Philippine Laws Platform

[ REPUBLIC ACT NO. 11439, August 22, 2019 ]

AN ACT PROVIDING FOR THE REGULATION AND ORGANIZATION OF ISLAMIC BANKS

Be it enacted by the Senate and House of Representatives of the Philippines in Congress assembled:

SECTION 1.Declaration of Policy.—The State recognizes the vital role of Islamic banking and finance in creating opportunities for greater financial inclusion especially for the underserved Muslim population, in expanding the funding base for small and medium-sized enterprises as well as large government infrastructure through financial arrangements with risk sharing as their core element, and in contributing to financial stability through the use of financial contracts and services that are founded on risk sharing rather than speculation in compliance withShari'ahprinciples.

SEC. 2.Definition of Terms.-(a) As used in this Act:

(1)Shari'ahrefers to the practical divine law deduced fromits legitimate sources: the Qur'an, Sunnah, consensus of Muslimscholars, analogical deduction and other approved sources ofIslamic law;

(2)Current accountrefers to the total deposits at an Islamicbank which are repayable on demand and compliant withShari'ahprinciples;

(3)Investment accountrefers to the total funds placedby an investor with an Islamic bank for a fixed period of timeunder an agreement to share the profits and losses on theinvestment of such funds in accordance with the principles ofShari'ah;

(4)Islamic banking businessrefers to a banking businesswith objectives and operations that do not involve interest(riba)as prohibited by theShari'akand which conducts its businesstransactions in accordance withShari'ahprinciples;

(5)Islamic banking unitrefers to a division, department, office or branch of a conventional bank that conducts businessin accordance with the principles of theShari'ah;

(6)Participationrefers to any agreement or arrangementunder which the mode of joint investments or specific transactionsshall not involve the element of interest charge other than aspercentage share in profits and losses of business and whichis conducted in accordance with the principles of theShari'ah;

(7)Ribahas the meaning assigned to it by Islamic law and jurisprudence as expounded by authoritative sources; in the context of banking business, the term refers to the receipt and payment of interest, including in the various types of lending and borrowing and in the exchange of currencies on forward basis; and

(8)Savings accountrefers to an account reflecting the total deposits at an Islamic bank which normally require the presentation of passbooks or in lieu thereof, such other legally acceptable documents approved by theBangko Sentral ng Pilipinas (Bangko Sentral)for deposit or withdrawal of money.

(b) The Monetary Board may, by regulation, further define or clarify the terms used in this Act or commonly used in Islamic banking transactions, consistent with the declared State policy and taking into consideration the peculiar characteristics of Islamic banking.

SEC. 3.Establishment of Islamic Banks.- (a) The Monetary Board may authorize the establishment of Islamic banks. It may also authorize conventional banks to engage in Islamic banking arrangements, including structures and transactions, through a designated Islamic banking unit within the bank:Provided,That the bank shall have a system for segregating the transactions of the Islamic banking unit .from its conventional banking business.

(b)The Monetary Board may, under such rules andregulations as it may prescribe, authorize foreign Islamicbanks to establish Islamic banking operations in thePhilippines under any of the modes of entry provided for underRepublic Act No. 7721, as amended, otherwise known as TheLiberalization of Entry and Operations of Foreign Banks.The Monetary Board may regulate the number of participantsin the Islamic banking system taking into account the requirements of the economy, the preservation of the stabilityof the system, and the maintenance of healthy competition.

(c)For purposes of this Act, the Al-Amanah IslamicInvestment Bank of the Philippines, other" Islamic banks,designated Islamic banking units of conventional banks, andforeign banks that are authorized to conduct business inaccordance with the principles ofShari'ahshall be referred tocollectively as Islamic Banks'¹or "Islamic banking system".

SEC. 4.Supervision and Regulation by the Bangko Sentral. -TheBangko Sentralshall exercise regulatory powers and supervision over the operations of Islamic banks. TheBangko Sentralshall issue the implementing rules and regulations on Islamic banking.

SEC. 5.Shari'ah Advisory Councils.- It shall be' the responsibility of an Islamic bank to comply withShari'ahprinciples. For this purpose, it shall constitute aShari'ahadvisory council composed of persons who are qualified inShari'ahor who have knowledge or experience inShari'ahand in banking, finance, law or such other related disciplines. The council shall render advice and review applications ofShari'ahprinciples, but it shall not involve itself directly in the operations of the Islamic bank or engage in any activity which may give rise to conflict of interest. Nothing contained herein precludes the establishment of a centralizedShari'ahSupervisory Board to ensure that the Islamic banking transactions and products comply withShari'ahprinciples.

SEC. 6.Powers of Islamic Banks.- (a) In addition to the general powers granted to corporations, Islamic banks shall have such powers as shall be necessary and prudent to carry out the business of a bank in accordance withShari'ahprinciples.

