BSP Eyes Incentives to Boost Sukuk Market Development

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is proposing to ease bank fundraising through Islamic financial instruments and offer temporary regulatory incentives to help develop the domestic market. Under a draft circular, eligible banks will be allowed to issue sukuk for funding or operational purposes without prior BSP approval. Sukuk are the Islamic alternative to bonds, representing investors’ ownership interests in underlying assets, rights to use assets or investment activities consistent with Shari’ah or Islamic law. Returns come from the performance or cash flows of the underlying assets or projects rather than interest payments. The proposal seeks to broaden banks’ funding sources and channel more money into productive sectors, including infrastructure and development. “Sukuk issuance enables diversification of funding sources, expansion of investor base and access to new pools of capital, thereby promoting economically strategic and socially inclusive financing,” the draft said. Banks have to notify the BSP within five banking days after issuance and submit supporting documents. These include proof of board approval, certifications of regulatory and Shari’ah compliance and the final offering and transaction documents. Conventional banks without an Islamic banking unit or quasi-banking authority, which permits certain forms of borrowing from the public for relending, will be limited to private offerings or equivalent negotiated issuances. The draft defines a private offering as a sale to no more than 19 investors without a public offering. To encourage investment, the BSP proposes additional room equivalent to 15 percent of a bank’s net worth under the single borrower’s limit for five years from the circular’s effectivity. This limit caps a bank’s exposure to one borrower to prevent excessive concentration of risk. The additional allowance will expand banks’ capacity to take on sukuk-related investments and financing transactions. Qualifying exposures outstanding when the incentive expires can be maintained under their existing terms until maturity. The proposal will also set a zero-percent reserve requirement on sukuk issuances for the first three years, extending to five years for sustainability sukuk. This will remove the requirement to set aside reserves against the covered funding during those periods. Sustainable sukuk fund eligible green or sustainable projects and activities, including efforts to reduce carbon emissions. After the applicable incentive period, both outstanding and subsequent sukuk issuances will become subject to the reserve requirement for other bonds. A separate approval process will remain for sukuk intended to count as regulatory capital, the financial cushion banks must maintain to absorb losses. Islamic banks and conventional banks with Islamic banking units seeking to classify sukuk as additional Tier 1 or Tier 2 capital still need prior Monetary Board approval and must meet the corresponding capital eligibility requirements. The proposal will allow qualified financial institutions or investment banks affiliated with the issuer to arrange, manage or underwrite the offering, including handling its distribution and sale. The affiliation must be disclosed to investors and safeguards must address potential conflicts of interest. “The originator or issuer bank shall be prohibited from holding or acting as market maker of its own listed or traded sukuk,” the draft said. A market maker supports trading by offering to buy and sell a security. Banks will also remain subject to customer checks under anti-money laundering rules and requirements for managing their ability to meet foreign currency obligations. Source: Philstar Business