Islamic Finance

As defined and discussed in the World Bank Group in their

report on Developing Islamic Finance in the Philippines,
a copy of which is attached hereto marked as Annex A, it
refer to financial activities conforming to Islamic Law
(Shari‘ah). One of the main principles of the Islamic
finance system is the prohibition of the payment and the
receipt of ribā (interest) in a financial transaction.
The term ribā covers all forms of interest and is not
limited to usury or excessive interest only. The most
critical and significant implication of banning interest
is the indirect prohibition of a “pure” or unsecured debt
security. This is based on Islamic law which doesn’t
recognize money and money instruments as a commodity but
merely as a medium of exchange. Hence any return on
financing must be tied to an asset, or participation and
risk-taking in a joint enterprise such as partnerships.
A pure debt security is replaced with an “asset-based”
security, direct financing of a real asset, and different
forms of partnerships of which equity financing is the
most desirable.

Hotspots for Islamic banking are found all over the world,
with the Middle East taking almost two-thirds of the
entire pie. Mature markets in this region include Saudi
Arabia and Kuwait. The former houses Al-Rajhi Banking &
Investment Corp., the world’s largest Islamic bank, while
the latter invests on project finance.

Services offered by these Islamic banks include current

accounts, credit cards, money transfers and mortgages.
Although these banks collide under a unitary belief,
practices may vary depending on the laws of land where
they are located or their special objectives.

Moreover, the political climate and numerous

circumstances pave the way for novelty and unique
techniques and treatments. Specializations within this
system are apparent. UAE focuses on trade financing, and
Bahrain, on corporate finance and investment.

Current Trends and Issues

At present, conventional Western banks are establishing

subsidiaries which are Islamic in nature. Otherwise, they
create special divisions to cater to the needs of their
clients. The other side of the banking system coin
counteracts this by developing ways and means to provide
cost-effective packages to Muslims and non-members alike.

Truly, competition urges economic agents to innovate and

design efficient services to benefit everyone, big or
small, regardless of religion and beliefs. Even the
Vatican stated that Islamic finance can be a ‘cure for
ailing markets.’

The current issue of excess liquidity calls for rule

reviews regarding the matter. Rules on financing in
Islamic banking hinder trade, making the entire system
inefficient. One of the main functions of financial
institutions is to channel financial resources or money
from those who have it to those who need it.

Islamic Banking in the Philippines

Islamic finance, or to be precise Islamic banking, in the

Philippines is presently defined by the law adopted in
1990 establishing Al-Amanah Islamic Investment Bank of
the Philippines. Al-Amanah bank is a sole Islamic bank,
state owned, and in its present form not financially
viable. The existing framework for Islamic banking in the
Philippines must be understood in the context of the
history of conflict in Mindanao. Ongoing peace process,
ASEAN integration, and globalization of Islamic financial
markets offer an opportunity to change course, move
forward and develop effective Islamic finance in the
Philippines.

The first and and only Islamic bank in the Philippines,

the Al-Amanah Islamic Bank, began its operations in 1973
and was recently bought by the Development Bank of the
Philippines.

What sets this bank apart from the traditional banks in

the country? Similar to any Islamic bank, it religiously
abides by the Shariah, zeroing in on its transaction
rules. Most people bridge this type of banking to the
concepts of prohibited interests (usury) and profit
sharing.

For example, profit, according to the Qíuran, is only

warranted if it yields additional values in the economy
and society; unwarranted profits are surplus values
‘without a counterpart.’ Working under such a definition,
Islamic banking minimizes exploitative contracts and
unjust transactions.

Early Islamic doctrines emphasize interest as a surplus

value without an equivalent real value, thus making it
unacceptable. Sukuk, as an example, is an Islamic
financial instrument. It is the counterpart of bonds, but
differing in the aspect that these types of bonds are
non-interest-bearing and is utilized without fixed
income.

Islamic banking also prohibits transactions related to

alcohol and pork, in deference to common Islamic doctrine.
Ethics and morality are at its pedestal; thus, gambling
and other games of chance are also restricted.

