Islamic Bank As Investment House, Part 2

Islamic Bank as Investment House, part 2 By: Abdel Aziz Dimapunong Founding chairman, Amanah Islamic Bank Chancellor, Islamic Banking Research Institute

This is a sequel to my earlier article: Islamic Bank as Investment House which was published in my blog at Sulekha Network. The previous article delved into Presidential Decree No. 129 which is the original Investment House Law in the Philippines. This law was originally approved on February 15, 1973. Islamic Bank as Investment House, part 2 touches on the amendments to Presidential Decree 129, namely:

(1) Batas Pambansa Bilang 66, An Act amending Presidential Decree No. 129, as amended. Approved: April 1, 1980 (2) Presidential Decree No. 1797, An Act further amending Presidential Decree No. 129, as amended, otherwise known as Presidential Decree No. 129, as amended. Approved: January 16, 1981 (3) Republic Act No. 8366, An Act liberalizing the Philippine Investment House Industry, amending certain sections of Presidential Decree No. 129, as amended, otherwise known as the Investment Houses Law. These amendments are also vital in conducting due diligence about the Islamic Bank. They provide the legal basis of certain acts of the chairman and the board of directors during the history of the Islamic Bank. Moreover, the Islamic Bank is more of an Investment House rather than a commercial bank. Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

I am uploading this article as a sequel to my previous article upon the request of Mr. Ashroff Gaffoor, President of ERA Petroleum Company of Hong Kong, and former president of the Amanah Islamic Investment Bank of the Philippines. Mr. Gaffoor has called me earlier and requested for this information. I am obliged by the fact that I was the founding chairman of this Islamic Bank and Mr. Gaffoor was former President of the Amanah Islamic Bank. I was informed by Gaffoor that certain Malaysian and Chinese investors are presently conducting due diligence on the Amanah Islamic Bank. I am therefore obliged to provide this legal information concerning the Amanah Islamic Bank as Investment House in the Philippines by the fact that I was the founding chairman of this Bank.

Ashroff Gaffoor Former President Amanah Islamic Bank (1999-2002) As far as I can recall Batas Pambansa Bilang 66 was the first amendment to Presidential Decree 129, otherwise known as the Investment House Law. Batas Pambansa Bilang 66 prohibits any person to be a director in any bank while being a director of an Investment House at the same time. This was the basis of the disqualification of directors of the Development Bank of the Philippines (DBP) who were directors of the Philippine Amanah Bank (PAB) at the same time. In the case of the Philippine Amanah Bank, it used to be that the chairman of the DBP sits as concurrent director and chairman of the Philippine Amanah Bank. This was the case before the issuance of Executive Order No. 81 which prohibits concurrent directorship. This practice of concurrent directorship in the Amanah Islamic Bank and the DBP had no basis in law. It also had no basis in professional management. The only obvious reason for the directors of the Development Bank of the Philippines to sit concurrently as directors of the Philippine Amanah Bank was for them to receive more allowances and fringe benefits. To some professional Muslims, this practice was an affront because it seems to show that the Muslims can not run the management of the Islamic Bank. The prohibitions in Batas Pambansa Bilang 66 are echoed in Executive Order No. 81, otherwise known as the Revised Charter of the Development Bank of the Philippines. Section 5, E.O. 81 provides:

Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

“Except for the chairman and the vice chairman of the Board, no officer or employee of the Bank (DBP) maybe appointed as a member of the Board of Directors of the Bank: nor shall any director, officer, or employee of any other bank be eligible as a member of the Board of Directors of the Bank. (Emphasis mine)” When I was designated by the Office of the President of the Philippines to organize the Islamic Bank, I saw to it that the practice of concurrent directorship will not happen again. Aware of the prohibitions of Presidential Decree No. 129, as amended, and the prohibition under Executive Order No. 81, we disqualified the then chairman of the Development Bank of the Philippines, Mr. Roberto De Ocampo, to be elected as concurrent director of the Islamic Bank in the organizational election on April 28, 1992. It bears emphasizing that during this organizational meeting the Development Bank of the Philippines (DBP) was no longer entitled to be represented in the new Islamic Bank because the old DBP ( a stockholder of the old Philippine Amanah Bank) was abolished by Executive Order No. 81.

