February 9, 2015, Lecture on The Prospect of Islamic Finance in the Philippines by NCMF Commissioner MEHOL K. SADAIN held at NCMF Social Hall, Central Office.

1. THE PROSPECT OF
ISLAMIC FINANCE IN THE PHILIPPINES
MEHOL K. SADAIN
Commissioner
NCMF
February 9, 2015

2. Definition of Terms
• Finance is the science or study of
management of funds; the system that
includes the circulation of money, the
granting of credit, the making of investments,
and the provision of banking facilities.
• Economics is the analysis and description of
the production, distribution and consumption
of goods and services.
[Webster’s Ninth Collegiate Dictionary]

3. What is Islamic Finance?
“Islamic finance is based on the principle that the
provider of capital and the user of capital should equally
share the risks of business ventures. It encourages
sanctity of contracts, sharing of risks, prohibition of
interest and speculative trading, and gambling. Islamic
theories of finance encourage earnings through
participation in business activities, and discourage the
avenues of unearned income.”
[Salahuddin Ahmed. Islamic Banking, Finance and Insurance, 2006]

4. ISLAMIC
INVESTMENT
ISLAMIC
BANKING
ISLAMIC
INSURANCE
THE ISLAMIC FINANCE TRIUMVIRATE

5. Distinguishing Feature
of Islamic Finance
• The most obvious, says Mahmoud El-Gamal, is the
“central importance of Islamicity certification (also
called Shari’ah compliance) of the various contracts.
[from Islamic Finance: Law, Economics and Practice, 2006]
• Islamic Finance is a value-based financial system and
brings to fore the importance of Islamic business
ethics.
“Give full measure when you measure and weigh with a
balance that is straight: that is the most fitting and most
advantageous in the final determination.” [17:35]

6. From “Working with Islamic Finance”
by Marc L. Ross
• Islamic finance refers to the means by which corporations in
the Muslim world, including banks and other lending
institutions, raise capital in accordance with Shari’a… A
unique form of socially responsible investment, Islam makes
no division between the spiritual and the secular…
• Although mandated since the beginning of Islam, Islamic
banking and finance have been formalized gradually in the
late 60s coincident with and in response to the tremendous
oil wealth which fueled renewed interest in and demand for
Shari’a compliant products and practice.

7. Modes of Islamic Finance
• MUDARABAH (Profit Sharing or Trust Financing)
• MUSHARAKAH (Partnership Financing)
• MURABAHA (Mark-Up Financing/Credit Sale)
• IJARA (Leasing)
• ISTISNAA’ (Manufacturing Contract)
• ISLAMIC SECURITIZATION (Sukuk/Shari’ah Compliant
Securites/Bonds)
• QARD HASAN (Benevolent Loan)

8. Mudarabah or
Profit Sharing/Trust Financing
• 100 percent capital from one party and 100 percent
management/labor from the other party
• Mudarib manages without interference by capitalist,
except in the monitoring aspect
• Financial loss borne by capitalist/investor
• Does not provide guaranteed amount as return
• Prophet Muhammad (SAW) was a mudarib for the
capital provided by Khadijah who later became his
wife.

9. Musharakah or Partnership Financing
• A joint enterprise or partnership with profit-
loss sharing implications that is used in Islamic
finance instead of interest-bearing loans.
[investopedia.com]
• Partnership to carry out specific project,
usually for a limited period
• All parties contribute to financing and profits
and losses are shared according to equity [S.
Ahmed]

10. Murabaha or Credit Sale
• A popular financing product in the nature of a contract of
sale, where an intermediary (usually the bank or creditor)
buys a property, and then the intermediary and prospective
buyer agree upon a sale price (with an agreed profit for the
intermediary), and payment is made through installments or
by lump sum payment.
• In short, the bank purchases goods on behalf of clients and
later sells them at a marked up price
• Murabaha is not an interest-bearing loan, but an acceptable
form of credit sale where the financier retains ownership of
property until the loan is paid in full.

11. Ijara or Lease
• Ijara means to give something on rent. The client
selects the asset to be financed by the financial
institution, and the financial institution purchases
the asset and leases it to the client for a fixed period.
• Applies to costly assets or things, which the
borrower cannot afford. The bank buys the asset and
leases it to the borrower for monthly payments
totalling cost of purchase plus profit.

