Frequently Asked Questions (FAQs) on Islamic Banking

IANOKO STXITTL NO PILIFINAg OFFICE OF THE DEPUTY GOVERNOR FI NANCIAL SU PERVISION SECTOR MEMORANDUM NO. M-2020. 052 To All BSP-Supervised Financial Institutions (BSFls) Subject : Frequently Asked Questions (FAQs) on lslamic Banking To address common questions on the implementation of R.A. No. 11439 or otherwise known as Act Providing for the Regulation and Organization of lslamic Banksl and the BSP's preliminary policy issuances2 thereon, additional guidance and clarifications are hereby provided in the attached FAQs on lslamic Banking. The said FAQs provide simplified and concise discussions on lslamic banking fundamentals and cover the following major points: 1. Core features of the lslamic banking law; 2. Accessibility of lslamic banking to both Muslims and non-Muslims; 3. Key distinctions between conventional and lslamic banking; and 4. Requirements for establishing lslamic banks or lslamic banking units in the Philippines. For guidance and information. .-rq- HUCHIG. FONACIER Att.: a/s 18 June 2020 1 Signed by President Duterte on 22 August 2019, 2 BSP Circular Nos. 1069 and 1070 dated 27 December 2019, covering the Guidelines on the Establishment of lslamic Banks and lslamic Banking Units and the Shari'ah Governance Framework, respectively. A. MabiniSt., Malate, 1004 Manila, Philippines . (532) 8708-770L o www.bsp.gov.ph . [email protected]

4l What are the expected benefits from the 5) Was there a legal constraint to establish an FREQUENTTY ASKED QUESTIONS (FAQs) Ottt law? lslamic bank prior to R.A. No. 11439? REPUBUC ACT (R.A.) NO. 11439, OTHERWTSE KNOWN AS THE'ACT PROVIDING FOR THE lslamic banking and finance can promote Yes. Under Section 3 of the General Banking REGULATION AND ORGANIZATION OF inclusive finance, by making it available to Law, an lslamic bank is a separate ISLAMIC BANKS" groups which avoid using existing classification of banks which made reference conventional banking facilities due to their to R.A. 6848 or otherwise known as "The U When was R.A. No. 11439 or An Act faith. lslamic banking and finance can also be Charter of the Al-Amanah lslamic lnvestment Providing for the Regulation and attractive to non-Muslims, particularly those Bank of the Philippines". Organization of lslamic Banks signed into investors (within or outside the Philippines) law? who in their quest for diversifying their Thus, the Al-Amanah Bank has been the sole portfolios are looking for new asset classes, lslamic bank in the Philippines since its The law was signed by President Rodrigo Roa new instruments and new products. Finally, creation in 1973. Duterte on 22 August 2019. lt took effect on promoting lslamic banking and finance can 15 September 2OL9 or fifteen (15) days after attract foreign investments which can in turn 7l Did the law effectively amend or revise the its publication in the Official Gazette or in a be deployed to support critical projects of Charter of the Al-Amanah Bank? newspaper of general circulation. the Government. No. The Charter of the Al-Amanah Bank 2l What is lslamic Banking? 5l In a nutshell, what is the law about? remains in force. However, R.A. No. 11439 may still apply to Al-Amanah Bank, provided lslamic banking business, as defined in the The law seeks to establish a clear legal and it does not conflict with its Charter. law, refers to a banking business with regulatory f ramework that would best objectives and operations that do not involve accommodate lslamic banking and finance in 8) Briefly, what are BSP's main responsibilities interest {riba) as prohibited by the Shari'ah the Philippines. Likewise, the law opens the under the law? and which conducts its business in Philippine financial system to new lslamic accordance with the principles of the banking players, whether full-fledged or The Bangko Sentral shall exercise regulatory Shari'ah. lslamic banking windows. lt aims to establish and supervisory powers over the operations an expanded lslamic banking system in the of lslamic banks and shall issue the 3l ls lslamic banking and finance only for Philippines. implementing rules and regulations on Muslims? lslamic banking. No. lslamic banking and finance is available The BSP aims to create an enabling to all, whether muslims or non-muslims. environment that will allow lslamic banks to

