Questions on Islamic Banking and Finance

By AMANODING D. ESMAIL, CPA, MPA

1. What is the importance of Islamic Banking?

Islamic finance is more than just delivering products and services to customers. It is about having a certain kind of worldview that understands the competing realities of the poor and the rich, the environment and the economy, and the future and the present.

The turbulence in the global financial market has caused an alternative system of financial intermediation to receive increased prominence in recent years – that of Islamic banking and finance. Islamic banks are said to be less directly impacted by the recent credit crunch because they didn’t get into securitization activity or mortgage-backed securities. 

Moreover, there is a connection between interest and many of the world’s problem. If we do not have compound interest, we would not need compound growth. And if we did not need compound growth, we would not have most of the debt-induced poverty, resource-hungry wars, and runaway climate change we now see. All interest – whether simple interest or compound interest whether at very low rates or very high rates – grows so fast that we simply cannot keep up. Islamic finance can help solve this problem. 

Why should the Philippines push for Islamic Banking System?

With the growth of Islamic finance, we have the emergence of Islamic finance entrepreneurs. These are individuals and institutions starting up small and medium-sized enterprises to serve the growing needs of our burgeoning industry. 

Islamic banking will mobilize enormous capital held by devout Muslims who sparingly participate in the conventional market. Specifically for Philippines, this means institutional money from the Middle East and Southeast Asia, as well as private wealth held by Bangsmaoro in and out of the country, thus, Islamic banking holds an enticing opportunity for fuller market capitalization. 

Though Islamic banking is a political and not financial argument in the Philippines. In an environment of minority vote – banking and cynical political manipulation, any idea tagged with a religious prefix is doomed. It should be remembered, however, that Islamic banking is not a mandatory methodology imposed on all financial operations in the country. It is an additional choice for the investor, and nothing prohibits one from using different systems for different transactions. 

2. Why do you think Islamic Banking has not been successful so far?

In general, attitude is the main problem facing the development of the Islamic banking system. However, the Philippine government, in specific, has somehow minimally adopted positive attitude towards the needs of Islamic banks through the creation of Al Amanah Islamic Investment Bank of the Philippines. 

Islamic banking system faces the following problems under the current environment, namely: Lack of standardization, regulation and legislation, capital and liquidity requirements, tax discrimination, financial instruments, accounting practices, liquidity and risk management, staffing and training, marketing Islamic banking products and services, competition from conventional banks, etc.

In one instance, Interpretations of Islamic Shariah principles are left to Muslim scholars. Hence, different schools of thought have emerged in different cultures and Islamic societies. For example, there is no agreement among different schools of thought on whether riba and interest are synonymous terms. The fact that Muslim scholars disagree on such a basic issue highlights the lack of standardization. As a result, each Islamic bank appoints an Islamic Shariah Committee whose remit it is to assess whether its bank transactions and activities are in accordance with the Islamic Shariah. The lack of standardization between these committees results in diverse interpretations and evaluations, time-consuming, costly, and also leads to confusion about what Islamic banking really encompasses and, therefore, hinders its widespread acceptance. 

3. In your opinion as an expert on your field, what factors are necessary to propel the growth of Islamic Banking System in the Philippines.

Since the Islamic banking system has only recently emerged, regulatory framework and supervisory techniques must be developed to accommodate Islamic banks. Lack of understanding, coupled with lack of regulation, caused hindrance to the growth of Islamic banking system in the Philippines. On the other hand, the following are the needed factors which must be considered, such as: banking efficiency, increasing confidence in a bank, efficiency in investment management, financial engineering and marketing, preservation of shareholders and depositors’ equity, provision of humanitarian and social services and other factors.

What possible interventions and solutions are necessary to address those you mentioned. 

To achieve the foregoing factors, it may be useful to establish consultative working groups between the regulatory body and representatives of the Islamic financial community. These working groups would seek to identify the challenges faced by the Islamic banking industry, and to advise on the adequate regulatory responses. The authorities should strive to ensure that (i) Islamic principles are well-understood by practitioners, (ii) transactions fall under the umbrella of prudential regulations, and (iii) customers of Islamic institutions are afforded the same level of regulatory protection as those of conventional banks. 

4. How do we ensure its sustainability?

Nonetheless, despite the rapid growth of Islamic finance in the last few decades, many supervisory authorities and practitioners are unfamiliar with the process by which Islamic banks are introduced into a conventional system. 

As Islamic finance keeps expanding, the supervisory authorities will have to ensure that these new institutions become fully integrated with the rest of the financial system. The integration process will not only entail allowing Islamic institutions to operate, but also providing a comprehensive regulatory framework, as well as developing a supportive financial infrastructure. 

Finally, it should be emphasized again that, fortunately, a number of multilateral institutions have been recently created in order to provide assistance to governments in the matters discussed above, and to issue standards and best-practice guidelines for this industry. Therefore, it is firstly to these multilateral organizations that governments newly acquainted with Islamic finance should turn to for advice. In addition, the authorities should engage in dialogue with the local interlocutors of this industry, in order to promote an open and fluid exchange of information and ideas.

(Mr. Amanoding D. Esmail, CPA, MPA, is founding president of the Philippine Association of Islamic Accountants (PAIA), Inc. and Revenue District Officer of the Bureau of Internal Revenue RDO 101, Iligan City.)