By Melissa Luz T. Lopez
Senior Reporter

EFFORTS by the administration of President Rodrigo R. Duterte to make economic growth more inclusive extend to the financial sphere, with Mindnaoans seen as potential key beneficiaries of this thrust.
Aside from introducing big-ticket infrastructure projects, the government is looking for ways to bring more Filipinos in Mindanao — some of whose provinces and regions remain among the country’s poorest — on board formal financial channels, enabling them to contribute more to economic growth.

But it is in this field that Mindanaoans seem to face more hurdles than other Filipinos.
Apart from the usual documentary and monetary barriers that keep many locals from opening deposit accounts, the Muslim community is also limited by business models in which commercial lenders operate.

Many residents conduct financial transactions mostly via cooperatives and microfinance nongovernment organizations, according to the Bangko Sentral ng Pilipinas’ (BSP) National Baseline Survey on Financial Inclusion published in 2015. Of those who have savings, some 73.9% said they keep money at home rather than in formal institutions.

There were 243 unbanked cities and towns in Mindanao as of end-June, according to latest BSP data. About a fifth of the country’s 571 unbanked localities were in the Autonomous Region in Muslim Mindanao alone.

This has prodded the BSP to push for the creation of a legal framework for Islamic banking in the country, although such proposal has languished in Congress in recent years.

“BSP would like that to be passed into law so that it would address underbanked people in Mindanao,” BSP Deputy Governor Chuchi G. Fonacier said in a recent interview, noting that Islamic banking poses a huge potential to bring Muslim Filipinos aboard the financial system.

Islamic banking differs from commercial banking in that it adheres to Shari’ah principles that, among others, prohibit the charging of interest on loans – instead, the lender earns via lease-to-own deals with borrowers for instance.

Ms. Fonacier said the BSP is exploring two routes to open Islamic banking to more players in the country.

The first option is to amend the charter of the Al-Amanah Islamic Investment Bank —which is currently the sole bank offering the service in the Philippines — to serve as the framework for a Shari’ah-compliant lending platform.

However, being subject to the same laws for commercial banks left this lender less attractive to potential clients.

The alternative is to amend Republic Act No. 8791, or the General Banking Law of 2000, to allow all other firms to open their own Islamic banking windows.

Both proposals, however, remain stuck in the legislative mill.

Shari’ah-compliant banks — which observe “risk-sharing” banking — will be allowed to accept or create demand deposits, take in savings for safekeeping, act as collection agents for interest-free payments, as well as provide collateral-free financing, among others.

Southeast Asia’s economic integration would also add some pressure for the Philippines to embrace Islamic banking, Ms. Fonacier said, as foreign banks could beat local players in serving this untapped market.

The same legal barriers to this form of banking also stand in the way of the Philippine efforts to tap Islamic financing.

Finance Secretary Carlos G. Dominguez III had earlier floated the idea of issuing sukuk bonds to further diversify the Philippines’ debt profile and access new sources of funding, alongside venturing into the Chinese market via panda bonds.

After over a year of preparations, the Philippines is ready to offer yuan-denominated debt papers to Chinese investors by the first quarter of 2018, awaiting only approval of the People’s Bank of China.

Overall, there has been “renewed interest” among banks to set up branches in Mindanao – Mr. Duterte’s bailiwick – over the past few years.

BSP’s Ms. Fonacier said the strongest signal that monetary authorities have seen so far is BDO Unibank, Inc.’s acquisition of the Davao-based One Network Bank in 2015, alongside applications from big players to set up bank branches in the region.

Despite the five-month battle for Marawi City that displaced over 77,000 families or more than 350,000 individuals and disrupted economic activity, Ms. Fonacier said this has actually sent a “good signal” for investors to keep looking to Mindanao for growth, with damage from the seige seen contained and recovery plans underway.

Mindanao-based lenders are likewise upping their game by venturing into financial technology, the central bank official said, with the regulator receiving requests from rural lenders as they try out cloud computing.

Upcoming reforms eyed by the central bank to broaden financial inclusion — such as no-frills basic deposit accounts and the “branch lite” concept, designed to offer basic financial services to underserved and unbanked localities — are likewise being counted on to bring more Filipinos into the banking system.

Still, the demand for accessible banking will not stop until the last town and sitio in Mindanao finds its way into formal banking channels.

In still another financial realm, the Philippine Stock Exchange (PSE) opened its doors for Muslim investors after seeing the huge potential of Islamic finance.

In 2013, the bourse unveiled an initial batch of 47 listed companies that satisfy Shari’ah principles after partnering with IdealRatings Inc. to screen companies in accordance with the Accounting and Auditing of Islamic Financial Companies (AAOIFI) standards.

That list, which is updated quarterly, increased to 60 in June — the biggest complement so far since October 2015.

The maintenance of a list of Shari’ah-compliant stocks was aimed at improving liquidity in the local stock market and enabling the exchange to tap global Islamic funds.

Prior to the release of the list of Shari’ah-compliant firms, there were no Muslim investors in the Philippine stock market, with most of them opting to trade in Malaysia’s bourse.

These Shari’ah-compliant equities do not derive sales from conventional interest-based lending, financial institutions, pork, alcohol, intoxicants, tobacco, arms and weapons, gambling, casinos, derivatives, pornography, music/entertainment and human stem-cell research.

In terms of financial ratios, their cash and interest-bearing investments must not exceed 30% of the total, interest bearing debts must not go beyond 30% and accounts receivables must not surpass 67% of market capitalization.

Standards for Shari’ah compliance are different from the set of filters that govern other PSE sub-indexes such as market capitalization, public float and liquidity.

Gauged according to these standards, only six component companies of the bellwether PSE index were deemed Shari’ah-compliant in June.

Identifying Shari’ah-compliant stocks sets the stage for the creation of more products catering to Islamic investors.

One product that the PSE hopes to create is a sub-index that will facilitate the launch of mutual funds or exchange-traded funds for Shari’ah-compliant stocks. That initiative has yet to take off, with the bourse focusing on other initiatives such as its merger with the Philippine Dealing and Exchange Corp. — with Krista Angela M. Montealegre