The MUSFIL Chamber and Islamic

Bank on biofuels

By Abdel Aziz Dimapunong

Chancellor, Islamic Banking Research Institute

( Note: This article was originally published by the same author as Amanah
Islamic Bank on biofuels. It was dated January 15, 2007 and published as a
blog at http://www.dimapunong.sulekha.com, “The world of Islamic
bankers”. The present article is another edition to reflect the participation of
the landowners for biofuels under the auspices of the Muslim Filipino
Chamber of Agriculture and Fisheries. Therefore, the former article has
been rewritten as per the request of the Chamber with some new inputs in
this new version. The MUSFIL Chamber also requested permission to
repost the same article on the website of the MUSFIL Chamber of
Agriculture and Fisheries, Inc.)

January 16, 2007, Manila, Philippines – The Amanah Islamic Bank and
the MUSFIL CHAMBER of Agriculture and Fisheries have reasons to
celebrate today in the office of the bank at the Washington Tower in
Metro Manila. Firstly, the Asian and Pacific leaders signed yesterday in
Cebu city an agreement to promote the use of biofuels. This alternative
energy has been the focus of development by the Amanah Islamic Bank
in collaboration with the MUSFIL Chamber, the pioneer proponents to
the promotion of bio-diesel and bio-ethanol energy in the Philippines.

The Cebu Declaration on East Asian Energy Security was signed by

leaders from Southeast Asia, Australia, New Zealand, India, Japan,
China and South Korea after a three-hour summit in Cebu, the oldest
city in the Philippines. The agreement aims for ``reliable, adequate and
affordable'' alternative energy. The declaration calls for improved
energy efficiency that will reduce dependence on traditional fossil fuels.
It is urging countries to expand renewable energy systems and biofuel
production.
On its part, the Philippines had already passed into law the Biofuels Act of 2006.
That is another reason for the Islamic Bank to celebrate. The Biofuels Act was
signed by President Gloria Macapagal Arroyo only few days before the Cebu
Declaration. Among the salient features of the law are (1) the mandatory use of
biofuels under Section 5, and (2) the provisions of a number of incentives under
Section 6.

Under its mandatory provisions, all liquid fuels for motors and engines sold in the
Philippines shall contain locally-sourced biofuels components in accordance with a
schedule under Section 6.

The incentives provided under Section 6 of the Biofuels Act include exemption from
specific tax on local or imported biofuels component. “The sale of raw material
used in the production of biofuels such as, but not limited to, coconut, jatropha,
sugarcane, cassava, corn, and sweet sorghum” has also been exempted from the
value added tax. Section 6 also provides that: "All water effluents, such as but not
limited to distillery slops from the production of biofuels used as liquid fertilizer
and for other agricultural purposes are considered “reuse”, and are therefore,
exempt from wastewater charges under the system provided under Section 13 of
R.A. No. 9275, also known as the Philippine Clean Water Act” On financing, the
Biofuels Act also provides that government financial institutions shall accord high
priority to extend financing to Filipino citizens or entities that shall engage in
activities involving production, storage, handling and transport of biofuel and
biofuel feedstock.

The Cebu Declaration on East Asian Energy Security was timely signed at a time
when oil could be a cause for war among nations. Immediately following the
signing of the Biofuels Act of 2006 and the Cebu Declaration, the board of directors
of the Amanah Islamic Bank held its meeting to celebrate and map out its
implementing strategies. As a longtime corporate advisor to the Amanah Islamic
Bank, the Islamic Banking Research Institute has been furnished copies of the
bank’s biofuel projects.

In its Al Amanah Report 2006, Grande M. Dianaton, incumbent chairman and

chief executive officer of the Amanah Islamic Bank informed its stockholders of
the continuing interest of the Bank in its US$ 2 Billion Biofuel project. This refers
to its bio-diesel and bio-ethanol projects. According to Dianaton, the project is also
in support of the Philippines’ Ten-Point Agenda that is being pushed by Her
Excellency, President Gloria Macapagal Arroyo. The Ten Point Agenda envisions
the development of 2 million hectares of agricultural land. The Islamic Bank aims
to develop one (1) million hectares of private agricultural landholdings in the
Autonomous Region of Muslim Mindanao (ARMM). The development of this one
million hectares is in collaboration of the Muslim-Filipino Chamber of Agriculture
and Fisheries, Inc.
The President of the Philippines has lately issued Memorandum Order No. 55
about bio-diesel projects in the Philippines.

