Lack Of Rules Hinders Islamic Financing

After 40 years of delays, the Philippines still faces hurdles in a renewed push to attract Shariah-compliant investors to Muslim Mindanao, its poorest region, according to Islamic lenders.

The Southeast Asian nation lacks regulations and talent to develop the market, said Kuala Lumpur-based Asian Finance Bank Bhd. and CIMB Group Holdings Bhd. Al-Amanah Islamic Investment Bank in Manila, the sole lender dedicated to the industry, was forced to postpone a sale of what would have been the country's first sukuk last year because it wasn't making a profit.

The government announced over the past month that it would draw up a list of Shariah-compliant stocks and revisit a plan to sell bonds complying with the Koran's ban on interest, after signing a peace treaty with rebels to end a four-decade insurgency in the resource rich south. Now is an opportune moment to promote legislation for Islamic finance, Treasurer Roberto Tan said in an Oct. 18 interview in Manila, adding that it would help integrate the Muslim community.

"What remains to be seen is whether the Philippines can develop a tax-friendly regulatory framework and muster the political will to raise awareness of the benefits of Islamic financing," Malek Khodr Temsah, vice president of treasury and investments at Albaraka Banking Group BSC in Bahrain, said in an Oct. 24 interview. President Benigno Aquino's commitment to "lay the groundwork to develop Islamic finance isn't in doubt," he said.

The Philippines has toyed with proposals to draft a Shariah finance bill since 1973 as it seeks development funds for the autonomous region of Mindanao, home to most of its five million Muslims. Idiosa B. Ursolino, Al-Amanah's senior vice president, said in an Oct. 24 e-mail that the bank has no immediate plan to sell sukuk even after it trimmed losses last year.

The government may consider selling Islamic bonds to raise cash for Mindanao, Finance Undersecretary Rosalia de Leon told reporters in Manila on Oct. 17.

Issuing sukuk may be more expensive than debt that doesn't comply with religious tenets. The yield on the Philippines 4 percent non-Shariah-compliant notes due in 2021 dropped 140 basis points, or 1.40 percentage points, to 2.33 percent from the year's high of 3.73 percent reached in January, according to data compiled by Bloomberg. That compares with record-low borrowing costs for global Islamic securities of 2.86 percent, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows.

Sergey Dergachev, a senior portfolio manager at Union Investment Privatfonds in Frankfurt, said he would buy a sukuk from the Philippines as sovereign Islamic bonds are rare and they would offer diversification. Albaraka's Temsah said he isn't interested as valuations aren't compelling.

"I would assume that a Philippine sukuk would be strongly supported by local banks and dedicated sukuk investors, making this deal very interesting," Dergachev said in an e-mailed reply to questions on Oct. 24.

Global issuance of Islamic bonds climbed 79 percent to a record $39.4 billion in 2012 from a year earlier, data compiled by Bloomberg show. The notes returned 8.5 percent this year, while debt in developing markets jumped 16.3 percent, according to separate prices on the HSBC/Nasdaq index and JPMorgan Chase & Co.'s EMBI Global Composite Index.

Average yields on sukuk have dropped 113 basis points this year, narrowing the spread with the London interbank offered rate by 91 basis points to 182 basis points as of Oct. 24, the HSBC/Nasdaq index shows.

The Southeast Asian nation will face challenges like all new countries looking to develop a Shariah market, according to Asian Finance Bank and CIMB Group Holdings.

It took Malaysia, a global hub for financing along religious guidelines, 30 years to develop into what it is today, Badlisyah Abdul Ghani, chief executive officer of CIMB Islamic Bank Bhd., a unit of CIMB Group, said in an Oct. 25 interview.

Al-Amanah was set up in 1973 by then President Ferdinand Marcos with a mandate to promote development in Mindanao through banking, financing and agricultural ventures in accordance with Shariah law, its website says.

The bank is undergoing a five-year rehabilitation plan that started in 2010 and is still looking for an investor expert in Shariah finance to purchase a stake, Senior Vice President Ursolino said. It has nine branches and plans to open 10 more in the next two years, subject to finding a buyer, she said, adding that it has assets of less than 1 billion pesos ($24.3 million).

"There's no notable growth in assets or improvement in deposits because of the limitations in Islamic investments," she said in the e-mail. "We hope there will be renewed interest in Islamic banking with the latest peace treaty. Al-Amanah can be an instrument to introduce economic development in the area following the Shariah principles."

President Aquino announced an agreement on Oct. 7 to create a "political entity" called Bangsamoro to replace the failed autonomous region set up in 1989. The talks with the Moro Islamic Liberation Front called for a 15-member committee to draft a new law that will need to be passed in Congress and approved by a local referendum.

The region has per capita gross domestic product of 26,000 pesos, the lowest among the 17 provinces and below the national average of 103,366 pesos, according to the government's National Statistical Coordination Board. Muslims account for 5 percent of the 103 million population, the U.S.-based Central Intelligence Agency estimates.

Finance Secretary Cesar Purisima said in February last year that the government was studying options for Islamic banking in Mindanao. Central bank Governor Amando Tetangco said in July of 2010 that the monetary authority was drafting a Shariah bill.

"The Philippines can successfully open up its Islamic finance market once it puts in a place a broader and deeper infrastructure framework," CIMB's Badlisyah said. "Mindanao is resource-rich, and when peace settles it would be a natural market that Islamic players would look at."

Al-Amanah is holding consultations with the stock market regulator, government agencies and the Asian Development Bank to compile standards for Islamic equities, Leo Quinitio, head of the exchange's capital markets development division, said in a Sept. 21 interview.

Shariah law bars investment in businesses deemed unethical such as those involved in gambling, pork, alcohol and pornography, as well as some entertainment establishments.

The Dow Jones Islamic Market World Index of companies that operate in accordance with Shariah law rose 9 percent this year, outpacing a 7.8 percent gain in the MSCI Asia Pacific Index.

"The Philippines has a long way to go," Mohamed Azahari Kamil, CEO of Asian Finance Bank, the Malaysian unit of Qatar Islamic Bank SAQ, said in an Oct. 25 interview. "How fast the Philippine government will be able to implement Shariah rules and the level of acceptance are some of the challenges that it will have to face."

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