so minded, can authorise the establishment of Islamic banks other than the AIIBP, as well as Islamic units within conventional banks. This is because Subsection 3.2 of that Law empowers the BSP to make 'other classifications of banks', specifically mentioning 'Islamic banks as defined in Republic Act No. 6848, otherwise known as the Charter of AIIBP'. As the reference in Subsection 3.2 is to 'Islamic banks' in the plural (not singular), there is a legislative intent for the BSP to enable the formation of more Islamic banks (and, for that matter, Islamic units within conventional banks), in addition to the AIIBP. In fact, the BSP is well aware of this, considering that Section 101(b)(6) of the BSP's Manual of Regulations for Banks contains an enumeration of the services that Islamic banks can provide to their customers.

Nevertheless, the passage of Republic Act No. 11054, the Organic Law for the Bangsamoro Autonomous Region in Muslim Mindanao (the Bangsamoro Organic Law), should boost Islamic banking and finance, considering that the BSP, the Department of Finance and the National Commission on Muslim Filipinos are mandated therein to 'jointly promote the development of an Islamic banking and finance system, to include, among others, the establishment of a Shariah Supervisory Board and the promotion and development of shariah-compliant financial institutions'. Further, there will be a review of 'existing market environment policies' and the adoption of 'measures to enhance the competitiveness of Islamic finance products', so that 'Islamic financial players are not inhibited from introducing Islamic finance products'.

What is more, House Bill No. 8281 has been passed by the House of Representatives, adopted by the Senate and is due to be signed of the President of the Philippines. Officially, it is called 'An Act Providing for the Regulation and Organization of Islamic Banks' in the Philippines (the Islamic Banking Law).

i Legislative and regulatory regime

The Islamic Banking Law constitutes the general legislative framework for Islamic banking and finance in the Philippines and the Bangsamoro Organic Law authorises 'the crafting of the Bangsamoro Islamic banking and finance framework by the Bangsamoro Parliament applicable within the Bangsamoro Autonomous Region'. However, as the operation of Islamic banks and financial institutions within the Bangsamoro Autonomous Region is also to be supervised by the BSP, uniformity of regulations on Islamic banking and finance both outside and within the Bangsamoro Autonomous Region is expected.

The BSP had already issued the regulations implementing the Charter of the AIIBP. Under the Islamic Banking Law, the BSP is also mandated to promulgate the necessary rules for the effective implementation of this Law. This new set of implementing rules will govern the operations of entities authorised by the BSP to perform banking, financing and investment operations designed to promote and accelerate the socioeconomic development of the country in accordance with shariah principles. The BSP is expressly empowered under the Islamic Banking Law to authorise the establishment of Islamic banks other than the AIIBP, as well as Islamic units within conventional banks. This empowerment is more direct and explicit than that granted to the BSP by Subsection 3.2 of the General Banking Law of 2000.

It must be noted that, existing laws applicable to conventional banking, capital market and insurance can be considered as enabling Islamic banking and finance. Central to this is Article 1306 of the Civil Code of the Philippines, which 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 freedom in contract-making would allow the adoption of terms and conditions suitable to Islamic banking, capital market and insurance, with the approval of pertinent regulators, namely the BSP for banking, the Securities and Exchange Commission (SEC) for capital markets and the Insurance Commission for insurance.

Interestingly, the absence of legislation or regulation on Islamic capital markets has not prevented the Philippine Stock Exchange (PSE) from releasing its list of shariah-compliant shares of stock, with a view to diversifying its investment base. The list is updated from time to time and published by the PSE on its website (www.pse.com.ph) by the fifth trading day of the month following every quarter.

ii Regulatory and supervisory authorities

The BSP has sole supervision over the operations of banking institutions in the Philippines, including Islamic banks and financial institutions. On the other hand, the Insurance Commission is expected to regulate and supervise entities that will issue Islamic insurance in due time in the country.

It is reasonable to assume, too, that the SEC will be the regulator and supervisor of the Islamic capital market in the Philippines, once the rules for this have been promulgated. In fact, the SEC has already asserted its supervisory authority in this regard, by not interdicting the periodic issuance by the PSE (a stock exchange under the supervision of the SEC) of the list of shariah-compliant shares of stock. It is also expected that the SEC will regulate the issuance of sukuk in the domestic market, pursuant to its authority under the Securities Regulation Code to register securities issued and offered to the public in the Philippines.

To date, there is no central authority in the Philippines responsible for ensuring that transactions or products are shariah-compliant. However, within the AIIBP, 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'. Under the Islamic Banking Law, each Islamic bank is required to constitute its shariah advisory council. The challenge here is the current scarcity in the Philippines of experts or scholars on Islamic banking and finance.