The Islamic Bank project on alternative energy embraces agricultural

developments, principally palm-oil, coco bio-diesel and bio-ethanol. Coco-Bio-diesel
is a priority project of the Arroyo Administration. It is now being implemented by
the Department of Energy and the Department of Environment & Natural
Resources, Department of Science & Technology, Department of Transportation &
Communications, Philippine Coconut Authority, Department of Trade & Industry,
Department of Finance, Technological University of the Philippines, Asian Institute
of Petroleum Studies Inc. , and other academic and research institutions.

Memorandum Circular No. 55 was issued by the President of the Philippines on

February 9, 2004 in order to initiate the implementation of the country’s coco bio-
diesel. The Circular directed “all departments, bureaus, offices, agencies and
instrumentalities of the government, including government-owned and controlled
corporations to incorporate the use of one percent (1%) by volume of Coco bio-
diesel requirements."

In comparison to bio-ethanol, the new law provides that within two (2) years from
effectivity, “all bioethanol blended gasoline shall contain a minimum of five percent
(5%) bioethanol fuel by volume. After four years, this may be increased by the
Department of Energy to a "minimum of ten (10) percent blend of bioethanol by
volume into all gasoline fuel distributed and sold by each and every oil company in
the country".

Bio-diesel and bio-ethanol are renewable energy fuels. They are produced from a
number of sources from plants. Bio-diesel has some very similar properties to
petroleum-based diesel. Because bio-diesel is a renewable fuel, it can replace
petroleum diesel in current engines, and can be transported and sold using the
current infrastructure. It is foreseen by the Islamic Banking Research Institute that
alternative energy from renewable sources could one day replace fossil fuel as the
world's primary transportation energy source.

Bio-diesel is also non-flammable and non-explosive. It is also biodegradable and

non-toxic. Bio-diesel fuel is now commonly used in the United States, Canada,
Thailand, and many countries in Europe. The Philippines has launched the use of
bio-diesel, particularly Coco-Bio-diesel.

Obviously, bio-diesel projects require wide tract of agricultural land. The Islamic
Bank has been acquiring land since 1996. From July 1, 2002, the Islamic Bank was
using SKR (Safe Keeping Receipts) for certain properties, including agricultural
landholdings, prime real estates in the cities of Iligan, Marawi, Cagayan de Oro, and
even cities within Metro Manila, including Quezon City. The financial values of
these properties were not reflected in the financial statements of the Islamic Bank.
This is because the properties under SKR do not belong to the bank. Only bank
charges, related income and expenses were reflected on the financial statements.
starting on the second half of year 2002, the Bank transformed these properties
from off-balance sheet SKR status to the present status of ASSET and its
corresponding credits to AL KAFALA in accordance with the Islamic banking
principles as provided in the charter of the Islamic Bank and the related BSP Rules
and Regulations under BSP Circular 105 Series of 1996 as amended pursuant to the
new General Banking Law of 2000.

The report says that during the year 2004 and 2005, the Islamic Bank acquired for
its bio-diesel and bio-ethanol projects a total of 100,000 hectares valued at P400,000
per hectare or a total of P40 billion. These landholdings were previously under Safe
Keeping Receipts by the Islamic Bank in favor of the Muslim Filipino Chamber
of Agriculture and Fisheries, Inc. (MF-CAF). From a status of SKR, the
Islamic Bank acquired these landholdings from the Muslim Filipino
Chamber of Agriculture and Fisheries, Inc., an association of land
owners. Under the Agreement, Islamic Bank pays for the 100,000
hectares with a 5-Year Notes Payable amounting to P20 billion and a 10
Year Bank Guarantees amounting to P20 billion.

The Amanah Islamic Bank Guarantees (AIBG) is otherwise known in Philippine

Islamic banking as Al Kafalah. It is well defined under Sec. 44, par. (4) Of Bangko
Sentral Circular No. 105, Series 1996. Bank Guarantees is now the second most
significant account in the 2004 and 2005 Balance Sheets of the Islamic Bank.