The Philippines with its sound and stable banking system is positioning itself as a viable investment destination for Islamic banks.
The Bangko Sentral ng Pilipinas (BSP) considers the country ready for Islamic banking investments for three main reasons: enabling regulatory environment, a large untapped consumer market, and a growing economy that has substantial demand for financing.
Enabling regulatory environment
In August 2019, Republic Act No. 11439 or the landmark Islamic banking law was enacted. Providing a sound legal framework for the establishment and operation of Islamic banks, the legislation put in place an enabling environment for the growth of Islamic banking in the country.
Complementing the law are the circulars issued by the BSP to provide regulatory clarity on the new regime. Circular No. 1069, which the BSP issued in December 2019, contains the implementing guidelines on the establishment of Islamic banks (IBs) and Islamic banking units (IBUs). Circular No. 1070, also issued in December 2019, provides the Shari’ah Governance Framework, which ensures that Islamic finance institutions observe Islamic principles in the conduct of their businesses.
Circular No. 1116, which the BSP released in May 2021, provides guidelines on the management of liquidity risk by IBs and IBUs. Meanwhile, Circular No. 1139 issued in March 2022 provides the reporting guidelines for Islamic banking and finance transactions and arrangements.
“We have liberalized the banking system. The Islamic banking law was built to provide flexibility in promoting and developing Islamic finance in the country,” said BSP Assistant Governor Arifa A. Ala, BSP ambassador for Islamic banking and finance and chair of the Islamic Finance Coordination Forum.
Assistant Governor Ala also noted the tax neutrality in the country, with which Islamic banks are taxed the same way as conventional banks.
According to the Assistant Governor, a single regulatory approach helps establish a level playing field for the growth of Islamic and conventional banks.
To further develop the Islamic banking and finance industry in the country, the BSP issued Circular No. 1173 dated April 19, 2023 on modified minimum capitalization requirement for conventional banks with Islamic banking unit (IBU). This Circular provides more flexibility in licensing of an IBU of qualified conventional banks.
Huge untapped consumer market
With a large untapped market, the Philippines presents various Islamic banking opportunities for domestic and foreign investors alike.
According to BSP data as of end-2021, 44 percent of the country’s adult population still do not own a formal financial account.
Given the large number of Filipinos without bank accounts, Islamic banks may find it worthwhile to do business in the Philippines to help fill the financial inclusion gap.
In geographical terms, unbanked cities and municipalities across the country totaled 481 as of end-2022.2 This is more prevalent in the Bangsamoro Autonomous Region in Muslim Mindanao, where 93.2 percent of cities and municipalities were recorded as unbanked.
Further, latest data from the Philippine Statistics Authority showed that there are 6.98 million Muslim Filipinos, consisting of 6.4 percent3 of the country’s population. Given their specific needs for financial services, Islamic banks may find it worthwhile to do business in the Philippines and cater to this underserved segment.
The BSP underscores that Islamic banking caters to both Muslims and non-Muslims. For Muslims, Islamic banks will help onboard them to the formal financial system. For non-Muslims, Islamic banks may serve as alternative sources of financial services, including investments.
“Other Southeast Asian countries have advanced their Islamic finance system, where even non-Muslims patronize Islamic banking and finance simply because of the business model of profit-sharing,” Assistant Governor Ala explained.
Philippine Economic Zone Authority (PEZA) Deputy Director General Aleem Siddiqui M. Guiapal said they are looking at much better numbers in terms of value of the Islamic finance industry.
“Currently, the market for Islamic finance and halal industry across the world is about US$7.2 trillion. In 2028, it is expected to grow to US$11.2 trillion,” Deputy Director Guiapal said.
“The presence of foreign Islamic banks will help increase investments in Philippine economic zones, which in turn will translate to job creation,” he added.
Deputy Director Guiapal said PEZA is keen to position itself as a preferred destination for Islamic investors.
The digitalization trend in the country’s financial sector should also be encouraging for Islamic banking players as more Filipinos open digital financial accounts.
Under its Digital Payments Transformation Roadmap 2020 to 2023, the BSP aims to increase the share of digital transactions to the total volume of financial transactions in the Philippines to at least 50 percent and to onboard at least 70 percent of Filipino adults in the formal financial system by the end of this year. Given recent trends, the BSP is confident that these goals will be met, if not exceeded.
A growing economy
The Philippine economy has strongly rebounded from the recession in 2020 driven by the COVID-19 pandemic. It grew by 5.7 percent in 2021 and accelerated to a growth of 7.6 percent in 2022 and 6.4 percent in the first quarter of 2023.
Along with the economic rebound came the improvement in the country’s employment situation. After peaking at 17.6 percent in April 2020, the unemployment rate had consistently dropped to settle at 4.7 percent in March 2023.
These indicators signal a growing demand for credit and other financial services to fund economic activities.
“The Philippines is ripe for Islamic banking investments. We look forward to a future where Islamic banking is a thriving industry in the country,” Assistant Governor Ala said.