ISLAMIC BANK OF THE PHILIPPINES

Literature Review
Amanah Islamic Investment Bank of the Philippines (AIIBP), the forerunner of AIB, is the only
bank in the Philippines authorized to offer Islamic banking products and services that adhere to
the principles of Shari’ah. AIIBP was first established as Philippine Amanah Bank by virtue of
Presidential Decree No. 264, which requires this bank to invest 75% of its loan funds to provide
reasonable medium and long-term credit facilities, among others, to people from Muslim-
dominated provinces in the southern region of the country. At present, this bank has nine
branches, eight of which are in Mindanao. Of the eight branches, those branches located in
Cagayan de Oro City, Cotabato City, General Santos City, Jolo, Zamboanga, and Makati have
been refurbished.
In 1974, AAIIBP was directed to implement the Islamic model of banking and financing, which
follows the “no interest principle” and partnership mechanisms. In 1990, AAIIBP became a
primarily Islamic bank with the signing of Republic Act No. 6848, otherwise known as the
Charter of AAIIBP. Subsequently, AAIIBP was rebranded as AIB. The mandate of AIB is to
promote and accelerate the socioeconomic development of the Autonomous Region in Muslim
Mindanao (ARMM) through banking, financing, and investment operations, as well as to
establish and participate in agricultural, commercial, and industrial ventures based on the Islamic
concept of banking. In 1989, AIB was re-chartered and re-capitalized pursuant to Republic Act
No. 6848, with a capital of one billion pesos. The Philippine government attempted to privatize
AIB in 2000 after it began incurring losses in the mid-1990s.
In 2009, the Monetary Board of the Philippines approved AIB’s five-year Rehabilitation Plan,
which focused on four corporate strategies (4Rs): recapitalization, capital infusions from DBP
and domestic and foreign investors that aimed to cover the expenses of AIB’s rehabilitation;
restoration of financial viability, which focused on aggressive marketing effort to introduce
AIB’s new products and services, liquidation of non-performing assets, and sourcing of
contingent funds; reorganization, which centered on building institutional capacity, particularly
with regard to Shari’ah compliance, and involved organizational structuring, relocation,
refurbishing of bank offices, expansion, and automation; and reforms institutionalization, which
entailed the strengthening of corporate culture and governance, monitoring system, risk
management and audit system, and review of product and operating manuals.
CORPORATE POWERS

Under RA 6848, The Al-Amanah Islamic Investment Bank of the Philippines, upon its
organization, shall be a body corporate and shall have the power:

1. To prescribe its bylaws and its operating policies;

2. To adopt, alter and use a corporate seal;

3. To make contracts, to sue and be sued;

4. To borrow money; to own real or personal property and introduce improvements, and to
sell, mortgage or otherwise dispose of the same;

5. To employ such officers and personnel, preferably from the qualified Muslim sector, as
may be necessary to carry Islamic banking business;

6. To establish such branches and agencies in provinces and cities in the Philippines,
particularly where Muslims are predominantly located, and such correspondent offices in
other areas in the country or abroad as may be necessary to carry on its Islamic banking
business.

7. To act as an official government depository, or its branches, subdivisions and

instrumentalities and of government-owned or controlled corporations, particularly those
doing business in the autonomous region;

8. To issue investment participation certificates, muquaradah (non-interest-bearing bonds),

debentures, collaterals and/or the renewal or refinancing of the same, with the approval of
the Monetary Board of the Central Bank of the Philippines, to be used by the Bank in its
financing operations for projects that will promote the economic development primarily
of the Autonomous Region;

9. To carry out financing and joint investment operations by way of mudarabah partnership,
musharaka joint venture or by decreasing participation, murabaha purchasing for others
on a cost-plus financing arrangement, and to invest funds directly in various projects or
through the use of funds whose owners desire to invest jointly with other resources
available to the Islamic Bank on a joint mudarabah basis;

