Member Article

Download the Philippine section of Global Banking & Financial Review 2015/2016.

This chapter is reproduced with permission from Law Business Research Ltd. This article was first published in Getting the Deal Through: Aviation Finance & Leasing 2015, (published in June 2015; contributing editor: Mark Bisset, Clyde & Co LLP). For further information please visitwww.gettingthedealthrough.com.

The Philippine banking system remains strong and resilient to external and internal risks, under the able supervision of the Bangko Sentral ng Pilipinas (BSP). To be sure, the early implementation of Basel III-based capital adequacy standards for universal and commercial banks is proof of the stability of the system. Certain legal and regulatory developments in the Philippines, which this article presents, reinforce this positive outlook.

LIBERALIZATION OF FINANCIAL SECTOR

The areas of business activities wherein foreign ownership is restricted or limited are specified in the Negative List issued, from time to time, pursuant to the Foreign Investments Act of 1991. Under the Ninth Negative List, foreign equity is limited to up to 60% of the voting stock in financing companies and investment houses, which are financial institutions supervised by the BSP if they performed quasi-banking functions. Significantly, the Tenth Negative List, issued by the President of the Philippines through Executive Order No. 184 (2015), does not mention any such limit. Still, a law must be passed by the Congress of the Philippines to remove those limits in the Financing Company Act and the Investment Houses Law, before those financial institutions can be legally owned 100% by non-Philippine nationals. Until then, the Tenth Negative List should be construed merely as a Presidential goad to the legislature to pass the requisite amendatory law to allow full ownership by non-Philippine nationals of the said financial institutions.

The passage of such amendatory law would be consistent with the further liberalization of the banking industry by Republic Act No. 10641, which allows full entry of qualified foreign banks into the Philippines. Presently, a qualified foreign bank can (i) acquire up to 100% of the voting stock of an existing domestic bank, (ii) establish a 100%-owned domestic banking subsidiary, or (iii) establish a Philippine branch with full banking authority. To date, five foreign banks have been granted entry by the BSP into the Philippine banking sector under the liberalized system.

ISLAMIC BANKING AND FINANCE

Islamic banking and finance will get a boost from the expected passage of the Bangsamoro Basic Law, which will be the charter of the autonomous region envisaged by the agreement between the Philippine government and the Moro Islamic Liberation Front to end the armed conflict and bring peace in southern Philippines. Under that proposed law, the BSP, the Department of Finance and the National Commission on Muslim Filipinos are tasked to “jointly promote the development of an Islamic banking and finance system, to include among others the establishment of a Shariah Supervisory Board.” They are to conduct a review of “existing market environment and policies” and adopt “measures to enhance the competitiveness of Islamic finance products,” so that “Islamic financial players are not inhibited from introducing of Islamic finance products.” Part of these objectives is the eventual acquisition by the Bangsamoro government of the only existing Islamic bank in the country, namely the Al-Amanah Islamic Investment Bank of the Philippines. One will recall that the Philippines officially recognized Islamic banking and finance more than 40 years ago when a legislative charter was granted to the Al Amanah Bank, the first Islamic bank in the country established to cater to the banking requirements of the Muslim population. The said bank was reorganized and phased out in 1990 with the formation of Al-Amanah Islamic Investment Bank of the Philippines.

The proposed Bangsamoro Basic Law also aims to “further promote investor awareness and acceptance in order to build a broader customer and asset base.” In fact, the private sector has already taken the lead in this area. For one, the Philippine Stock Exchange (PSE) released a list of companies that passed the AAOIFI Shariah rulebook, with a view to diversifying the investor base of the PSE. This list is updated quarterly to ensure its continuing validity. Further, civil society organizations in southern Philippines are espousing the development and establishment of hybrid financial services or a combination of conventional and Shariah-based financial services, which cater to both Muslim and Christian borrowers.­