BSP dangles incentives to boost sukuk market

The Bangko Sentral ng Pilipinas (BSP) is considering easing bank fundraising through Islamic financial instruments and providing temporary regulatory incentives to promote the domestic market for sukuk. These sukuk, akin to bonds, represent ownership interests or rights to assets, consistent with Islamic law. They generate returns from asset performance or cash flows, unlike traditional interest payments.

The proposal aims to diversify funding sources, expand the investor base, and channel more capital into productive sectors such as infrastructure and development.

Banks must inform the BSP within five banking days of issuance, submitting supporting documents such as board approval, regulatory and Shari'ah compliance certifications, and final offering and transaction documents. Conventional banks without Islamic banking units or quasi-banking authorities can only engage in private or negotiated offerings.

To incentivize investment, the BSP suggests allowing banks to issue up to 15 percent more sukuk than their net worth limit for five years from the circular's implementation. This expanded capacity will enable banks to take on more sukuk-related investments and financing. The reserve requirement for sukuk issuances will be zero for the first three years, extending to five years for sustainability sukuk, eliminating the need to set aside reserves for those periods.

After the incentive period, all sukuk issuances will be subject to the standard reserve requirement. However, sukuk intended to serve as regulatory capital will require separate approval and must meet capital eligibility requirements. Qualified financial institutions or investment banks affiliated with the issuer can arrange, manage, or underwrite the offering, but must disclose their affiliation and address potential conflicts of interest.

Banks will continue to be subject to anti-money laundering rules and requirements for managing foreign currency obligations.