Guidelines on the Establishment of lslamic Banks and lslamic Banking Units

BlNexo SerrnlL Ne Ptuerrueg OFFICE OF THE GOVERNOR crRcurAR No.1059 Series of 2019 Subject: Guidelines on the Establishment of lslamic Banks and lslamic Banking Units The Monetary Board, in its Resolution No. 1945 dated 13 December 2019, approved the guidelines on the establishment of lslamic banks and lslamic banking units. Section 1. Section 102 of the Manual of Regulations for Banks (MORB) is hereby amended to read as follows: Section 1O2 BASIC GUIDELINES IN ESTABLISHING DOMESTIC BANKS xxx Establishment of new domestic banks. x x x xxx Establishment of lslamic banks and lslamic banking units. Policy Statement. The Bangko Sentral recognizes the importance of lslamic banking as an alternative business model to promote its financial inclusion agenda. In this respect, the bangko Sentral aims to promote an lslamic banking system that can operate alongside the conventional banking system, and an open approach where conventional banks operate lslamic banking units. The following minimum prudential requirements and the guidelines under Appendix 139 (Annex A of this Circular)are hereby adopted: a. organizotional Structure. with prior approval of the Bangko sentral, the establishment of the following entities or units may be allowed: (1) Domestic lslamic banks; (21 Foreign lslamic banksl; and (3) lslamic bankjng units (lBU) in the form of a division, department, office, or branch of a conventional bank. b. Stockholding limits. The stockholdings limits prescribed for the establishment of a universal bank (uB) under Section 122 shall apply to an lslamic bank (lB). copitalizotion. The minimum capitalization requirements for a uB shall apply to an lB or conventional bank with lBU. lBs may take the necessary steps to have their shares of stock listed in any duly registered stock exchange. I Although this pertains to the establishment of new domestic banks, foreign lslamic banks are mentioned because the establishment thereof is subJect to the same requirements as that of domestic lslamic banks. A. MabiniSt., Malate 1004 Manila, Philippines . (532) 708-77OL. www.bsp.gov.ph

d. Governonce. A Shari'ah governance framework must be in place to ensure that the lB or IBU adheres to Sh.ari'ih principles. The said framework must include a Shari'ah Advisory Council composed of persons who are competent in the field of Shari'ah and banking, finance, law or such other related disciplines. Estabtishment of microfinance-oriented banks. x x x xxx Section 2. Section 101 of the MORB is hereby amended as follows: Sec 101 CLASSIFICATION, POWERS AND SCOPE OF AUTHORITIES OF BANKS The following are the classification, poweis and scope of authorities of banks, as well as the prerequisites for the grant of banking authorities. a. Clossificotion of banks. xxx xxx (6) lslamic banks {lBs} b. Powers ond scope of outhorities. x x x xxx (6) ,gs. ln addition to the general powers granted to corporations, lBs shall have such powers as shall be necessary to carry out the business of a bank in accordance with Shari'ah principles. lBs may perform the following services: (a) accept or create current accounts; (b) accept savings accounts for safekeeping or custody with no participation in profit and loss except unless otherwise authorized by the account holders to be invested; (c) accept investment accounts; (d) accept foreign currency deposits; (e) act as correspondent of banks and institutions to handle remittances or any fund transfers; {f) accept drafts and issue letters of credit or letters of guarantee, negotiate notes and bills of exchange and other evidence of indebtedness; (g) aa as collection agent insofar as the payment orders, bills of exchange or other commercial documents; (h) provide financing contracts and structures; (i) handle storage operations for goods or commodity financing secured by warehouse receipts presented to the lslamic bank; PaSe 2 of 3

(j) issue shares for the account of institutions and companies assisted by the lslamic bank in meeting subscription calls or augmenting their capital and/or fund requirements as may be allowed by law; (k) carry out financing and joint investment operations by way of mudarabah partnership, musharakah joint venture or by decreasing participation, murabahah purchasing on a cost-plus financing arrangement, lease (ijara) arrangements, construction and manufacture (istisna'a) arrangements, and other shari'ah compliant contracts and structures, and to invest funds directly in various projects or through the use of funds whose owners desire to invest jointly with other resources available to the lB on a joint mudarabah basis in accordance with the foregoing arrangements, contracts and structu res; (l) undertake various investments in all transactions allowed by shari'ah principles; (m) subject to the guidelines as may be prescribed by the BSp, tslamic banks may invest in equities of shari'ah compliant undertakings that directly support the deiivery of rslamic banking and financing services; (n) such other banking services as may be authorized by the Monetary Board. with prior Monetary Board approval, an lB may issue investment participation certificates, sukuk, and other shari'ah compliant funding instruments to be used by the lB in its operations or capital needs. The lB may exercise the general powers of a UB that are consistent with the principles of Shari'ah. In addition to the powers granted to lBs, the powers granted to the Al- Amanah lslamic Investment Bank of the philippines under R.A. No. Gg4g shall remain in force. Finally, the foregoing powers of an rB shall arso be applicable to lBUs. Section 3. Effectivity. This Circular shall take effect fifteen (15) calendar days following its publication either in the Official Gazette or in a newspaper of general circulation. na44).444- . IG. FONACIER cer-in-Charge 27 December 2019

