BSP mulls lower capital for Islamic banks

The central bank is planning to reduce the required capital to set up an Islamic bank or Islamic banking unit (IBU), currently pegged at a minimum P3 billion up to P20 billion depending on the number of branches, to encourage local and foreign banks in the country to go into Islamic finance.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said on Thursday, April 7, that the capital requirement is one of the reasons cited by banks why there is still no application to put up IBUs or Islamic banks.

BSP Governor Benjamin E. Diokno

A hefty capital is needed to establish a Sha’riah Governance Framework (SGF) and “this requirement entail resources,” said Diokno.

This is why the BSP is currently studying to lower the minimum capital requirement for Islamic banks and IBUs.

BSP Deputy Director and Head of Islamic Banking Supervision Group, Atty. Noel P. Tianela, said they are conducting a policy study to “liberalize and relax” the Islamic bank and IBUs’ minimum capital requirement to encourage conventional banks or non-Islamic banks to open or even explore possibilities of setting up an IBU, either as a department, unit or a branch.

“(The) capital requirement will be reviewed and the policy will be issued soon within this year,” said Tianela during Thursday’s online “GBED Talks” press chat.

The current minimum capital requirement for Islamic banks or IBUs is the same as for the universal and commercial banks. “It depends on how many branches you will be planning to establish, it ranges from P10 billion to P20 billion,” said Taniela.

Meantime, Diokno said besides the capital requirement, another concern for the low turnout of inquiries to establish Islamic banks or IBUs is lack of information or understanding, especially for the Shari’ah. It is one of BSP’s many challenges that there are not enough Shari’ah scholars or Islamic finance experts in the country.

Shari’ah, which defines a set of rules and the lslamic financial system, refers to the practical divine law deduced from its legitimate sources such as the Qur’an, Sunnah, consensus of Muslim scholars, analogical sources of lslamic law.

“Low awareness or understanding of Islamic banking remains a major concern for all stakeholders including potential banks exploring to open an IBU. To address this, the government is mandated to provide capacity building programs which cater to the specific needs of different stakeholders both in the public and private sector,” said Diokno.

The key difference between an Islamic bank and a conventional bank is that depositors are “investors rather than lenders” in the former and they are just lenders in the latter. In a conventional bank set up, the bank pays fixed interest on deposit liabilities and charges interest on loans while an Islamic bank has risk sharing or profit and loss sharing. A non-Muslim bank is also “exposed to assets and liabilities mismatch risk” while an Islamic bank’s assets and liabilities are “better matched”.

Diokno said the BSP is still receiving “a number” of inquiries on the establishment of an Islamic bank or IBU. “The inquiries include one relating to the establishment of a foreign Islamic bank within a foreign bank. However the discussion on this are still in the exploratory stage,” he said.

Pre-pandemic, the BSP entertained exploratory talks with at least three conventional banks but “no formal application has been filed yet (since) potential players are perhaps conducting market research,” said Diokno.

The Philippines has an open, competitive and Shari’ah-compliant financial system.

The BSP since 2019 with the passage of Republic Act No. 11439 (Islamic Banking Law) has also issued several policies based on the law and the provisions on Islamic banking under the Bangsamoro Organic Law.

The regulations set by the BSP is designed to have Islamic banks operating alongside the conventional banks and basically, both are under the same regulatory and supervisory approach, except that Islamic banking operations are guided by the SGF.

The SGF ensures that the Islamic bank or IBU adheres to Shari’ah principles and each Islamic bank or IBU must include a Shari’ah Advisory Council that will include “persons who are competent in the field of Shari’ah and banking, finance, law or such other related disciplines,” according to a BSP circular.

“We aim to provide a supportive and enabling environment for Islamic banking that can operate alongside the conventional banking system,” said Diokno on Thursday.

The BSP’s prudential regulatory reforms on Islamic banking cover licensing, Shari’ah governance, liquidity risk management as well as reporting guidelines.

Complementing these regulations are the Bureau of Internal Revenue’s guidelines on tax neutrality, which provide that Islamic banking transactions should be taxed neither more nor less than conventional banking transactions, and the Insurance Commission’s baseline framework on “takaful’ or Islamic insurance.

“The BSP will continue to sustain prudential reforms on Islamic banking. Policy studies in the pipeline include research on profit sharing investment accounts, minimum capital requirement of Islamic banking units, and capital adequacy ratio of Islamic banks and Islamic banking units,” said Diokno.

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