Philippines Moves to Regulate Its Growing Islamic Banking Sector

When lawmakers in the Philippines began drafting rules for Islamic banking more than a decade ago, the ambition was modest: provide basic financial services to Muslim communities long underserved by the country’s overwhelmingly conventional banking system.

Today, that ambition has quietly expanded.

As demand for Shariah-compliant finance rises—driven by domestic inclusion goals and the pull of global halal capital—the Philippine government is moving to strengthen regulation of Islamic banking, marking a significant shift in how Southeast Asia’s only majority-Catholic nation approaches ethical and faith-based finance.

Related: Maybank Becomes First Commercial Bank to Offer Islamic Banking in the Philippines

From niche experiment to regulated sector

Islamic banking in the Philippines has long existed at the margins. For years, it was represented almost entirely by a single institution, Al-Amanah Islamic Investment Bank, a state-owned lender created to support economic development in Muslim-majority areas of Mindanao. Limited capital, governance constraints, and unclear regulation kept the sector small.

That is now changing.

New regulatory efforts—led by the Bangko Sentral ng Pilipinas (BSP)—aim to create a clearer legal and supervisory framework for Islamic banks and Islamic banking windows. The goal is twofold: to protect financial stability while allowing Shariah-compliant institutions to compete on more equal footing with conventional lenders.

In practice, this means aligning Islamic banking oversight with international standards, clarifying capital requirements, strengthening Shariah governance, and enabling product innovation without regulatory ambiguity.

Financial inclusion, not theology

Officials are careful to frame Islamic banking as an inclusion tool rather than a religious concession.

Roughly 6–7 per cent of the Philippine population is Muslim, concentrated largely in the Bangsamoro Autonomous Region in Muslim Mindanao. In these regions, banking penetration remains low, savings rates lag the national average, and access to credit is limited—particularly for small businesses and farmers.

Islamic finance, with its emphasis on asset-backed lending and risk-sharing, is seen as a way to draw more people into the formal financial system without violating religious principles that prohibit interest.

For the BSP, regulation is essential if Islamic banking is to scale safely. Without clear rules, products risk inconsistency, consumer confusion, and reputational damage—especially in a global industry where trust and Shariah compliance are central.

A signal to global halal capital

The move also carries external significance.

Globally, Islamic finance assets exceed $3tn, dominated by markets in the Gulf and Malaysia. Southeast Asia, particularly Malaysia and Indonesia, has positioned itself as a hub for Shariah-compliant finance, sukuk issuance, and halal investment.

The Philippines, by contrast, has largely watched from the sidelines.

By formalising regulation, Manila is sending a signal—tentative but notable—that it wants to participate in this ecosystem. Clearer rules make it easier for foreign Islamic banks, investors, and multilateral institutions to assess risk, structure partnerships, and deploy capital.

For a country with chronic infrastructure funding needs and a growing interest in sustainable finance, Islamic banking could complement green bonds and social finance rather than compete with them.

Balancing growth with safeguards

Regulating Islamic banking is not without challenges.

Supervisors must ensure that Shariah governance does not become box-ticking, while also avoiding conflicts between religious advisory boards and prudential oversight. There is also the practical issue of talent: Islamic finance requires specialised legal, accounting, and risk expertise that remains scarce in the Philippine market.

Moreover, demand should not be overstated. While interest is rising, Islamic banking will remain a small segment of the system for the foreseeable future. Over-promising growth risks disappointment and policy fatigue.

This is why the BSP’s incremental approach matters. Rather than chasing rapid expansion, regulators appear focused on building credibility first—ensuring that products are genuinely Shariah-compliant, transparently priced, and properly supervised.

A quiet but meaningful shift

In global terms, the Philippines’ Islamic banking push will not reshape the industry overnight. But symbolically, it matters.

It reflects a broader recalibration in how governments think about finance: less as a one-size-fits-all system, and more as an ecosystem that can accommodate ethical, social, and cultural preferences without sacrificing stability.

For the Philippines, regulation is not just about Islamic banking. It is about signalling openness—to inclusion, to diversified capital, and to financial models that sit alongside, rather than outside, the mainstream.

In that sense, the move may prove more consequential than its current scale suggests.