The Bangko Sentral ng Pilipinas (BSP) is planning to streamline regulations governing sukuk transactions to support the development of Islamic banking and finance in the Philippines and deepen the domestic capital market.

Under a draft circular, the central bank is proposing a simplified licensing framework that would allow banks to issue sukuk for operational or funding purposes without securing prior approval from the Monetary Board (MB).

“The Bangko Sentral ng Pilipinas adopts 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,” the BSP said in an explanatory note.

“The proposed circular implements key provisions of the Islamic Banking Law and rationalizes the requirement for prior Monetary Board (MB) approval of sukuk transactions aligned with the regulations issued by the Securities and Exchange Commission (SEC),” it added.

Banks offering sukuk would still have to comply with the BSP’s prudential criteria, the Securities Regulation Code and other applicable SEC rules. The central bank also clarified that traditional banks without an Islamic banking unit (IBU) or quasi-banking authority may issue sukuk only through private offerings.

Sukuk, or Islamic bonds, are certificates of equal value representing shared ownership in tangible assets, usage rights, services, or assets linked to specific Shari’ah-compliant projects or investments. The structure enables Muslim investors to participate in capital markets while observing Shari’ah principles.

“Sukuk play a critical role in deepening and strengthening the Philippine capital market by serving as a flexible funding mechanism for both public and private sector entities,” the BSP said. “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 BSP would continue to require Monetary Board approval for sukuk intended to qualify as additional Tier 1 or Tier 2 regulatory capital. Their features must comply with the criteria and conditions for inclusion set out in the Manual of Regulations for Banks.

“Accordingly, Section 101 is amended to clarify that prior MB approval is required only for sukuk issuances by Islamic banks and conventional banks with IBUs intended to qualify as regulatory capital, while sukuk issued for funding or operational purposes shall not be subject to prior MB approval,” the central bank said.

The proposed rules would also introduce time-bound incentives to encourage banks to participate in the local sukuk market. As the measures are contained in a draft circular, the five-year period for the proposed additional single borrower’s limit would begin only upon the circular’s effectivity.

Banks may be granted a single borrower’s limit (SBL) equivalent to 15% of their net worth for sukuk-related exposures during a five-year period from the circular’s effectivity.

Any outstanding investments or exposures obtained under the additional SBL during the incentive period may continue to be held until maturity, according to the BSP.

“This incentive is intended to encourage bank participation in sukuk investments and financing transactions by providing additional capacity for sukuk-related exposures,” it said.

The central bank is also proposing a 0% reserve requirement rate for sukuk issuances. The rate would apply for three years to all sukuk types and for five years to sustainability sukuk.

“Together, 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 BSP said.

The proposed framework would allow financial institutions or investment banks affiliated with an issuer to underwrite, arrange, or manage the issuer’s sukuk offering. However, the offering prospectus would have to fully disclose the affiliation to prevent potential conflicts of interest, the BSP said.

Issuers would be prohibited from holding, directly investing in, or acting as a market maker for their own sukuk under the proposed guidelines.

Banks would also have to ensure that sukuk issuances meet enhanced due diligence requirements and foreign-currency liquidity management requirements when the instruments are denominated in foreign currency.

Earlier this year, BSP Deputy Governor Lyn I. Javier said the central bank wanted to broaden access to Shari’ah-compliant financial products as part of its efforts to expand Islamic banking and finance across the country. — Katherine K. Chan