The Department of Justice (DOJ) said the Department of Finance (DOF) is legally empowered to issue Shari’ah compliant financing instruments called Sukuk, particularly Ijarah and Wakalah structures, to make the Philippines appealing to Islamic investments.

In a legal opinion, DOJ Secretary Jesus Crispin C. Remulla told DOF Secretary Benjamin E. Diokno: “We believe that the Republic, through the DOF, may issue Sukuk Ijarah and Wakalah structures under existing laws, rules and regulations.”

“The issuance of Sukuk Ijarah and Wakalah structures is legally feasible and within the express powers of the Secretary of Finance,” Remulla said.

He pointed out that “the Secretary and the DOF are given broad powers to find creative ways to tap other markets, and broaden the country’s investor base, and the issuance of Sukuk is a valid exercise of such power.”

Remulla noted that Ijarah structure “involves the sale of a tangible and unencumbered asset (‘ljarah asset’) owned by the Republic (as obligor), which is then leased back to the Republic (as lessee) for its use.”

Wakalah structure, on the other hand, “originates from the concept of agency whereby investors purchase a revenue-generating asset ('Wakalah asset”) owned by the Republic (as obligor), and appoints the Republic (as agent or wakeel) to manage and invest into the Wakalah assets to generate returns,” he said.

In its legal opinion sought from the DOJ, the DOF said that under the Shari’ah law, “interest or riba, which is income from lending money, is prohibited” but “profit, which is income from an economic activity, is allowed.”

“Sukuk in different forms were developed to accommodate investors who are not keen on conventional bonds by reason of the prohibition of riba,” Remulla said.

The DOJ’s legal opinion on Ijarah and Wakalah structures was sought by DOF which is exerting efforts “to attract Malaysian investors, other investors such as those in the Middle East and other centers of Islamic finance such as the United Kingdom, with untapped liquidity for Shari’ah-compliant investments” but these sectors “continue to express demand for other widely accepted forms of Sukuk.”

Since Ijarah and Wakalah have been found by the DOF as the most widely accepted Sukuk, Diokno decided to tap the structures since “the National Government (NG) will not relinquish its legal title over the public property used for the Sukuk issuance.”

Remulla told Diokno that Republic Act (RA) No. 11439, An Act Providing for the Regulation and Organization of Islamic Banks, “clearly recognizes the ljarah structure lease arrangements and other Shari’ah compliant contracts and structures as among the financing and joint investment operations that may be carried out by Islamic banks.”

“While R.A. No. 11439 only contemplates the Islamic banks which will carry out the financing and joint investment operations by way of lease (Ijara) arrangements and other Shari’ah-compliant contracts and structures, we believe that the DOF, through the Secretary of Finance, for that matter, being the government steward of sound fiscal policy and the agency that undertakes funding of government programs, may carry out the financing and joint investment operations of the Sukuk structures discussed herein,” the legal opinion stated.

“We note that R.A. No. 11439 does not expressly prohibit the use of Sukuk structures by the government or private entities for as long as they are Shari’ah compliant. There is nothing in the law that exclusively grants unto Islamic banks the authority to engage in financing and joint investment program under the Sukuk structures. Thus, the DOF may perform such financial transaction and contract subject to the limits and preconditions under Shari’ah law,” it stated.

The opinion also stated:

“We would like to reiterate that the authority granted to the President, through the Secretary of Finance, pursuant to R.A. No. 245, as amended, to issue evidence of indebtedness admits a wide scope of discretion.

“Hence, when the law allows the Secretary of Finance to exercise the broad power of prescribing the form of forms, the interest and discount rates, the denominations, maturities, negotiability, convertibility, call and redemption features, and all other terms and conditions of issuance, placement, sale, servicing, redemption, and payment of all evidences of indebtedness issued under the authority of the said law, it would also cover and include the issuance of Islamic banking instruments, such as Sukuk.

“This conclusion is true notwithstanding that these types of bonds are not yet in existence at the time of the passage of R. A. No. 245. Laws are to be interpreted in such manner as to fulfill its avowed purpose to the intendment of the legislature.”

Secretary Remulla reminded Secretary Diokno that legal opinion is “applicable only to the unique Sukuk structure being presented in this request, referring to Sukuk ljarah and Wakalah, and may not be applicable to other Sukuk structures not discussed herein.”

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