Philippines central bank in broad Islamic finance push


* Central bank submitted request to amend its charter

* Drafting Islamic banking law to present to congress

* To complement efforts with product-specific regulations

* Conventional banks could offer Islamic products as well

* Coordinating with securities and insurance regulators

By Karen Lema and Bernardo Vizcaino

MANILA/SYDNEY, Sept 27 (Reuters) - In what could be one ofthe most ambitious efforts to facilitate Islamic finance in anon-Muslim country, the Philippines' central bank is pushingseveral initiatives to develop the sector and encouragefinancial inclusion of the Muslim minority.

The effort follows a landmark peace deal signed in Octoberlast year which sought to end a 40-year conflict with Muslimseparatists that has killed 120,000 people, displaced twomillion and stunted growth.

"There is renewed interest in this and the key drivers arethe peace initiative in Mindanao as well as broad initiative ofthe BSP to create a more inclusive financial system," NestorEspenilla, deputy governor of the Bangko Sentral ng Pilipinas(BSP) told Reuters.

"That is the arching principle."

Mindanao island, roughly the size of Portugal, accounts foraround one-quarter of the country's 97 million population andone-fifth of its economy. But decades of neglect, corruption andviolence have impoverished parts of the island, despite beingrich in natural resources which the government wants to develop.

"We have a significant Muslim population and they areeconomically active and if you want to create an inclusivefinancial system then you should also have financial productsthat are geared to that particular customer base."

Espenilla said the central bank has asked congress to haveits charter amended, a move that would allow it to providesharia-compliant instruments to Islamic banks, in particularinterbank lending products.

Islamic finance follows religious principles such as a banon interest and gambling, making interest-based transactions amajor problem for Islamic banks operating outside of the coreindustry hubs in the Middle East and Southeast Asia.

"That is just once piece of a broader initiative," he said.

The BSP hopes an Islamic banking law can also help attractmore market participants as there is only one Islamic bank, AlAmanah, which has struggled financially and is being privatisedby the Development Bank of the Philippines (DBP).

"Even if DBP is successful in privatizing it, it will justresult in one Islamic bank in the country. If you want to fullyenable an Islamic banking system, as opposed to one Islamicbank, we may have to come up with an Islamic banking law."

The BSP would thus have to tackle an issue shared by othercountries trying to encourage Islamic finance: taxation. CertainIslamic finance contracts, such as sukuk or Islamic bonds, canattract double or even triple tax duties because they requiremultiple transfers of title of the underlying asset.

The BSP has setup a working group that is now drafting theproposed law which would then be presented to congress,Espenilla said, without giving a time frame.

Such a legislative approach would be complemented by aregulations-based approach, broadening the types of productswhich could also be delivered by conventional banks, he said.

"We also need to coordinate mutual-type products, withsecurities and insurance regulators as well," he added.

The BSP has sought support from industry bodies such as theMalaysia-based Islamic Financial Services Board (IFSB), of whichthe central bank is an associate member.

Last October, the IFSB signed a five-year agreement with theManila-based Asian Development Bank (ADB) to promoteIslamic finance, focusing on Indonesia, Bangladesh, Pakistan,the Maldives, Afghanistan, Kazakhstan and the Philippines.

The IFSB and ADB also plan to hold a two-day Islamic financeconference in Manila in November. (Editing by Kim Coghill)

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