Building inclusive finance: Governance and compliance of Islamic banking in PHL

ISLAMIC BANKING has been one of the more inclusive developments in Philippine finance in recent years.

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The system of finance, which conforms to the Shari'ah law, has two distinct features: transactions made in the bank do not involve interest (riba) as prohibited by the Shari'ah, and it conducts its business in accordance with the law’s principles.

While an Islamic bank has been operational in the Philippines since 1973, the Act Providing for the Regulation and Organization of Islamic Banks, or R.A. No. 11439, only took effect in August 2019. Contrary to popular belief, Islamic banking and finance are available to all, whether Muslims or non-Muslims.

One of the differences between Islamic banking and conventional banking transactions revolves around the relationship between banks and their customers. Compared to traditional banks, Islamic banks consider their depositors as investors rather than lenders. Additionally, Islamic banks and depositors take risks together through profit and loss sharing instead of the normal fixed interest on deposit liabilities and interest on loans offered by banks. Assets and liabilities are also better matched in Islamic banks, in contrast to the mismatch risks posed by conventional banks.

For the establishment of these institutions, the law mandates the same procedural and documentary requirements as the founding of traditional banks. These include compliance with guidelines, public offering of bank shares, listing of bank shares in the stock exchange, and supervisory enforcement actions, among others. The establishment of these banks shall also be subject to the payment of appropriate application and license fees for universal banks. Aside from these, applicant Islamic banks shall submit a deed of undertaking to establish a Shari'ah Governance Framework appropriate to the bank's risk profile.