The Philippines is on a quest to reignite Islamic finance as RADHIKA MADANA MOHAN discovers.

The Philippines economy grew 7.3% in the first quarter of 2010, reaching a 22-year high. Should the country maintain this stellar growth, it is set to end the year on a positive note.

Agost Benard, credit analyst at Standard & Poor’s, believes pre-election spending was responsible for this growth, but is dubious about the next quarter mimicking this trend.

Although it might seem that the country had avoided the recession that gripped most industrialized nations, the downturn still reduced domestic consumption, exports and capital inflows.

Experts forecast the global economy’s recovery from crisis will soon encourage consumers and businesses to increase spending; hence, enabling an increase for external demand and improving the nation’s economic growth.

How then, has Islamic banking fared in the republic? Islamic banking assets are said to still be relatively negligible compared to global figures, and the acquisition of Al Amanah Islamic Bank by the Development Bank of the Philippines proved two points: A lack of demand for Islamic banking products and the government’s willingness to endorse, but not boost this sector.

Not all is lost

In the past, there was no legal definition on what Islamic banking meant in the Philippines. As a result, the first Islamic bank created in 1973, Philippine Amana Bank, was poorly received. The bank was accused of pretense — disguising itself as an Islamic financial institution and subsequently failed to take off.

The bank’s fortunes changed in 1989 as it was re-chartered, re-capitalized and renamed the Al-Amanah Islamic Investment Bank of the Philippines with a capital of PHP1 billion (US$21.6 million).

Finally in 2008, the government-owned Development Bank of the Philippines (DBP) acquired Al-Amanah.

The central bank, Bangko Sentral ng Pilipinas, has also allowed Al-Amanah to retain a conventional banking license for the next five years to enable it to establish stronger financial footing, and the bank has committed to gradually minimize the ratio of conventional banking as its Islamic banking activities strengthen.

Al-Amanah, however, which has yet to see any profit, is still chasing its current goal to decrease losses and build its infrastructure. Armando Samia, chairman and CEO of Al-Amanah added that the upgrading of operational systems and training on Islamic banking operations takes time, and these are costly measures.

Sukuk on hold

In February, the Philippines had hoped to issue its first ever Sukuk worth around US$500 million. This did not transpire. Strangely, the country’s sole Islamic bank was not planning on being involved. However, Samia explained the bank’s reluctance to be involved in the Sukuk was due to timing discrepancies. He believes that the time is still not right for such an issuance, and the bank is looking to be involved in larger issuances. “Once we have the projects coming in, probably that’s the time to issue a Sukuk,” he added.

The bank has also recently signed a deal with oil refiner Petron Corporation, a joint venture offering dealership to small and medium business entrepreneurs.

According to the program, Al-Amanah will finance project sites acquisitions and capital expenditures.

What the future holds

Islamic banking in the Philippines is relatively far from being a self-sustaining industry. However, the CEO of Al-Amanah hopes to see progress in the next five years: “We hope the bank would have established itself as an Islamic financial institution and received interest from investors, especially from the Gulf or Malaysia.

The investors’ experience in the Islamic finance industry would certainly be an asset to the Philippines.”

Moving forward, the country is motivated by its growing Muslim population consisting of 9 million of the approximate 94 million people, most of whom are located in Mindanao.

There is however, still a need for education as well as infrastructure development. Nonetheless, the mood is upbeat. As Samia puts it: “Everybody wants to do it and we’re trying our best to make this work.”