10. To perform the following BANKING SERVICES:

a. Open current or checking accounts;

b. Open savings accounts for safekeeping or custody with no participation in profit

and losses except unless otherwise authorized by the account holders to be
invested;

c. Accept investment account placements and invest the same for a term with the
Islamic Bank's funds in Islamically permissible transactions on participation
basis;

d. Accept foreign currency deposits from banks, companies, organizations and

individuals, including foreign governments;

e. Buy and sell foreign exchange;

f. Act as correspondent of banks and institutions to handle remittances or any fund

transfers;
 g. Accept drafts and issue letters of credit or letters of guarantee, negotiate notes and
bills of exchange and other evidence of indebtedness under the universally
accepted Islamic financial instruments;

h. Act as collection agent insofar as the payment orders, bills of exchange or other
commercial documents are exclusive of riba or interest prohibitions;

i. Provide financing with or without collateral by way of leasing, sale and leaseback,
or cost plus profit sales arrangement;

j. Handle storage operations for goods or commodity financing secured by

warehouse receipts presented to the Bank;

k. Issue shares for the account of institutions and companies assisted by the Bank in
meeting subscription calls or augmenting their capital and/or fund requirements as
may be allowed by law;

l. Undertake various investments in all transactions allowed by Islamic Shari'a in

such a way that shall not permit the haram (forbidden), nor forbid the halal
(permissible);

11. To invest in equities of the following allied undertakings:

a. Warehousing companies;

b. Leasing companies;

c. Storage companies;

d. Safe deposit box companies;

e. Companies engaged in the management of mutual funds but not in the mutual
funds themselves; and

f. Such other similar activities as the Monetary Board of the Central Bank of the
Philippines has declared or may declare as appropriate from time to time, subject
to existing limitations imposed by law;

FEATURES OF ISLAMIC BANKS AND ISLAMIC BANKING CONTRACTS

The features of Islamic banking include:

1. The relationship between the bank and its customer is not one between a debtor and a
creditor; rather, it means sharing risks and rewards.
2. An Islamic bank keeps separate accounts for its own capital and deposits to avoid mixing
its own share of profits with those belonging to depositors and distributes them
proportionately according to the profit-and-loss-sharing agreement.
 3. Unlike conventional banks, Islamic banks do not offer cash loans; rather, they grant
facilities based on either Islamic contracts with uncertain returns, such as participation
(Musharakah), Mudarabah, Muzaraah, and Musaghat, or contracts with certain returns,
such as Murabahah, sale on installments, and Ijarah. Deals in the real economy form the
lion’s share of Islamic banking activities, with the bank purchasing the merchandise for
customers and selling it to them against cash or gradual payments with an agreed profit.
4. Islamic banks are multi-purpose institutions. They perform the roles of commercial,
investment, and development banks. Based on its resources, an Islamic bank is involved
in short-term operations just like a commercial bank or participates in medium- and long-
term investments just like a development bank or a non-bank financial institution.
5. Islamic banks are supposed to contribute to the development of the whole society.
Although making a profit is important, it is not the main objective of finance in Islamic
banking. An Islamic bank stresses the realization of socioeconomic goals without any
violation of Shariah law.
6. Islamic banking is based on shares. To mobilize funds, Islamic banks receive term
deposits with uncertain interest rates and then, on behalf of depositors, consolidate these
funds with their own resources to offer facilities to applicants based on contracts with
either certain or uncertain profits. Eventually, they share the realized profits in
accordance with the agreement between the bank and the depositors.
7. An Islamic banking system is supposed to comply with high moral values.
8. In addition to the existing audits conducted in conventional banks, an Islamic supervisory
board usually audits Islamic banks to ensure their compliance with Shariah law while
absorbing funds and making investments; however, this may differ across countries.

