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.

One factor to watch will be whether the authorities’ efforts to develop the regulatory environment are able to attract foreign direct investment, leading to merger and acquisition activity or potential tie-ups that might accelerate the sector’s growth. Fitch believes that Islamic financial institutions from member states of the Gulf Cooperation Council, for example, could have interest in the potential for cross-border deals. These institutions have been instrumental in developing Islamic finance outside the Gulf, in countries such as Morocco and Turkey.

Despite the potential for better regulation to further develop Islamic banking in the Philippines, we believe the sector’s growth will likely remain constrained by limited funding sources, as well as a lack of public awareness and trust in Islamic financial services, at least in the medium term. Building greater consumer awareness and achieving trust will take time, in our view.

This has been the case when Islamic banking was introduced in other countries, even those with a significant Muslim majority like Morocco. The country’s first Islamic banking licences were issued in 2017, but despite the sector’s rapid growth Islamic banking still accounted for less than 1% of the Moroccan banking industry’s total loans at end-2018. Other Muslim-majority countries such as Turkey and Indonesia also saw strong growth from a low base in the early stages of the development of Islamic banking, but the sector’s market share subsequently stalled at around 5%-6% of total banking system lending in these countries. In the majority-Catholic Philippines, Islamic banking’s potential share of total national lending is likely to be considerably more limited.

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