THE Bangko Sentral ng Pilipinas (BSP) is moving to make it easier for banks to issue sukuk as it seeks to accelerate the development of the country’s Islamic finance market and deepen the domestic capital market.
In a draft circular, the central bank said they adopt a flexible regulatory framework for issuance of Sukuk as “an Islamic alternative to bonds by eligible banks to promote Islamic finance in the Philippines and support efforts to deepen the domestic capital market.”
Under the proposed guidelines, Islamic banks, Islamic banking units, and conventional banks may originate or issue sukuk for funding or operational purposes without securing prior Monetary Board approval, provided they meet the required prudential standards and comply with regulations of the Securities and Exchange Commission (SEC).
Banks would instead be required to notify the BSP within five banking days after the sukuk issuance and submit documents showing compliance with prudential, securities, and Shari’ah requirements.
Sukuk are Shari’ah-compliant financial instruments that represent undivided ownership interests in tangible assets, usufructs, services, projects, or specific investment activities.
Unlike conventional bonds, returns from sukuk are derived from the performance or cash flows of underlying assets or projects rather than interest payments.
“The BSP recognizes that Shari’ah-compliant financial instruments, such as sukuk, widen capital markets options, diversify funding sources, and facilitate the efficient mobilization of capital to productive sectors, including infrastructure and development,” the central bank said.
The proposed rules also seek to expand the pool of banks that can participate in the sukuk market.
The central bank said conventional banks that do not operate an Islamic banking unit or have quasi-banking authority would be allowed to originate or issue sukuk, although they would be limited to private offerings or equivalent negotiated issuances.
For other eligible banks, the framework would allow sukuk to be issued without prior BSP approval, subject to compliance with the prudential criteria under the Manual of Regulations for Banks and applicable SEC rules.
The BSP said the simplified framework would make it easier for banks to use sukuk as another source of funding while maintaining regulatory safeguards.
However, the central bank would continue to require prior Monetary Board approval for sukuk that banks intend to recognize as regulatory capital.
Islamic banks and conventional banks with Islamic banking units may issue sukuk for recognition as Additional Tier 1 or Tier 2 capital, provided the instruments meet the eligibility requirements under the BSP’s risk-based capital framework.
The distinction means that sukuk intended simply to raise funds or support bank operations would no longer require prior Monetary Board approval, while those intended to strengthen a bank’s regulatory capital would remain subject to the additional approval process.
The proposed circular also introduces incentives intended to encourage both the issuance and investment of sukuk.
One of these is an additional single borrower’s limit equivalent to 15 percent of a bank’s net worth. The additional capacity would be available for five years from the effectivity of the circular and is intended to encourage banks to participate in sukuk investments and financing transactions.
The BSP is also proposing a zero-percent reserve requirement on sukuk issuances during the applicable regulatory incentive period.
Under the proposed amendments to the reserve requirement rules, the zero percent rate would apply to all types of sukuk during the first three years from the effectivity of the circular.
For sustainability sukuk, the zero-percent reserve requirement would be available for the first five years.
After the applicable incentive period ends, outstanding and new sukuk issuances would become subject to the reserve requirement applicable to other bonds.
“These measures support the development of the Philippine sukuk market by reducing issuance and funding constraints, expanding financing capacity, and encouraging greater bank participation,” the central bank said.
The proposed framework also recognizes the potential of sukuk to broaden the country’s investor base.
The central bank said sukuk can provide public and private sector entities with a flexible funding mechanism while allowing issuers to diversify their funding sources and gain access to new pools of capital.
The framework specifically recognizes the potential of green sukuk and environmental, social and governance-linked sukuk to help issuers access global ESG capital markets and respond to demand for impact investing and ethical finance.
Sustainable sukuk would cover Shari’ah-compliant instruments whose proceeds are used exclusively to finance or refinance eligible green or sustainable projects and activities, including transitional activities related to decarbonization.
The proposed rules would require banks issuing green, social, sustainability, or other sustainable sukuk to comply with relevant SEC guidelines and BSP disclosure requirements.
To ensure regulatory oversight despite the streamlined approval process, banks would have to submit several documents to the BSP after issuing sukuk.
These include a written notice of the issuance, evidence of compliance with SEC notification and disclosure requirements, a corporate secretary’s certificate confirming board approval, and certifications from the bank’s president or equivalent officer and chief compliance officer.
Banks would also have to secure certification from their Shari’ah Advisory Council or designated Shari’ah adviser or consultant confirming that the sukuk complies with Shari’ah principles.
The final offering document or prospectus and other transaction documents would likewise have to be submitted to the BSP. Niña Myka Pauline Arceo
