Guidelines on the Establishment of IBs and IBUs

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The Bangko Sentral ng Pilipinas (abbreviated as "BSP") has approved Circular No. 1069 on the Guidelines on the Establishment of establishment of Islamic banks (IBs) and separate Islamic banking units (IBUs) within conventional banks in the Philippines pursuant to Republic Act No. 11439 or the “Islamic Banking Act”.

The Circular outlines the following key requirements for the establishment of an Islamic bank in the Philippines:

  • Capitalization: The minimum capitalization requirement for an Islamic bank is set at PHP 1 billion, the same as for conventional banks.
  • Shari'ah Compliance: Islamic banks must comply with the principles and rules of Shari'ah, as well as relevant laws, regulations, and supervisory guidelines in the Philippines.
  • Organizational Structure: The organizational structure of an Islamic bank must include a Shari'ah Advisory Council (abbreviated as "SAC") responsible for ensuring the bank's compliance with Shari'ah principles.
  • Business Plan: An Islamic bank must submit a business plan to the BSP for approval, which must include the bank's target market, products and services, and risk management strategies.
  • Licensing: An Islamic bank must obtain a license from the BSP, as well as comply with all other regulatory requirements for banks in the Philippines.

The Circular also sets out the requirements for the establishment of an IBU, which must be a subsidiary of a conventional bank and must be fully compliant with Shari'ah principles.

Relationship to the AAOIFI

After the issuance of this circular, the BSP signed a Memorandum of Agreement with the Accounting and Auditing Organization for Islamic Financial Institutions (AOOIFI), the international standard-setting body for Shari'ah auditing, accounting, and governance, to cover the possible adoption of relevant AAOIFI standards by the local Islamic banking and finance industry, and cooperation in the areas of capacity building and technical assistance.

BSP Circular No. 1069, s. 2019 is a regulatory framework specific to the Philippines that outlines the requirements for the establishment and operation of IBs/IBUs in the country. On the other hand, the AAOIFI provides a more comprehensive set of guidance, including accounting, auditing, financial reporting and governance standards for Islamic financial institutions globally.

In terms of the establishment of an Islamic bank, the AAOIFI requires the following:

  • Compliance with Shariah law: The Islamic bank must be fully compliant with the principles of Islamic finance and must follow Shariah law in all its operations.
  • Governance Structure: The bank must have a well-defined governance structure that includes clear lines of responsibility, accountability, and transparency. The Islamic bank must have a Shari'ah governance structure that includes a Shari'ah Supervisory Board (abbreviated as "SSB"), which is responsible for ensuring that the bank's operations are in compliance with Islamic law and principles. For corporate governance, the Islamic bank must adhere to the standards on corporate governance practices and the structure of an Islamic financial institution, including the roles and responsibilities of its board of directors and management.
  • Capitalization: The Islamic bank must maintain a minimum level of capital adequacy in order to meet the regulatory requirements and to support its operations.The Islamic bank is also required to adhere to the standards on the different forms of capital that can be used, such as mudarabah, musharakah, and murabahah.
  • Product Development: The Islamic bank must have a process for developing and launching new products that are in line with Islamic law and principles.
  • Risk Management: The Islamic bank must have a comprehensive risk management framework in place that covers all aspects of its operations. The Islamic bank must have a clear investment policy that outlines its investment strategy, risk management processes, and criteria for selecting investments.
  • Accounting and reporting: The Islamic bank must adhere to provide on accounting and reporting practices for Islamic financial institutions, including the use of Shari'ah-compliant accounting standards. It must provide transparent and accurate information to its stakeholders, including shareholders, customers, regulators, and the public.
  • Auditing: The Islamic bank must adhere to the standards on auditing practices for Islamic financial institutions, including the role of the internal and external auditors in ensuring that the institution complies with Shari'ah principles.
  • Social Responsibility: The Islamic bank must be socially responsible and contribute to the development of the communities it serves.

These are the basic requirements that an Islamic bank must meet in order to be established according to AAOIFI standards. Additionally, AAOIFI provides guidance on accounting, auditing, and financial reporting for Islamic financial institutions.

Related Issuances

These reporting guidelines were followed by the guidelines on the Shari'ah Governance Framework; Guidelines for Reporting Islamic Banking and Finance Transactions/Arrangements; and the Management of Liquidity Risk by IBs and IBUs. The Shari’ah Supervisory Board in the BARMM was established by virtue of a joint circular issued by the BSP, the Department of Finance, the National Commission on Muslim Filipinos, and the Bangsamoro Government. The Insurance Commission also issued Circular Letter No. 2022-04 on the Baseline Regulatory Framework for Takaful Undertakings in 2022, while the Bureau of Internal Revenue issued Revenue Regulations No. 17-2020 and Revenue Memorandum Circular No. 35-2022 to implement the tax neutrality provision in the Islamic Banking Act.

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