(b) Islamic banks may perform the following banking services:

(1) Accept or create current accounts;

(2)Accept savings accounts for safekeeping or custodywith no participation in profit and loss except unless otherwiseauthorized by the account holders to be invested;

(3) Accept investment accounts;

(4) Accept foreign currency deposits;

(5)Act as correspondent of banks and institutions tohandle remittances or any fund transfers;

(6)Accept drafts and issue letters of credit or lettersof guarantee, negotiate notes and bills of exchange andother evidence of indebtedness:Provided,That such financialinstruments are in accordance with the principlesoi Shari'ah;

(7)Act as collection agent insofar as payment orders,bills of exchange or other commercial documents coveringShari'ahcompliant transactions;

(8)ProvideShari'ahcompliant financing contracts andstructures;

(9)Handle storage operations for goods or commodityfinancing secured by warehouse receipts presented to theIslamic bank;

(10)Issue shares for the account of institutions andcompanies assisted by the Islamic bank in meetingsubscription calls or augmenting their capital and/or fundrequirements as may be allowed by law;

(11)Undertake various investments in all transactionsallowed byShari'ahprinciples; and

(12)Such other banking services as may be authorizedby the Monetary Board.

(c)With prior Monetary Board approval, Islamic banksmay issue investment participation certificates,sukuk,and otherShari'ahcompliant funding instruments to beused by the Islamic banks in its operations or capital needs.

(d)Islamic banks may carry out financing and jointinvestment operations by way ofmudarabahpartnership,musharakahjoint venture or by decreasing participation,murabahahpurchasing on a cost-plus financing arrangement,lease(ijara)arrangements, construction and manufacture(istisno'a)arrangements, and otherShari'ahcompliantcontracts and structures, and to invest funds directly invarious projects or through the use of funds whose ownersdesire to invest jointly with other resources available to theIslamic bank on a jointmudarabahbasis in accordance withthe foregoing arrangements, contracts and structures.

(e)With prior Monetary Board approval, Islamic banks mayinvest in equities ofShari'ahcompliant undertakingsthat directly support the delivery of Islamic banking andfinancing services.

(f)Islamic-banks may exercise the general powers ofa universal bank that are consistent with the principles of Shari'ah.

SEC. 7.Ownership and Legal Existence.— Islamic banks to be created under this Act shall comply with pertinent laws, rules and regulations applicable to a private corporation engaged in banking, such as "The Corporation Code of the Philippines" (Batas Pambansa Big. 68), as amended, and the requirements of the respective regulatory agencies. Islamic banking units shall be operated and managed pursuant to a management and organizational structure which should be properly disclosed and segregated from the operations of the parent bank.

The capitalization requirements of an Islamic bank shall be equal to that prescribed by theBangko Sentralfor a universal bank. Islamic banks may take the necessary steps to have their shares of stock listed in any duly registered stock exchange.

SEC. 8.Transfer and Acquisition of Substantial Shareholdings.— No person shall -acquire shares in an Islamic bank that will result in ownership or control, directly or indirectly, of more than ten percent (10%) of the voting stock of such Islamic bank, without obtaining the prior approval of the Monetary Board. Prior to the Monetary Board approval, no such transfer or acquisition of shares shall have legal effect nor shall the same be recognized in the stock and transfer books of the Islamic bank or in the records of any government agency.

SEC. 9.Fit and Proper Rule.- In order to maintain the quality of bank management and afford better protection to depositors, investors and the public in general, the Monetary Board shall prescribe, pass upon and review the qualifications of persons who are elected or appointed as directors or officers of Islamic banks and disqualify those found unfit. The Monetary Board shall prescribe the qualifications of bank directors and officers for purposes of this Act.

SEC. 10.Regulatory Standards. -Islamic banks shall be licensed and regulated in the same manner as a universal bank. TheBangko Sentralshall prescribe prudential regulations and standards of conduct to promote the sound financial position of Islamic banks find to ensure integrity, professionalism and expertise in the conduct of their business, affairs and activities. These standards shall take into consideration international best practices and principles relating to, but not limited to:

(a) capital adequacy;

(b) liquidity;

(c) corporate governance;

(d) risk management;

(e) related party transactions;

(f) maintenance of reserve funds;

(g) prudential reporting;

(h) investment ceilings and limitations;

(i) prevention of an institution from being used, intentionally or unintentionally, for unlawful activities; and

(j) consumer protection.

SEC. 11.Current Accounts of Islamic Banks. —TheBangko Sentralis authorized to open current accounts for Islamic banks for settlement and other purposes under such rules and regulations as the Monetary Board may prescribe. TheBangko Sentralmay charge administrative and other fees for the maintenance of such facilities as may be allowed underShari'ahprinciples.

