Developing Islamic Finance in the Philippines

This report was prepared as part of the
World Bank engagement in the Philippines to support Islamic
Finance and Financial Inclusion. It provides an overview on
the context for the development of Islamic finance in the
Philippines and is accompanied by two focused reports
providing further detail and suggestions on enhancing
financial inclusion in the Philippines through Islamic
microfinance and assessment of the status of financial
inclusion in Autonomous Region in Muslim Mindanao (ARMM)and
the proposed Bangsamoro territory. The term Islamic finance
is used to refer to financial activities conforming to
Islamic Law (Shari‘ah). One of the main principles of the
Islamic finance system is the prohibition of the payment and
the receipt of ribā (interest) in a financial transaction. A
pure debt security is replaced with an “asset-based”
security, direct financing of a real asset, and different
forms of partnerships of which equity financing is the most
desirable.The following key principles guide Islamic
Finance: i) Prohibition of interest on transactions (ribā);
ii) Financing must be linked to assets (materiality); iii)
Engagement in immoral or ethically problematic businesses
not allowed (e.g., gambling or alcohol production); iv)
Returns must be linked to risks. Table 1 provides a summary
description of basic financial instruments.Over the past
decade Islamic finance has emerged as an effective tool for
financing development worldwide, including in non-Muslim
majority countries. Discussion and interest in Islamic
finance has also appeared on G20 discussions. Major
financial markets are discovering solid evidence that
Islamic finance has already been mainstreamed within the
global financial system – and that it has the potential to
help address the challenges of ending extreme poverty and
boosting shared prosperity.In summary, Islamic finance is
equity-based, asset-backed, ethical, sustainable,
environmentally- and socially-responsible finance. It
promotes risk sharing, connects the financial sector with
the real economy, and emphasizes financial inclusion and
social welfare.