Islamic banking in the Philippines could get a strongly needed push

31/07/2014 10:05 AST

Talks are ongoing that the Philippines’ one and only Islamic financial institution, Al-Amanah Islamic Investment Bank, could get a foreign partner and with it a cash injection and desperately needed expertise in creating modern Islamic banking products for the more than 10mn Muslims in the country who are looking for a way to invest and save their money in accordance with Muslim beliefs.

The bank, 100% owned by the Development Bank of the Philippines, has been struggling for decades to establish itself among the Muslim community but never managed to become profitable due to a lack of Islamic banking expertise, too few products attractive enough for Muslim customers and a general lack of Islamic banking regulations in the Philippines.

Interestingly, the Philippines’ Al-Amanah is one of the oldest Islamic banks worldwide – it was established in 1973 by presidential decree of then-President Ferdinand Marcos mainly as a political concession to the Muslims in the South. However, while many other Islamic banks that were launched at that time grew rapidly in Southeast Asia and the Middle East, Al-Amanah never took off and failed to post profits year after year. It was even forced to offer conventional banking products just to keep afloat, and its branches remained limited to Muslim Mindanao in the South of the Philippines up to this day.

By 2009, the bank started with a five-year rehabilitation plan that included a cash injection by the Development Bank of the Philippines, but also aimed at eventually divesting Al-Amanah to an institution with enough expertise to run an Islamic financial institution in the Philippines. Reportedly, talks have been held with Middle East and Malaysian banks in this period, but a deal never materialised. As of end-2013, Al-Amanah had remaining assets of just $22mn and business has practically stalled.

But in the current situation – with a ground-breaking peace deal in force between the Manila government and the former Muslim insurgency in Mindanao which has pushed business activity in the region, and new regulations that foreign banks can now own up to 100% of Philippine banks – prospects that Al-Amanah could get a foreign partner have emerged again.

According to local media reports, one of the candidates is Malaysia’s banking giant CIMB, which is looking for an entry point into the Philippines to counter the expansion of Maybank, another big Malaysian financial conglomerate, in the archipelago. There has been no official confirmation of CIMB that it pursues the acquisition of Al-Amanah, but observers say it is plausible as CIMB has long sought to expand into the Philippines as part of its regional growth strategy, preferably via an Islamic banking institution.

In any case, a possible buyer of Al-Amanah will have to rebuild the bank from scratch and will also have to shoulder its dire recapitalisation needs, which – according to the Development Bank of the Philippines – amount to a sum between $1.1bn and $2.2bn in fresh investments to eventually create a bank that is able to serve the Islamic community in the country with modern Shariah-compliant banking products and compete in the upcoming Asean Economic Community.

Gulf Times