Islamic Finance - what next?

Almost exactly one year ago, Noel Bonoan and Aaron Lim published an article entitled “Why not Islamic finance?” in this KPMG CORNER. The article summarizes the potential opportunities of Islamic finance while at the same time mindful of the hurdles currently in the Philippine fiscal and regulatory regime.

In trying to understand and flesh out some of these hurdles, Manabat Sanagustin and Co., CPAs (MS&Co.), the Philippine member firm of KPMG International, partnering with the British Embassy in Manila organized a forum on Islamic finance entitled “Enabling Islamic Finance in the Philippines” on March 8, 2012. The forum was well-attended by over 50 participants from diverse background including the banking industry, Muslim organizations, members of the academe, the Philippine government represented by the Department of Finance, Bureau of Internal Revenue (BIR) and the Bangko Sentral ng Pilipinas (BSP) as well as global experts in this arena.

The general consensus during the RTD was that now is a good time for the Philippines to start considering Islamic finance – and any necessary changes are achievable! Neil Miller, KPMG global head of Islamic finance and a UK national, emphasized that similar struggles existed when the UK attempted to introduce Islamic finance and it took the Bank of England over a period of more than six years to introduce Islamic finance – clearly not a short timeframe. Comparison with the UK is relevant as it was able to position itself as the global Islamic center without compromising on its state and religious identity – something the Philippines can aspire to, as well. Neil was one of the initial members of a working group tasked with establishing Islamic finance in the UK.

Being a member of the UK Treasury Committee of Islamic Finance Experts and Financial Services Authority Committee on Islamic Finance, Neil worked closely with the Muslim Council of Britain and other bodies to promote and develop Islamic finance in the UK. The message was clear – UK was able to successfully introduce Islamic finance because of the presence of a driving political will, most crucially demonstrated by the then governor of the Bank of England (the late) Sir Eddie George. Identifying such a person who embraces and understands Islamic finance will be key to achieving the same development in the Philippines.

Such person will also need to have a strong understanding of Philippine tax, often mentioned as one of the main hurdles to Islamic finance in the Philippines. Noel Bonoan, former undersecretary of Finance and current vice chair of MS&Co.’s tax division, compared the possible taxes likely to be incurred on conventional bonds and Sukuk bonds. As an example, consider a three-year conventional bond that pays interest at five percent annually, and a typical Ijarah or lease-type Sukuk with face value of P1 million. Other assumptions include a fair market value of P1 million for a real property and a three-year lease agreement with an annual payment of P50,000.