ANNEX A (Appendix 139! PRUDENTIAT REGUTATIONS FOR ISTAMIC BANKS AND ISLAMIC BANKING UNITS (Appendix to Section 102 of the Monuol of Regulotions for Banks) Following are the minimum prudential rules and regulations governing the establishment and organization of an lslamic bank (lB) and an lslamic banking unit (lBU): Sec. 1 Licensing of an lB. Applicants which intend to engage in lslamic banking business (lBB) shall comply with the prudential and documentary requirements provided under Sections 102 and 103 as well as Appendices 2 and 33 of the Manual of Regulations for Banks (MORB), as may be applicable, including the supplemental requirements contained herein. The establishment of an lB shall also be subject to the payment of appropriate application and license fees for universal banks (UBs) as prescribed under Section 102 and Appendix 2 of the MORB, as applicable. Supplemental Requirement for an /8. The applicant shall submit a deed of undertaking tcr establish a Shari'ah Governance Framework (SGF) as prescribed by the Bongko Sentral appropriate to the risk profile of the lB. The authority to establish an lB shall be automatically revoked if the lB is not organized and opened for business within one year after receipt by the organizers of the notice of approval by the Monetary Board of their application in accordance with Appendix 33 of the MORB. Sec. 2 Licensing of an lBU. Applicants which intend to engage in IBU are required to comply with the fotlowing minimum requirements: a. The applicant must be compliant with the prudential criteria prescribed under Section 111of the MORB; and The applicant shall submit a certification stating that: (i) it has a system for segregating the lslamic banking transactions of the IBU from its conventional banking business; and (ii) it commits to establish an appropriate SGF as prescribed by the Bangko Sentral. b. The applicant shall submit a corporate plan which describes the organizational and business model to be used in deliveiing lslamic banking products and services to its clients.

The establishment of an IBU shall also be subject to the payment of appropriate processing fees applicable to UBs as prescribed under Section 105 of the MORB. The authority to establish an IBU shall be automatically revoked if the IBU is not commenced for business within one year after receipt by the bank of the notice of approval by the Monetary Board of their application Sec. 3 Commencement of Operations. The lB or IBU are expected to ensure that the following are in place on the first day of operations: a. Appropriate Shari'ah Governance Framework. An lB or IBU shall constitute a shari'ah Advisory council as prescribed by the Bangko sentral; b. Adequate risk management systems and internal controls; and Necessary policies and procedures, information system and documentation that support the offering of lslamic banking products and services. The products and services should be duly certified as shari'ah compliant by the lB/lBU,s shari,ah Advisory Council. Sec. 4 Definitions of Terms. The following terms shall apply in relation to lslamic banking: Shari'ah refers to the practical divine law deduced from its legitimate sources: the Qur'an, Sunnah, consensus of Muslim scholars, analogical deduction and other approved sources of lslamic law. shari'ah defines a set of rules and principles governing the overall lslamic financial system. Current occount refers to the total deposits at an lslamic bank which are repayable on demand and compliant with Sharl,ah principles. lnvestment occount refers to the total funds placed by an investor with an lslamic bank or lslamic banking unit for a fixed period of time under an agreement to share the profits and losses on the investment of such funds in accordance with the principles of Shari,ah. lslomic banking system refers to the Al-Amanah lslamic Investment Bank of the Philippines, lslamic banks, either domestic or foreign, and designated lslamic banking units of conventional banks that are authorized to conduct business in accordance with the principles of Shari'ah. lslamic bonks (lBs) refersto the Al-Amanah lslamic Investment Bank of the philippines and lslamic banks, either domestic or foreign. lslomic bonking unit (lBU) refers to a division, department, office or branch of a conventional bank that conducts business in accordance with the principles of the Shari'ah.

lslamic banking business (IBB) refers to a banking business with objectives and operations that do not involve interest (ribol as prohibited by the Shari'ah and which conducts its business transactions in accordance with Shari'ah principles. Porticipation refers to any agreement or arrangement under which the mode of joint investments or specific transactions shall not involve the element of interest charge other than as percentage share in profits and losses of business and which is conducted in accordance with the principles of the Shari'ah. Riba generally refers to the receipt and payment of interest, including in the various types of lending and borrowing and in the exchange of currencies on forward basis.