It is to be noted clearly that on February 1986, President Corazon C. Aquino succeeded President Ferdinand Marcos by a people’s revolt known to world as the popular people power. Aquino pursued vigorously the implementation of the privatization laws. Aquino signed into law Proclamation No. 50, creating the Committee on Privatization (COP) and the Assets Privatization Trust (APT) to administer the implementation of privatization. This was promulgated by President Aquino sometime in December 1986 pursuant to Administrative Order No. 14.

Former President Corazon Aquino (center) In pursuance of Proclamation No. 50 several non-performing assets (including the Philippine Amanah Bank) of the government financial institutions, including Development Bank of the Philippines, were transferred to the National Government. The transfer was implemented through a Deed of Transfer executed on February 27, 1987 between DBP and the National Government, which in turn, designated the Asset Privatization Trust to act as its trustee over the assets. (See Development Bank Of The Philippines and Asset Privatization Trust, petitioners, vs. Court of Appeals and Continental Cement Corporation, respondents. [G.R. No. 119712. January 29, 1999])

Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

It should also be recalled that in 1986, Former President Corazon Aquino issued E.O. No. 81 which provided for the 1986 DBP Revised Charter that called for a clean up of DBP's books, staff reorganization and infusion of initial operating budget. In pursuance of Executive Order No. 81, the transfer of non-performing assets to the National Government on June 30, 1986 includes the equity shares of the DBP in the former Philippine Amanah along with liabilities. In order to set the precedence so that never again will the DBP lord over the Islamic Bank I filed a formal complaint on June 18, 1992 in the Office of the Ombudsman against Roberto De Ocampo. My complaint was against De Ocampo’s violation of law for having held concurrent directorship of the Development Bank of the Philippines and the Philippine Amanah Bank. The case was officially docketed as OMB-0-92-1279. This legal action was a follow up to my earlier complaint against De Ocampo earlier filed in Office of the Ombudsman. It was docketed as Case No. OMB-92-1278. This other complain concerns his attempt to be elected as concurrent director of the new Amanah Islamic Bank by means of a spurious stockholders meeting. Another case was officially filed on August 24, 1992, docketed as Case No. OMB-0-92-1706, against the same person and Ernesto Duran on the same issue but on the basis of another law, the provisions of RA 6848. The cases I filed were not resolved until several years. Since then, no director of the Development Bank of the Philippines and other government banks dares to be elected as concurrent director of the Amanah Islamic Bank. The corporate tyranny of the DBP and the PNB over a bank for Muslims is gone. And we are on our own. This is something that the Muslims in the Philippines and elsewhere should be aware about. Abdel Aziz Dimapunong Manila, March 22, 2007 x-------------x

Introduction The charter of the Islamic Bank provides that it is authorized to source for funds from governments, banks, organizations or other entities and individuals from within the Philippines or abroad. These funds are classified into commercial and investment accounts. Commercial accounts are those derived from deposits received by the Islamic Bank without authorization to invest. These accounts are to be treated as current Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