Frequently Asked Questions {FAQsl on lslamic Banking May 2020 operate alongside the conventional banks building required by the expanded lslamic 13)What is Shari'ah? Discuss its principles under the same regulatory and supervisory banking system. Other challenges are the briefly. approach, taking into consideration the scarcity of Shari'ah scholars and the lack of unique features of the lslamic banking tax neutrality. Shari'ah refers to the practical divine law operations. The goal is to provide a deduced from its legitimate sources: the coherent, consistent, and comprehensive set 11)What is this Tax Neutrality provision under Qur'an, Sunnah, consensus of Muslim of regulations and standards to encourage the law? scholars, among others. lt is a very wide and wider investor and consumer participation comprehensive system of values, norms and on lslamic banking and finance without any Section 14 of R.A. No. 11439 provides that rules regulating all aspects of life. regulatory arbitrage. the Government shall endeavour to achieve neutral tax treatment between lslamic Shari'ah is based on the principles of justice, 9l What are the other salient features of the banking transactions and equivalent fair dealings and harmony through the law? conventional banking transactions within the equitable distribution of wealth. The main provisions of the National Internal Revenue objective is to create a balance in which The law provides for tax neutrality between Code of 1997 (Republic Act No, 8424), as wealth is not accumulated only by a few lslamic banking transactions and equivalent amended. Tax neutrality means that lslamic while others suffer. conventional transactions in order to create finance products have parity of tax treatment a level-playing field for lslamic banking with conventional finance products, such To this end, foundational in lslamic finance is products and services. lt also mandates the that lslamic finance transactions are taxed no the principle of risk sharing. Risk sharing is Government to provide programs for more heavily (and no more lightly) than the justification for the fundamenta I consumer awareness and capacity building conventional finance transactions. The aim is requirements of profit and loss sharing. required by the expanded lslamic banking to create a level-playing field for lslamic Guarantees or assurances of return of capital system. banking products and services and foster an and return on capital (i.e. pre-determined open and competitive financial system. rate of interest), rewards without 10)What is the biggest challenge in commensurate risk and preferential awards implementing the lslamic banking law? 12)What are the forms or categories of lslamic are all not permissible in lslamic finance. banks? Trading and partnership or joint venture The biggest challenge is the low awareness arrangements are thus the appropriate risk- and capacity on lslamic banking and finance lslamic banks can be in the form of full-fledge reward paradigms. not only for the regulators but also for the domestic lslamic banks, full-fledge foreign industry players and other stakeholders. For lslamic banks, or lslamic banking units within this reason, the law mandates the domestic or foreign conventional banks. Government to provide programs for increased consumer awareness and capacity

Frequently Asked Questions (FAQs) on lslamic Banking May 2020 18) What are requirements for establishing an l4f What are the key differences between It shall perform the following functions: lslamic bank or IBU? lslamic banking vis-i-vis conventional i. Approval and certification for the product banking transactions? structures and all the documentation Refer briefly to Circular 1069. The basic thereon; requirements are the following: Conrrcntional Bankinr lslamic Bankinr ii. Rendering opinions or clarifications on Depositors are Depositors are Shari'ah compliance matters; and L. Capitalization - (see response to question lenders investors rather iii. Leading the Shari'ah compliance verification no. 15) than lenders of lB or IBU's transactions and operations 2. Governance - A Shari'ah governance Bank pays fixed Risk sharing through an effective internal and/or external framework must be in place to ensure interest on deposit through profit Shari'ah audit and issuing an annual Shari'ah that the lslamic bank or IBU adheres to liabilities and charges and loss sharing Compliance Statement thereon. Shari'ah principles interest on loans 17)Are persons appointed as members of the Bank is exposed to Assets and Shori'ah advisory council of an lslamic bank 19)What are the other laws and regulations assets and liabilities liabilities are or IBU subject to BSP confirmation? relevant to lslamic banking? mismatch risk. better matched. No, the fitness and propriety of the SAC The BSP has recently issued Circular Nos. 1sl What is the capital requirement for lslamic members endorsed for appointment shall be 1069 and L070 which provide guidance on banks or conventional banks with lslamic vetted by the bank's Board of Directors and the establishment of lBs and lBUs and on the banking units (lBUs)? subject to the approval by the majority of Shari'oh Governance Framework, stockholders. The screening must cover both respectively. The provisions on the The capitalization requirement for universal an lslamic bank or IBU's qualification criteria development of the lslamic banking and banks apply to lslamic banks or conventional and the BSP's prudential requirements. finance system under R.A. No. L1054 or the These may include the relevant academic Bongsomoro Organic Law are also relevant. banks with lBUs. qualifications, and adequate experience and exposure in lslamic banking and finance, 16) What is the role of the Shari'ah Advisory given the SAC members'duty to oversee and Council? review the bank's application of Shari'ah principles. Under Circular No. 1070, the Shari'ah Advisory Council or SAC shall be empowered to consider, decide and oversee all Shari'ah related matters of the lslamic Bank or lBU, and all rulings of the SAC on Shari'ah matters shall be final.