SOURCES OF FUNDS

Saving Accounts
Islamic banks also accept saving deposits from individuals. Four different methods of operating
saving accounts by Islamic banks have emerged: (i) accepting saving deposits on the principle of
al wadia requesting the depositors to give the bank permission to use the funds at its own risk,
but guaranteeing full return of the deposits and sharing any profits voluntarily; (ii) accepting
saving deposits with an authorisation to invest and share profits in an agreed manner for the
period in which a required minimum balance is maintained; (iii) treating saving deposits as qard-
e- hasan (benevolent loan) from the depositors to the bank and granting them pecuniary or non-
pecuniary benefits; and (iv) accepting saving deposits into an investment pool and treating them
as investment deposits. Generally speaking, the depositors are given a right of withdrawal
without notice in saving accounts but are not entitled for any share in the profit for the period in
which withdrawal is made.
Investment Accounts
Investment deposits are the Islamic banks’ counterpart of term deposits in the conventional
system. They are also called profit-and-loss sharing (PLS) or participatory accounts. These
accounts could be opened either by individuals or companies for any specified period such as six
months, one year or even longer. The depositors do not receive any interest. Instead, they are
entitled for a share in actual profit accrued from the investment operations of the bank. The
profits are shared by the depositors according to their amounts and the period they are held by
the bank in an agreed proportion.
Joint or General Investment Account
Some Islamic banks establish some kind of an investment pool in lieu of fixed term deposits. The
investment pool takes the form of a general investment account in which investment deposits of
different maturities are pooled together. They are not tied to any specific investment project but
are utilized in different financing operations of the bank. The profits are accounted and
distributed at the end of the period on a pro rata basis.
Limited-Period Investment Deposits
Some Islamic banks also accept investment deposits for a specified period determined by the
mutual consent of the depositor and the bank. The contract may terminate at the end of the period
but profits are distributed and accounted at the end of the financial year.
Unlimited-Period Investment Deposits
These investment deposits are automatically renewable without specifying the period. They
could be terminated by giving a specified notice to the bank. Usually the notice period is three
months. No withdrawals or increases in the amount of deposit are permitted during the period.
Profits are calculated and distributed at the end of the financial year.
Specified Investment Deposits
Some Islamic banks have evolved an investment deposits scheme with specific authorisation to
invest in a particular scheme or a specific trade. In this case the profits of this specific activity
are distributed between the depositor and the bank. In this case the bank works as an agent of the
investor. It may agree to perform this function against an agreed fee or may opt to have a share in
the profit.
Uses of Funds by the Islamic Banks
Islamic financing techniques on the uses of funds side of the balance-sheet marked a more
significant departure from the traditional banking. This is mainly because of the prohibition of
interest rate. Since Islamic banks cannot use lending on interest as a financing device, they were
compelled to find out innovative ways of financing which would not involve interest.
FINANCING TECHNIQUES USED BY ISLAMIC BANKS
Murabaha (Mark-Up Or Cost-Plus-Based Financing)
This is the most popular technique of financing among the Islamic banks.
The client approaches the Islamic bank to get finance for the purchase of a specified commodity.
The bank, either itself or through some agent (who could be the client himself), collects all the
required information about the commodity itself, such as price, nature and specification of the
commodity, names of dealers, etc. The bank informs the client of these details as well as of the
margin it would like to charge on the original price.
When these conditions are acceptable to the client, a contract of murabaha transactions will be
signed between the bank and the client. The bank will purchase the specified commodity from
any seller of its choice paying the price of commodity in cash. In case a sale deed is required
(e.g. in case of car or house) the registration is in the name of the bank. Once the ownership of
the commodity is transferred to the bank, it sells the commodity to the client based on differed
payment basis against an agreed price.
The new price at which the bank sells the commodity to the client includes the original price
(which is cost to the bank) plus the mark-up the bank is charging (which is the profit margin).
The client pays this price either in installment or in lumpsum at an agreed later date. (VIDEO)
Musharakah (Partnership)
Musharakah is another technique of financing used by Islamic banks. In this form, two or more
financiers provide the finance for a project. All partners are entitled to a share in total profits of
the project according to a ratio which is mutually agreed upon. However, the losses are to be
shared exactly in proportion to capital proportion. All partners have a right to participate in the
management of the project. However, they also have the right to waive this right in favour of any
specific partner.
I Jar All (Leasing)
Leasing is also one of the approved method of earning income according to Islamic law. In this
method, a real asset such as a machine, a car, a ship, a house, etc. can be leased by the lessor to
the lessee for a specified period against a specified price. The benefit and cost of each party
should be clearly spelled out in the contract to avoid any element of uncertainty (gharar) with
respect to the responsibility of each party.
Under this scheme of financing, the bank purchases a real asset (the bank may even purchase the
asset as per the specifications provided by the prospective client) and leases it to the client. The
period of lease may be determined by mutual agreement according to the nature of assets. In
general, it may be anywhere between three months to five years or more. During the period of
lease, the asset remains in the ownership of the bank but physical possession of the asset and its
right of use are transferred to the lessee. After the expiry of the lease agreement, these also revert
back to the original owner.
Loans with Service Charge
Some Islamic banks give loans with service charge. However, this fee should be within actual
expenses and any fee in addition to the actual service-related expenses is forbidden because it is
considered to be usurious.

Qard-E-Hasan (Interest-Free Loans)

Most of the Islamic banks also provide interest-free loans to their customers. Practices, however,
differ. Some banks provide the privilege of interest-free loans to the holders of investment
accounts at the bank. Some other banks have the provision to provide interest free loans to needy
students and other economically weaker sections of the society. Yet some other banks provide
interest-free loans to small producers, farmers, entrepreneurs who are not qualified to get
financing from other sources. The purpose of these loans is to help them start independent life or
to raise their income and standard of living.