* 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 of the most ambitious efforts to facilitate Islamic finance in a non-Muslim country, the Philippines' central bank is pushing several initiatives to develop the sector and encourage financial inclusion of the Muslim minority.
The effort follows a landmark peace deal signed in October last year which sought to end a 40-year conflict with Muslim separatists that has killed 120,000 people, displaced two million and stunted growth.
"There is renewed interest in this and the key drivers are the peace initiative in Mindanao as well as broad initiative of the BSP to create a more inclusive financial system," Nestor Espenilla, deputy governor of the Bangko Sentral ng Pilipinas (BSP) told Reuters.
"That is the arching principle."
Mindanao island, roughly the size of Portugal, accounts for around one-quarter of the country's 97 million population and one-fifth of its economy. But decades of neglect, corruption and violence have impoverished parts of the island, despite being rich in natural resources which the government wants to develop.
"We have a significant Muslim population and they are economically active and if you want to create an inclusive financial system then you should also have financial products that are geared to that particular customer base."
Espenilla said the central bank has asked congress to have its charter amended, a move that would allow it to provide sharia-compliant instruments to Islamic banks, in particular interbank lending products.
Islamic finance follows religious principles such as a ban on interest and gambling, making interest-based transactions a major problem for Islamic banks operating outside of the core industry 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 attract more market participants as there is only one Islamic bank, Al Amanah, which has struggled financially and is being privatised by the Development Bank of the Philippines (DBP).
"Even if DBP is successful in privatizing it, it will just result in one Islamic bank in the country. If you want to fully enable an Islamic banking system, as opposed to one Islamic bank, we may have to come up with an Islamic banking law."
The BSP would thus have to tackle an issue shared by other countries trying to encourage Islamic finance: taxation. Certain Islamic finance contracts, such as sukuk or Islamic bonds, can attract double or even triple tax duties because they require multiple transfers of title of the underlying asset.
The BSP has setup a working group that is now drafting the proposed law which would then be presented to congress, Espenilla said, without giving a time frame.
Such a legislative approach would be complemented by a regulations-based approach, broadening the types of products which could also be delivered by conventional banks, he said.
"We also need to coordinate mutual-type products, with securities and insurance regulators as well," he added.
The BSP has sought support from industry bodies such as the Malaysia-based Islamic Financial Services Board (IFSB), of which the central bank is an associate member.
Last October, the IFSB signed a five-year agreement with the Manila-based Asian Development Bank (ADB) to promote Islamic 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 finance conference in Manila in November. (Editing by Kim Coghill)