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SHARIAH SUPERVISION IN THE PHILIPPINES

Islamic Finance is a form of finance that is based on Shariah or body of Islamic Law (Abdullah
and Chee 2010). Shariah is comprised of the Holy Qur’an (the sacred book in Islam) and the
Sunnah (the deeds of the Prophet Muhammad, peace be upon him) which are both sent as a
mercy and guidance towards the righteous path. Muslims are expected to comply with these
divine instructions in all aspects of life. In the context of economic activities, compliance with
Shariah is often discussed in terms of prohibitions against riba (interest), gharar (excessive
uncertainty), and maysir (gambling). Shariah compliance is a unique attribute of the Islamic
finance industry which distinguishes it from the traditional interest-based finance.
The Shariah component is considered the backbone of the Islamic finance industry. Without
Shariah compliance, the entire industry may lose its credibility, collapse, and eventually cease
to exist. Therefore, it is imperative for the financial institutions to ensure compliance with
Shariah rules and principles in all its activities and at all times. To do this, the institutional
arrangements which ensure Shariah compliance must be established. This arrangement is
collectively called a Shariah governance regime and is comprised of functions such as Shariah
audit, Shariah review, Shariah research, and Shariah supervision.
Shariah supervision is considered one of the essential components of the Shariah governance
system because it pertains to the Shariah Board or the authority tasked to perform the
functions which guarantee Shariah compliance. The Shariah Board is a group of Muslim
scholars/jurists with Shariah background and expertise in fiqh muamalat (Islamic commercial
jurisprudence) and usul fiqh (Rules of Islamic jurisprudence). However, in practice, it is allowed
for Shariah Boards to have non-Shariah members in the minority. Shariah supervision exists
at both the national and organizational levels.
At the organizational level, the financial institution’s Shariah compliance is maintained by an
in-house/internal/organizational Shariah Board. The functions of the Shariah Board include,
among others: (1) examination of the activities, contracts, and operations, (2) approval of
products and services before their implementation, and (3) rendering an opinion on the
Shariah compliance of the institution. These functions ensure that the operations of a financial
institution offering Islamic financial services will not violate the principles of Shariah. At the
national level, the regulators maintain a central and overall Shariah authority which is
considered an external/national/regulatory Shariah Board. The functions of the national
Shariah authority often include harmonization of standards, product approval, higher Shariah
supervision, and conflict resolution on Shariah issues.
In the absence of Shariah supervision, distortions in the operations of Islamic financial
institutions may occur. These distortions may be in the form of product approvals with
questionable Shariah compliance or through preference of debt-based arrangements over
risk-sharing, equity-based products. The institution may tend to approve a financial product
on the basis of possible returns instead of its Shariah compliance. In the worst case, the
institution may engage in ‘fatwa-shopping’ or the hiring of Shariah advisors who guarantee
favorable Shariah opinions on products and services. At the same time, the institution may
proliferate debt-based products due to their predictable returns, instead of the equity-based
products which are more attuned with Shariah principles. At the industry level, the lack of
oversight can result in a conflict of interest and independence issue because some Shariah
advisors may simultaneously sit in an unrestricted number of Shariah Boards. When these
factors invade the Islamic finance industry, the reputation of Islamic financial institutions will
be tarnished, and the public may lose confidence in Islamic finance. Therefore, to mitigate
these occurrences, Shariah supervisory mechanisms must be established, especially in the
Philippines where Islamic finance is at the nascent stage.
Based on existing literature, Table 1 shows the jurisdictions which opted for two-tier (national
+ organizational) Shariah supervision. A robust or comprehensively detailed two-tier structure
is believed to be more conducive for a healthy Shariah compliance environment than a passive
(with less detail) structure. There are also jurisdictions which adopted the one-tier Shariah
supervisory model. Iran and Sudan only have a national level authority because their entire
financial system is based on Shariah. In the case of the UK, Turkey, and the KSA, all three

This document is intended exclusively for information of stakeholders specifically identified by the
researcher, Jam Abu Dharr P. Usman.
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jurisdictions neither have regulations on Islamic banking and finance nor Shariah supervision.
The market players initiate the desire for Shariah compliance in these jurisdictions.
In the Philippines, the application of Shariah supervisory regulations under R.A. 6848 is
restricted only to the Amanah Islamic Bank. In Republic Act 11054 (Organic Law of BARMM),
the key organizations (i.e., NCMF, Bangsamoro Govt, BSP and DOF) have the responsibility
to promote the establishment of a regulatory Shariah authority (i.e., Shariah Supervisory
Board). The law also mandates the BSP to determine the type of organizational structure to
be created and its composition. On the other hand, there are no existing laws for organizational
Shariah boards; however, there are pending bills (i.e., SB 2105 and HB 8281) in Congress
which recommend for a mandatory Shariah Advisory Council for all Islamic banks. To date,
there are no functional Shariah authorities in the Philippines at both the national and
organizational levels.
Based on the existing law and the pending bills, the trajectory of Shariah supervision in the
country can be described as moving towards a two-tier model. More than the model, the
jurisdiction must also discuss the other important aspects related to Shariah authorities:
(1) Size of the Shariah board considering the availability of qualified Shariah scholars,
not to mention the expensive services of Shariah advisors;
(2) Competency requirements of Shariah advisors which are generally stated in terms
of knowledge in fiqh muamalat, usul fiqh, and sometimes Islamic finance;
(3) The duties and responsibilities which can include product approval, review and
examination of records, issuance of a fatwa or religious rulings, and
(4) The binding effect of the resolution issued by the Shariah authority among the
financial institutions, as well to the court and arbitrator.
(5) Other than Islamic banks (e.g., Amanah Islamic Bank), other institutions are offering
Islamic financial services (e.g., CARD-MRI, ASA Philippines) which also require
supervision to safeguard the overall interest of Shariah.
Table 1. Model of Shariah Supervision based on Regulatory Requirement 1

