Developing Islamic Finance in the Philippines

Developing Islamic Finance in the Philippines

In this article, we will talk about the development of Islamic Finance in the Philippines.

The Concept of Islamic finance

Financial activities that follow Islamic Law (Shari‘ah) make Islamic finance. The prohibition of paying and receiving riba (interest) in a financial transaction is one of the major foundations of the Islamic banking system. The phrase “riba” refers to all types of interest, not just usury or high interest. The indirect restriction of an unsecured debt security is the most important and significant effect of outlawing interest.

The Islamic finance industry has expanded rapidly over the past decade, growing at 10-12% annually. In many Muslim majority countries, Islamic banking assets have been growing faster than conventional banking assets. Moreover, Islamic finance promotes risk sharing, connects the financial sector with the real economy, and emphasizes financial inclusion and social welfare.

Islamic Finance in Philippines

The Philippines Development Plan 2011-2016 identified the development of the Islamic finance framework as one of the priorities. There are several factors that have fueled the government’s, legislators, and private sector’s interest in expanding Islamic finance. The desire to meet the demands of the Muslim population in the Philippines and the ASEAN integration are among the factors. As an ASEAN member and a neighbor to Indonesia and Malaysia, the Philippines seeks to strengthen economic ties with its neighbors. The country also sees the regional and global Halal market as a vital part of its ASEAN integration plan.

The law adopted in 1990 establishing Al-Amanah Islamic Investment Bank of the Philippines is a milestone in Islamic finance. Al-Amanah bank is a sole Islamic bank, state-owned, and in its present form not financially viable. The existing framework for Islamic banking in the Philippines must be understood in the context of the history of conflict in Mindanao. In addition, the ongoing peace process, ASEAN integration, and globalization of Islamic financial markets offer an opportunity to change course, move forward and develop effective Islamic finance in the Philippines.

Islamic Finance and the Conflict in Mindanao

The Philippines’ Muslim population accounts for approximately 5-11% of the total population. 60% of Muslims live in Mindanao and nearby islands. The Autonomous Region in Muslim Mindanao (ARMM) is a predominantly Muslim region.

Before the Spanish invasion in 1571, Islam was an established religion in the Philippines, coexisting with other religious systems. Under Spanish authority, Christianity spread over Luzon and Visayas for over 300 years. But Mindanao remained predominantly Muslims when American authorities ruled the Philippines in the early twentieth century. The demographics of Mindanao changed due to rapid population growth and migration in the first half of the 20th century.

After the Philippines gained independence in 1946, the government facilitated migration to Mindanao. It was resulting in land ownership conflicts that grew in intensity and contributed to creating organized political parties and armed groups. Between 1975 and 2002, the Mindanao conflict claimed over 120,000 lives and displaced 2 million people. Additionally, the conflict caused an estimated economic loss of US$10 billion.

The Philippines’ government signed a Framework Agreement with the Moro Islamic Liberation Front (MILF) in October 2012. The agreement sets out the steps for establishing “the Bangsamoro,” a new autonomous political organization to replace the ARMM, and completing a peace agreement with the MILF. This situation creates an opportunity to promote investment, economic development, and poverty reduction in Muslim Mindanao.

Al-Amanah Bank

The origins of Al-Amanah bank may be traced back to the early 1970s; when Mindanao was under martial law, and warfare was escalating. The Philippine Amanah Bank (PAB) was formed by Presidential Decree (PD) 264 in 1972 to promote and expedite Mindanao’s socio-economic growth and development. But, PAB failed to operate due to primarily political creation and poor management.

With the overthrow of the Marcos regime in the Philippines, the Al-Amanah Islamic Investment Bank of the Philippines (AAIIBP) was established in 1989. AAIIBP was the country’s only Islamic bank. Its primary goal was to promote and accelerate the Autonomous Region’s socio-economic development through Islamic banking, finance, and investment.

Al-Amanah Islamic Investment Bank of the Philippines (AAIIBP)

AAIIBP had a poor performance. Between 1990 and 2006, the bank lost a total of PhP 554 million in operating losses; reducing its total capital base to a negative PhP 510 million by 2006. AAIIBP began a new chapter in 2008 when the Development Bank of the Philippines acquired it (DBP) and recapitalized with a PhP 1.0 billion capital infusion. The bank was given a five-year rehabilitation plan, but the legal basis for Islamic bank activities was not changed. According to the plan, the bank will continue to conduct Islamic and conventional banking transactions before transforming to a fully Islamic bank by the end of 2014.

However, Amanah Bank’s activities continued to lose money till the current years. Although revenues continuously increased from 2010 to 2014, operating costs remained higher than earnings.

Amanah Bank mainly provides conventional financial services at the moment. In 2014, Islamic deposits accounted for around US$1.5 million, or 25% of total deposits. However, the bank does not offer Islamic financing. The difficulties Amanah Bank is having reflect fundamental regulatory and institutional shortcomings in the Philippines’ Islamic finance sector. Therefore, They make a convincing argument for altering the broader regulatory structure and strategy.

Conclusion

Even though the Philippines was one of the first countries to establish an Islamic banking institution; the government does not support its infrastructure. Changing conditions in the country and the region have sparked new interest in Islamic finance due to Malaysia’s, Indonesia’s, and Brunei’s rapid expansion and development. Introducing Islamic finance in a non-Muslim majority country with no prior infrastructure is a problem that demands effort and political commitment.

To read more about Islamic Finance related topics, please click here and visit our academy.

Feel free to sign up for our free stock screening services at Musaffa.com