How then can this financial service be highly profitable?

In Islamic banking, loans either carry service charges or

entail absolutely zero costs. Loans with service charges
do not impose interests but asks for service compensation.
This amount is further restricted by the price ceiling
decided upon by authorities. Loans with no charges,
meanwhile, provide a more socially responsible view made
by the agents of Islamic banking. These loans are granted
to farmers, to the needy, and to the other unfortunate
sectors.

Clearly, these loans do not provide for a big percentage

of bank profits. Hence, trade and investment financing
dominate the scene. The catch, though, is to operate these
activities under PLS or the profit and loss sharing
scheme.

For example, in compliance with PLS, Mudaraba provides a

venue to put together resources, monetary or not, in
erecting a financial plan or activity. Profits and risks
are shared by the bank and entrepreneur. Similar to a
venture capital, the financial risk gives justification
for the profits that it will rake.

This very activity is an innovative way to integrate and

benefit the society by providing funds to plausibly
efficient and relevant projects. A probable dilemma lies
in the associated expenses in measuring and examining
participants and risks, as well as negotiations and
further transactions costs.
Rooting from the fact that Islamic banks are ‘keepers and
trustees of funds’, another source of profits are gifts.
These gifts lure in more customers to open savings
accounts, increasing their capital. Gifts are portions of
profits from the bank investments using the savings as
capital source. A concept of a ‘goodwill loan’ is also
utilized, stating that the debtor is only asked to pay
the principal. An option to give a token of appreciation
is placed on the table, without any form of promises.
This transaction is the epitome of the Islamic interest-
free loan.

The estimated rate of return concept, on the other hand,

states that the bank estimates profit before financing an
activity. If in actuality the project earns more that
what was gauged primarily, the bank gives the excess to
the client. This truly reflects their concept of profit
with actual value or counterpart.

Are the Islamic banking schemes effective?

It may come as a surprise that some of the biggest

companies in the world utilize Islamic banking for
funding. These companies reportedly include IBM, Daewoo,
GM (General Motors) and Alcatel.

The main difference between traditional and Islamic

banking lies in their concepts of profit. The maximization
goal of traditional banks targets the shareholders; on
the contrary, Islamic banks hurdle the interest of all
economic agents.

A study conducted by Celent concluded that assets under

these Islamic banks grew more rapidly than those under
the conventional ones. Generally, assets linked to
Islamic banking experienced a growth of over 10% for the
past decade. The Economist also estimates that such assets
amount to US$822. This system also remained formidable in
the face of the recent financial crisis.

Trends are geared towards the untapped markets with a

relatively high potential for growth. These locations
include Turkey and the majority of North Africa. According
to Standard and Poor’s, however, the profits of Islamic
banking may be grabbed by conventional banks once they
start offering a vast array of Islamic financial services.
The New Amanah Bank
Powered by the capital infusion of DBP and the
BSP approved 5-year rehabilitation plan of the Bank, Al-
Amanah Islamic Investment Bank of the Philippines had
completed the re-branding strategy that popularizes the
new Bank logo with the tag "Amanah Islamic Bank". From
thence, the Bank uses the new logo in its official
correspondences and documents. During the rehabilitation
period, the Bank is allowed to accept conventional
deposits and offer developmental loans to the private and
public sector.
2
Amanah Islamic Bank offers on-line banking to its
clientele covering the nine (9) Branches in Cagayan de
Oro, Cotabato, Davao, Jolo, Iligan, General Santos,
Marawi, Makati and Zamboanga.
2
With the new and refurbished branches, the Bank is proud
to open its doors to all Muslim and non-Muslim alike to
experience a new way of banking, the Islamic Banking.
2
 REFERENCES

https://ifinanceexpert.wordpress.com/2010/01/31/islamic-
banking-in-the-philippines/

http://documents.worldbank.org/curated/en/74884146808785
6489/pdf/106382-WP-P153163-PUBLIC.pdf