12. Istisna or Manufacturing Contract
• A pre-production financing tool where a manufacturer is
ordered to produce a specific commodity
• Price and specifications are fixed
• Payment is usually deferred
• In Istisna the subject matter is always something that needs
to be manufactured, in salam, it is anything that can be
specified
• In Istisna, the manufacturer obtains the material and does the
work to produce the item, in Ijarah, the customer provides
the material and the manufacturer employs labor and skill
only.
• Istisna is for manufactured good and labor to manufacture it,
while ju’ala is for labor only or for a specific work.

13. Islamic Securitization
• Done by converting illiquid assets into marketable securities,
and is an ideal financing tool for emerging markets (Sukuk)
• Securitization has to be Shari’ah compliant
• Shari’ah compliance for stocks/bonds is based on:
 Business activity must not be prohibited in Islam [Prohibited income screen]
 If prohibited activity is but a part of the business, its total revenue from such
prohibited business must not exceed 5% [sum of interest earned and revenue
divided by total income]
 Financial ratio-based screen: Total cash, deposits and receivables divided by
immediately preceding 12-month average total market capitalization cannot
exceed 70% [avoidance of gharar], and total cash, deposits and interest-bearing
securities divided by the immediately preceding 12 month average total market
capitalization cannot exceed 33% [avoidance of riba].
 Dividend Purification – investor gives in charity the portion of income deemed
impure.

14. Qard Hasan
• Means “Good Loan” and is based on the
Qur’anic verse which says: “If you lend to
ALLAH a good loan, He will multiply it for
you.” [64:17]
• An interest-free loan for financing welfare
projects or fulfilling short-term requirements.
Borrower only pays the principal amount, but
he may pay an additional amount, as a token
of appreciation, if he may so desire.

15. Islamic Banking
• A banking system that is based on the principles of
Islamic law and guided by Islamic economics. Two
basic principles behind Islamic banking are the
sharing of profit and loss, and the prohibition of
payment of interest.
• All undertakings of the Islamic bank follow Islamic
morals or Islamic business ethics, making it a form of
ethical investing. [investopedia.com]

16. Islamic Banking in the Philippines
• In the Philippines we have the Al Amanah Islamic Investment Bank of the
Philippines created under R.A. 6848 which repealed P.D. 264 as amended
by P.D. 542 (Creating the Philippine Amanah Bank)
• The AAIIB is mandated to accept investment account placements and
invest the same in Islamically permissible transactions on participation
basis [Sec. 6 (7.c). R.A. 6848]
• It can also undertake various investments in all transactions allowed by
Islamic Shari’a is such a way that shall not permit the haram (forbidden)
nor forbid the halal (permissible). [Sec. 6 (7.l)]
• It can likewise carry out financing and joint investment operations by way
of mudarabah partnership, musharaka joint venture … murabaha
purchasing for others on a cost-plus financing arrangement, and to invest
funds directly in various projects whose owners desire to invest jointly
with other resources of the bank, on a joint mudarabah.

17. Islamic Insurance
• Islamic insurance or Takaful according to the
website Investopedia is “a type of Islamic
insurance where members contribute money
into a pooling system in order to guarantee
each other againt loss or damage.
• Takaful is an alternative to commercial
insurance, and goes against riba (interest), al-
maisir (gambling) and al-gharar (uncertainty)

18. The Shari’ah Advisory Council
• There is a need for a National Shari’ah Advisory Council to,
among others, formulate fatwa on questions and issues in
Islamic finance.
• The Shari’a Advisory Council is also mentioned in R.A. 6848
[Sec. 4] as composed of five (5) members selected from
among Islamic scholars and jurists of comparative law “to
offer advice and undertake reviews pertaining to the
application of the principles and rulings of the Islamic Shari’a
to the Islamic Bank’s transactions, but it shall not directly
involve itself in the operations of the bank”.

19. Strides in Philippine Shari’ah
Compliant Bonds
• There are now more than sixty (60) Shari’ah
compliant bonds being traded in the
Philippine Stocks Exchange.
• The evaluation is being done by IdealRatings
which offers services in Shari’ah screening,
purification, fund and index management, and
identify and manage Shari’ah compliant
equities, funds and sukuk.

20. The Need for Market Regulations
• The need for local laws on Islamic Banking or
Islamic Finance in general
• “You are the best of peoples, evolved from
mankind, enjoining what is right and
forbidding what is wrong and believing in
ALLAH.” [3:110]
• Hisbah (Morality, Ethics and Accountability in
Enjoining Right and Forbidding Wrong)

26. Rabbi zidhnee ‘ilma
As-salaamu alaikum