accounts and savings accounts. They may be withdrawn by depositors wholly or partly at any time. The funders are referred to as mere depositors. They are not investors. On the other hand, investments accounts are those funds that are sourced and received by the Islamic Bank with authorization to invest for a given period of time. They constitute the general pool of placements allocated for the investment portfolios of the Islamic Bank: The funders are referred to as investors. They are actually partners of the Islamic Bank. They are not depositors. In the matter of investing funds from pooled resources, the Islamic Bank is acting in the capacity of an agent or attorney. Under the charter, the Islamic Bank may allocate part of its own investible funds to finance investment projects and carry on its Islamic banking business directly or indirectly under its own supervision. For this purpose, it is authorized to develop, establish and finance investment companies or affiliates, which shall manage investment projects on behalf of and under the supervision of the Islamic Bank and for its own account. In the tradition of Investment houses here and abroad, the main players in the business of investment banking are referred to as start-up companies. The Islamic Bank ascertains the viability and soundness of investment projects by start-up companies. They may be projects which the bank may directly supervise or they may be projects in which the bank may participate with the general pool of investor's funds with authorization. The Islamic Bank supervises these projects. The authority to operate as Investment House is provided under Section 17 of the charter of the Islamic Bank. Section 17 specifies that the authority of the Islamic Bank as an Investment House shall be “pursuant to Presidential Decree No. 129, as amended” By virtue of this authority, the Islamic Bank may carry on the following: (1) The Islamic Bank may have a direct interest as a shareholder, partner, owner or any other capacity in any commercial, industrial, agricultural, real estate or development project under mudarabah form of partnership or musharaka joint venture agreement or by decreasing participation, or otherwise invest under any of the various contemporary Islamic financing techniques or modes of investment for profit sharing (2) The Islamic Bank may carry on commercial operations for the purpose of realizing its investment banking objectives by establishing enterprises or financing existing enterprises, or otherwise by participating

Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

in any way with other companies, institution or banks performing activities similar to its own or which may help accomplish its objectives in the Philippines or abroad, under any of the contemporary Islamic financing techniques or modes of investment for profit sharing; and (3) The Islamic Bank may perform all business ventures and transactions as may be necessary to carry out the objectives of its charter within the framework of the Islamic Bank’s financial capabilities and technical considerations prescribed by law and convention: Provided that these shall not involve any riba or other activities prohibited by the Islamic Shari’a principles. Whenever the Islamic Bank operates as an Investment House and or as a Venture Capital Corporation, it is under the control and supervision of the Securities and Exchange Commission - rather than the Bangko Sentral. The provisions of the charter in relation to the authority of the Islamic Bank to operate as an Investment House are echoed verbatim in the Rules and Regulations promulgated by the Bangko Sentral Ng Pilipinas for the Islamic Bank. On October 21, 1997, PD 129 was amended by Republic Act No. 8366, otherwise known as An Act Liberalizing the Philippine Investment House Industry, amending certain sections of Presidential Decree 129, as amended, otherwise known as the Investment House Law. Under Republic Act No. 8366, it was declared a matter of government policy “to expand and strengthen the capital base of the economy in order to ensure sustained economic growth and development". "Toward this end', this law state, "the Philippine investment house industry is hereby liberalized, increasing foreign equity participation..." Under Section 2 of RA 8366, Section 5 of PD 129, was amended to read as follows: "Sec. 5. Citizenship requirements. - At lease forty percent (40%) of the voting stock of any Investment House shall be owned by citizens of the Philippines. In determining the percentage of foreign-owned voting stocks in Investment Houses, the basis for the computation shall be the citizenship of each stockholders, and, if the stockholder is a corporation, the citizenship of the individual stockholders holding voting shares in that corporation." Foreign nationals may now become members of the board of directors of an Investment House such as the Islamic Bank to the extent of their equity participation. This would be consistent with Section 38 of the charter which

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is aimed at achieving the international and domestic objectives of Islamic banking business”.

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BATAS PAMBANSA BILANG 66 . AN ACT AMENDING PRESIDENTIAL DECREE NO. 129, AS AMENDED, OTHERWISE KNOWN AS "THE INVESTMENT HOUSES LAW" Section 1. Section 6 of Presidential Decree No. 129 is hereby amended to read as follows: "Sec. 6. Prohibitions. — Except as may be authorized by the Monetary Board, no director or officer of an Investment House shall concurrently be a director or officer of a bank, as defined in Section 2 of Republic Act No. 337, as amended: Provided, however, That in no event can a person be authorized to be concurrently an officer of an Investment House and of a bank except where the majority or all of the equity of the Investment House is owned by the bank. "No Investment House shall engage in banking operations as defined in Section 2 of Republic Act No. 337, as amended." Sec. 2. Section 7 of the same Decree is hereby amended to read as follows: "Sec. 7. Powers. — In addition to the powers granted to corporations in general, an Investment House is authorized to do the following: "(1) Arrange to distribute on a guaranteed basis securities of other corporations and of the Government or its instrumentalities; "(2) Participate in a syndicate undertaking to purchase and sell, distribute or arrange to distribute on a guaranteed basis securities of other corporations and of the Government or its instrumentalities; "(3) Arrange to distribute or participate in a syndicate undertaking to purchase and sell on a best-efforts basis securities of other corporations and of the Government or its instrumentalities; "(4) Participate as soliciting dealer or selling group member in tender offers, block sales, or exchange offering of securities; deal in options, rights or warrants relating to securities and such other powers which a Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