SEC. 12.Financial Facilities for Islamic Banks.- TheBangko Sentralmay, taking into consideration the peculiar characteristics of Islamic banking, formulate rules and regulations for the extension of financial facilities to Islamic banks for purposes provided under Chapter IV, Articles IV and V of Republic Act No. 7653, as amended, otherwise known as the New Central Bank Act.

Subject to the availability of budgetary support and other funding sources, the Philippine Deposit Insurance Corporation (PDIC) may extend financial assistance to an Islamic bank determined by the Monetary Board to be in danger of closing in order to prevent such closing, or when it is determined by the Monetary Board and the PDIC Board of Directors that the continued operation of such Islamic bank is essential to the stability of the economy.

SEC. 13.Monetary Stabilization Policy and Tools. -TheBangko Sentral,pursuant to the authority of the Monetary Board under Section 61 of Republic Act No. 7653, to constantly assess price developments and outlook, and based on its analysis and evaluation of inflationary pressures, and its policy instruments to attain and maintain price stability, and taking into consideration the peculiar characteristics of Islamic banking, may require Islamic banks to maintain reserves against their deposit accounts and funds held in trust or under investment accounts. The Monetary Board may further identify and authorize the issuance by theBangko Sentralof other appropriate instruments and measures necessary to implement its monetary policy, including instances of abnormal movements in the price level, taking into account the peculiar characteristics of Islamic banking.

SEC. 14.Tax Neutrality.- The Government shall endeavor to achieve neutral tax treatment between Islamic banking transactions and equivalent conventional banking transactions within the provisions of the National Internal Revenue Code of 1997 (Republic Act No. 8424), as amended.

SEC. 15.Sanctions.- Any director, officer, employee, auditor, or agent of an Islamic bank who is found guilty of any act or omission in violation of any provision of this Act and its implementing rules and regulations shall be subject to the sanctions and penalties under Sections 34,35, 36 and 37 of Republic Act No. 7653, and shall be punished by a fine not exceeding One million pesos (Pl,O0O,00O.0O) or by imprisonment of not more than five (5) years, or both, at the discretion of the court, without prejudice to administrative and criminal sanctions that may be imposed pursuant to existing banking laws and regulations.

SEC. 16.Consumer Awareness and Capacity Building Program.- The Government shall provide programs for increased consumer awareness and capacity building required by the expanded Islamic banking system.

SEC. 17.Nonapplicability of Selected Acts.- In order to achieve the international and domestic objectives of Islamic banking, the provisions of the following laws shall not apply to Islamic banks to the extent as herein rendered inoperative:

(a)The provisions of Republic Act No. 7653, andRepublic Act No. 8791, otherwise known as "The GeneralBanking Law of 2000", with particular reference to thedetermination of bank interest rates, loans and discounts,and interest-bearing instruments or charge:Provided,Thatnothing contained herein shall be construed to impair thepowers of theBangko Sentralto supervise and regulate theactivities of Islamic banks and the Islamic banking system;

(b)The provisions of Presidential Decree No. 1445,otherwise known as the "Government Auditing Code of thePhilippines" and other enactments thereon inconsistent withthis Act:Provided, however,That nothing contained hereinshall preclude the development of an appropriate frameworkfor the auditing of Islamic banks and the Islamic bankingsystem; and

(c)The provisions of Republic Act No. 3591, as amended,known as the Philippine Deposit Insurance Corporation (PDIC)Charter, and all laws regulating insurance companies: Provided, however,That nothing contained herein shallpreclude Islamic banks from the establishment of contemporaryIslamictakaful(solidarity services) free ofriba,premiums orinterests.

SEC. 18.Separability Clause.- If any provision or section of this Act or the application thereof to any person, association, or circumstances is held invalid, the other provisions or sections and their application to such person, association, or circumstances shall not be affected thereby.

SEC. 19.Repealing Clause.-All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this Act are hereby repealed or modified accordingly.

SEC. 20.Effectivity. -This Act shall take effect fifteen (15) days after its publication in theOfficial Gazetteor in any newspaper of general circulation.

Approved,

(SGD.)VICENTE C. SOTTO III
President of the Senate

(SGD.)GLORIA MACAPAGAL-ARROYO
Speaker of the House of Representatives

This Act which originated in the House of Representativeswas passed by the House of Representatives and the Senateof the Philippines on November 20, 2018 and June 3, 2019,respectively.

(SGD.)MYRA MARIE D. VILLARICA
Secretary of the Senate

(SGD.)DANTE ROBERTO P. MALING
Acting Secretary General House of Representatives

Approved: AUG 22 2019

(SGD.)RODRIGO ROA DUTERTE
President of the Philippines