COUNTRY NATIONAL ORGANIZATIONAL TYPE OF SYSTEM APPOINTING BODY

LEVEL LEVEL FOR NATIONAL
LEVEL
Philippines ✔ ✖ One-tier ?
Kuwait ✔ ✔ Two-tier (Passive) Ministry2
Qatar ✔ ✔ Two-tier (Passive) Ministry
Malaysia ✔ ✔ Two-tier (Robust) Central Bank
UAE ✔ ✔ Two-tier (Passive) Ministry
Jordan ✔ ✔ Two-tier Ministry
Bahrain ✔ ✔ Two-tier (Robust) Central Bank
Pakistan ✔ ✔ Two-tier (Robust) Central Bank
Indonesia ✔ ✔ Two-tier Ministry
Mauritius ✔ ✔ Two-tier Central Bank
Syria ✖ ✔ One-tier N/A
Iraq ✖ ✔ One-tier N/A
Iran ✔ ✖ One-tier Constitution
Sudan ✔ ✖ One-tier President
KSA ✖ ✖ N/A (Market Driven) N/A
Turkey ✖ ✖ N/A (Market Driven) N/A
UK ✖ ✖ N/A (Market Driven) N/A
Note: /1 Adapted from Grassa, R. (2015) and Ahmed, H. (2011) with modifications
/2 All Ministry refers to Ministry handling Islamic Affairs, Awqaf, and Justice.

This document is intended exclusively for information of stakeholders specifically identified by the
researcher, Jam Abu Dharr P. Usman.
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KEY INFORMANT : ABDULMALIK POLAO LAGUINDAB

INSTITUTION : Markazosshabab Al-Muslim Fil-Filibbin Foundation, Inc.
TYPE/SPECIFIC : Private

A. BACKGROUND
Islamic Finance in the Philippines officially began in 1974 when the Presidential
Decree (PD) No. 525 amended PD 264 and instituted the Islamic banking concept (no
interest and partnership principles) into the Philippine Amanah Bank (PAB). In 1990,
the PD 525 was repealed by Republic Act (RA) No. 6848. The new law retained the
Islamic banking concept but changed, among others, the name of the bank from PAB
to ‘Al-Amanah Islamic Investment Bank of the Philippines’ (AAIIBP). Essentially, the
AAIIBP (previously PAB) became the first Islamic bank in the Philippines in 1974.
The narrative in the Philippines describes the AAIIBP not only as the first Islamic bank
in the country but as the first in the world since its predecessor (the PAB) was
fundamentally created a year ahead of the presently recognized first Islamic
commercial bank in the world, the Dubai Islamic Bank (1975). Moreover, the would-
have-been first-mover advantage of the Philippines was even more evident when
compared to its Muslim-dominated regional peers who only had their Islamic banking
at later years, such as Malaysia (1983), Indonesia (1992), and Brunei (2002). More
than four decades later, the Philippines is still at the nascent stage of this multi-trillion
industry, while its peers rose to become global leaders in Islamic finance.
In recent years, Islamic banking and finance gained traction when key organizations
such as Bangko Sentral ng Pilipinas (BSP), AAIIBP, Anak Mindanao, and other
institutions have spearheaded the amendment of the RA 6848 (AAIIBP Law) and the
creation of an Islamic finance framework for developing the long-dormant Islamic
finance industry. These initiatives gave life to SB 2105 and HB 8281 which viewed
Islamic finance as an avenue towards achieving several concerns: the development
of the Bangsamoro Region, the promotion of greater financial inclusion, and the
institution of linkages with Islamic markets across the Middle East and South East
Asia.
Given the preceding statutory initiatives, there is a growing clamor for parallel efforts
to speed up the development of the Islamic finance industry. One of the main factors
identified as hindering this development, other than the absence of a regulatory
framework, is the lack of an authoritative body which can certify the Shariah
compliance of financial products and services. Accordingly, an initiative to create a
Mindanao Shariah Board (MSB Initiative) that can provide Shariah-compliance
certifications/opinions to those who are interested in participating in the Islamic
finance industry came to be. Indeed, the concept is well-intended and is certainly a
breath of fresh air after more than 40 years of inactivity in the Philippine Islamic finance
industry; however, the idea raises crucial issues on Shariah supervision in the
Philippines (explained in a separate document) which require thoughtful
consideration.

B. SURVEY QUESTONS
Please refer to the attached Excel File to the Survey Questions.

This document is intended exclusively for information of stakeholders specifically identified by the
researcher, Jam Abu Dharr P. Usman.