An efficient capital market is one where persons who require capital or financing and persons able to supply such requirements have free access to one another through a wide variety of financial instruments, publicly available information and, yes, even modes of transaction consistent with their religious and moral beliefs.
For centuries, the most familiar and traditional way of raising capital in the Western world has been through incurring debt. In a sense, the business of moneylending has been associated with one particular faith – that of the Jews to the extent that Shakespeare’s fictional Jewish character of Shylock in the “Merchant of Venice” has come to stereotype the cut-throat ethos associated with moneylending (“shylock” now being slang for a usurer). (full story)
Moving away from the typical risk and return model of traditional financing institutions where the returns are correlated with the amount of risk, (possibly leading to disproportionate levels of risk in the search of higher potential return), financing – the Islamic way – is sought after by a growing body of investors. This is not surprising considering the continuous growth in the world’s Muslim population and the increasing influence of investors and sovereign wealth funds from the Arab-world. These investors require their investment to be consistent with their religious beliefs – thus birthing Islamic finance. The underlying concept of Islamic finance is that money does not intrinsically have value. Rather, it merely functions as a store and measure of wealth, and as a medium of exchange, and it cannot conceptually increase in value by virtue of being lent to someone else. The consequence: assets which earn interest are not compliant with Islamic Shariah laws.
Shariah law promotes the concept of “risk-sharing”. The Shariah law requires that financing should only be raised in association with a specific and identifiable asset. Thus, when an issuer of Islamic sukuk bonds (typically by a special purpose vehicle, ‘SPV’) raises funds on behalf of a financing institution, both the issuer and investor bear the risk and liability of the underlying asset. Further, the returns to the sukuk bondholders are linked to the performance of the underlying asset, meaning the returns are not fixed in advance.
While regular capital markets in our neighboring countries have developed to an extent that the Philippines is unlikely to match in the near term, Islamic finance represents a market development opportunity for the Philippines to carve a niche alongside Malaysia and Indonesia. As we earlier pointed out an efficient capital market is where issuers can go for their funding needs and investors can find instruments matching their requirements – Islamic investors are potentially searching for less debt-based products and more income-sharing products. This could potentially be an alternative banking model to supplement the existing conventional banking model.
However, for a real Islamic finance regime in the Philippines to flourish, there must be a concerted effort by government policymakers and private stakeholders such as banks and investors to study the statutory, tax and regulatory obstacles to such a regime.
Developing the Islamic finance market in the Philippines certainly will attract more investors from the Islamic world. This is because a number of Islamic wealth funds are mandated by their charters to invest only in Shariah-compliant instruments. Furthermore, the risk-sharing principles of Islamic finance are consistent with so-called private-public partnerships in infrastructure development that government is now espousing. Having an Islamic finance system will allow the government to cast a wider net over potential infrastructure investors.
By creating a legal and regulatory framework for Islamic finance, the Philippine government has potentially another benefit to gain. Embracing Islamic finance will signal to our Muslim compatriots that Philippine society embraces all that is good within their faith. This will truly demonstrate a policy of inclusion, rather than exclusion. This may even spur development efforts in Mindanao by making financial resources available to Filipino Muslims in that region.
Drawing on recent developments in the Islamic finance world, the UK is not an obvious place when one thinks of Islamic finance. Yet the UK courts have passed resolutions in recent years in their attempt to promote Islamic Finance, such as a review of existing legal and tax regulations that the UK is recognized as a center for Islamic banking in Europe. We believe the same exercise should be considered in the Philippines. Closer to home Singapore and Indonesia have been developing their Islamic finance markets by amending tax legislation that put Islamic financing instruments at a disadvantage compared to traditional sources of financing. Malaysia has gone a step further by even giving tax incentives to Islamic financing institutions. The Philippines will do good to study these various models as they are now developing rather than catching on only once we have been crowded out of the Islamic finance markets.
One does not need to be of the Islamic faith to participate in Islamic finance-it is open to all. Rather an understanding of Shariah-based concepts is crucial for the development of Islamic finance in the Philippines. Key enablers in order to bring success include a regulatory framework and structure that is conducive to the principles of Islamic finance. This includes building understanding and awareness in all key stakeholders. Academic input and sponsorship to formulate visionary framework and development is also crucial. To build an enabling framework requires concerted efforts – stakeholders in the financing community need to embrace this potential opportunity and not let this opportunity slip away.
(Noel P. Bonoan is vice chairman for Tax and COO, Manabat Sanagustin & Co., CPAs. Aaron Lim, a Malaysian, is a Director of Manabat Sanagustin & Co., CPAs., currently on secondment from KPMG Hong Kong. Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines.
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