Fitch: New Philippine regulations may boost Islamic banking

Fitch Ratings-Singapore/Hong Kong-20 January 2020: Bangko Sentral ng Pilipinas' (BSP) announcement in early January on the approval of new regulations for Islamic banks and banking units is a positive step towards the establishment of a cohesive Islamic finance regulatory framework in the country, says Fitch Ratings. However, the development of an Islamic finance ecosystem will take time, and we do not expect Islamic banks to take significant market share from the well-established conventional banks over the medium term.

Islamic banking is still quite nascent in the Philippines as there is only one major player - Al Amanah, a subsidiary of the Development Bank of the Philippines (BBB/Stable). The BSP's new regulations aim to allow the sector to compete on an even regulatory playing field. If the move is able to support financial inclusion and economic development, particularly in the Autonomous Region in Muslim Mindanao (ARMM), an area with one of the largest Muslim populations in the Philippines, it would be broadly in line with the government's agenda for inclusive growth. The ARMM, with a population of 4 million in 2018, is currently one of the least banked regions in the country, partly reflecting low levels of economic development.

The growth of Islamic banking in the Philippines will be affected by several factors. One will be the extent to which the financial ecosystem evolves to allow Islamic banks to operate on an equal footing with their conventional counterparts from a regulatory and tax perspective. A fully developed Islamic financial ecosystem would also require other key pillars of Islamic finance, such as sharia-compliant insurance (takaful) and sukuk. The absence in the Philippines of a central sharia board to certify Islamic financial products could hamper the sector's development.

Another important factor will be the ability of banks and other interested stakeholders, including regulators and government, to spread awareness about Islamic finance and build up a cadre of staff with expertise in working and structuring sharia-compliant financial products. Efforts to spread awareness may benefit from the experience many Filipinos have had working in the Middle East, where Islamic banking is widespread.