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

Islamic Bank as Investment House, part 2 Abdel Aziz Dimapunong

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

.
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 Abdel Aziz Dimapunong

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
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Islamic Bank as Investment House, part 2 Abdel Aziz Dimapunong