dealer may exercise under the Securities Act (Commonwealth Act No. 83, as amended);. "(5) Promote, sponsor, or otherwise assist and implement ventures, projects and programs that contribute to the economy's development; "(6) Act as financial consultant, investment adviser, or broker; "(7) Act as portfolio manager, and/or financial agent; "(8) Encourage companies to go public, and initiate and/or promote, whenever warranted, the formation, merger, consolidation, reorganization, expansion or recapitalization of productive enterprises, by providing assistance or participate in the form of debt or equity financing or through the extension of financial or technical advice or service; "(9) Undertake or contract for researches, studies and surveys on such matters as business and economic conditions of various countries, the structure of financial markets, the institutional arrangements for mobilizing investments; "(10) Acquire, own, hold, lease or obtain an interest in real and/or personal property as may be necessary or appropriate to carry on its objectives and purposes;. "(11) Design pension, profit-sharing and other employee benefits plans; "(12) Such other activities or business ventures as are directly or indirectly related to the dealing in securities and other commercial papers, unless otherwise governed or prohibited by special laws, in which case the special law shall apply; "(13) Subject to prior approval by the Monetary Board, the provisions of Chapter IV of the Central Bank Charter, and such rules and regulations as may be issued by the Monetary Board, engage in foreign exchange operations which the Monetary Board identified as directly related under Subsection 8 of this section; and "(14) Act as trustee of a trust fund or trust property, subject to the provisions of Chapter VII of the General Banking Act. "Nothing in this section shall preclude other enterprises not covered by this Decree from engaging in the activities listed under subsection (3) to (11) of this section, except as may otherwise be governed by special laws."

Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

Sec. 3. The same decree is hereby amended by adding a new section after Section 7 to read as follows: "Sec. 7-A. Subject to applicable laws and regulations and with prior approval of the Monetary Board, an Investment House may be converted into a commercial bank authorized to operate under an expanded commercial banking authority pursuant to Section 21-B of Republic Act No. 337, as amended.". Sec. 4. All Acts or parts thereof inconsistent with this Act are hereby repealed or modified accordingly. Sec. 5. This Act shall take effect upon its approval. Approved: April 1, 1980 X=============x Presidential Decree No. 1797 AMENDING FURTHER PRESIDENTIAL DECREE NO. 129, AS AMENDED, OTHERWISE KNOWN AS "THE INVESTMENT HOUSES LAW". WHEREAS, there must be greater cooperation among governmental agencies to ensure the accomplishment of desired objectives; WHEREAS, there is a need to provide flexibility to government authorities in setting the capitalization requirement for investment houses in order to enhance the capability of the latter to compete and to finance the requirements of economic development. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby decree and order as follows: Section 1. The third paragraph of Section 4 of Presidential Decree No. 129, as amended, is hereby amended to read as follows: In determining compliance with the provisions of subsections (b) and (c) above, the Securities and Exchange Commission shall consult with and act pursuant to such recommendation as the Monetary Board of the Central Bank of the Philippines may make. Sec. 2. Section 8 of the same Decree is hereby amended to read as follows:

Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

"Sec. 8. The minimum initial paid-in capital of any Investment House shall be Twenty Million (P20, 000,000) Pesos: Provided, That the Monetary Board of the Central Bank may prescribe a higher minimum capitalization if warranted by the circumstances. Sec. 3. The first paragraph of Section 16 of the same Decree is hereby amended to read as follows: "Sec. 16. Penalties for violation. — Upon proof that an Investment House is violating or not complying with the provisions of this Decree, of other pertinent laws, of the terms or conditions of its certificate of registration or charter, or of orders, decisions, rulings or regulations issued by the Securities and Exchange Commission, the Commission shall impose upon the Investment House and collect a fine of not exceeding two hundred (P200.00) pesos per day for every day during which such violation or non-compliance continues, and/or suspend its certificate of registration. The officer or director of the Investment House who ordered or authorized the violation or non-compliance shall be solidarily liable. The fine so imposed shall be paid to the Government of the Philippines through the Securities and Exchange Commission. Sec. 4. All laws, decrees, rules and regulations inconsistent with this Decree are hereby repealed or modified accordingly. Sec. 5. This Decree shall take effect immediately. Done in the City of Manila this 16th day of January, in the year of Our Lord, nineteen hundred and eighty-one. X============X REPUBLIC ACT NO. 8366 AN ACT LIBERALIZING THE PHILIPPINE INVESTMENT HOUSE INDUSTRY, AMENDING CERTAIN SECTIONS OF PRESIDENTIAL DECREE NO. 129, AS AMENDED, OTHERWISE KNOWN AS THE INVESTMENT HOUSES LAW

SECTION 1. Declaration of policy. — It is the policy of the State to expand and strengthen the capital base of the economy in order to ensure sustained economic growth and development. Toward this end, the Philippine investment house industry is hereby liberalized, increasing foreign equity participation and raising the minimum capitalization of investment houses to enable them to meet the present and future demands of the market.

Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong

SECTION 2. Section 5 of Presidential Decree No. 129, as amended, otherwise known as the Investment Houses Law, is hereby further amended, to read as follows: “SEC. 5. Citizenship requirements. — At least forty percent (40%) of the voting stock of any Investment House shall be owned by citizens of the Philippines. In determining the percentage of foreign-owned voting stocks in Investment Houses, the basis for the computation shall be the citizenship of each stockholder, and, if the stockholder is a corporation, the citizenship of the individual stockholders holding voting shares in that corporation. In approving foreign equity applications in Investment Houses, the Securities and Exchange Commission [underscoring ours] shall approve such applications only if the same or similar rights are enjoyed by Philippine nationals in the applicant's country. “ SECTION 3. Section 8 of the same Decree is hereby amended to read as follows: “SEC. 8. Capital requirements. — In the case of newly-organized Investment Houses, the minimum paid-in capital shall be Three hundred million pesos (P300, 000,000). The minimum paid-in capital of the existing Investment Houses shall be Three hundred million pesos (P300, 000,000) to be built up in two (2) years after the effectivity of this Act in the following manner: Two hundred million pesos (P200, 000,000) after the effectivity of this Act and an additional Fifty million pesos (P50, 000,000) for every year thereafter until the minimum capitalization is attained. The Monetary Board may prescribe a higher minimum capitalization in order to promote and ensure the stability of the Philippine capital market and the competitiveness of the investment house industry in line with the national economic goals. The Monetary Board shall, within six (6) months, prescribe a risk assets to capital ratio and other capital adequacy ratios in order to provide broader protection to the investing public.” SECTION 4. This Act shall take effect fifteen (15) days from its publication in a newspaper of general circulation. Approved: October 21, 1997 © March 2007 Islamic Banking Research Institute, Inc. “Islamic Bank as Investment House, part 2” March 2007 Ed., by Abdel Aziz Dimapunong is a property of the Islamic Banking Research Institute, Inc. All rights reserved. Except for a copy of the laws that are cited in this journal, reproduction of any other content, text or image, of this writing,

Islamic Bank as Investment House, part 2

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in any form or medium without the express written permission of the writer or the Islamic Banking Research Institute Inc. is prohibited This journal is for informational purposes only and is intended solely for the benefit of persons who might be aware of investment opportunities. The services provided by the Islamic Banking Research Institute, Inc. are only for research and information.

Islamic Bank as Investment House, part 2

Abdel Aziz Dimapunong