Al-Amanah Islamic Investment Bank Of The Philippines

Al-Amanah Islamic Investment till Of The PhilippinesRe human race Act No. 6848, otherwise k this instantn as The get of the Al-Amanah Islamic Investment swan of the Philippines outlines that the primary purpose of the Islamic bank is to promote and accelerate the socio-economic development of the Autonomous character by per bring ining banking, pay and investment operations and to establish and participate in agricultural, commercial and industrial ventures based on the Islamic concept of banking. In addition to allowing the bank to propel as a universal bank capable of offering both naturalized and Islamic banking products and run, the Sections No. 10 11 of the charter respectively digest incentives in the form of investor protection, and grant the bank the superpower to accept grants and donations (Congress of the Philippines, 1989).Dimapunong (2006) come throughs cathode-ray oscilloscope information and commentary on the rules and regulations governing the Al-Amanah Islamic Bank. A founding professorship of the bank, the rootage also wrote about the role of former senator Mamintal A. Tamanos role in the establishment of the original Philippine Amanah Bank, the precursor of the menses Al-Amanah Islamic Investment Bank of the Philippines. A r atomic number 18 representative from Muslim Mindanao, the late senator was supposedly the first to envision a Muslim bank in the Philippines, at a quantify when unexampled Islamic banking was at its infancy. According to the designer, the original PAB was not properly Shariah-compliant leading Ulama counsels to complain about the institution misleading the man. By 1988 it had been deemed a complete failure having already gone bankrupt (Dimapunong A. A.).Sandra Isnaji (2003) conducted a SWOT (Strength-Weakness-Opportunity-Threat) analysis of the Amanah Bank and prescribes a rehabilitation plan for the institution involving infusions of capital from the governance in allege to get rid of the banks de bt and to invest in new infrastructure. Her paper was aimed at answering three questions with sham to the beleaguered banks status (1) Where argon we now? (2) Where do we want to be? and (3) How do we get there? To that extent, Isnaji looked at the state of Islamic banking industry as a whole, the state of the Philippine fiscal remains, and the state of the Amanah bank itself.With image to the Amanah Banks operations, Isnaji (2003) states that (at the time of writing) it operates on a ii-window governance in which it offers both Islamic and conventional fiscal products and services. And while the institution face up no competition from other Islamic banks, it faced stiff competition from the countrys conventional financial institutions, both formal and informal. With regard to the Philippine banking sector, the author use Porters Five Forces framework to essay the ABs competition within it. The author findings be as follows (1) With regard to the bargain power of suppliers the tight control of the Bangko Sentral affords it high bargaining power, to the advantage of state- avered banks such as the Amanah Bank the bargaining power of multilateral and bilateral aid organizations(USTDA, WB, ADB, JBIC) is high out-of-pocket to their involvement with micro-finance and development banks the large sizing and unorganized nature of the labor sector affords it little bargaining power bargaining power among depositors is highly skewed towards the higher income deciles whos deposits account for 88.3% of the savings in banks, with the gl are deciles having nor bargaining power. (2) With regard to the bargaining power of buyers, the higher income deciles belonging to the middle and upper classes resided and/or did traffic in the National Capital Region (NCR) and demand services such as electronic banking, payroll services, and bill payments. The power portions of the population find it difficult to obtain financing from formal banks collectible to their situatio n, and thus do not have much bargaining power, but their sheer numbers offer a potentially large market. (3) With regard to the threat of new entrants, any new Islamic banks allowed by the BSP could actually benefit the Amanah Bank by providing much needed visibility for the beleaguered Philippine Islamic banking sector. (4) With regard to the threat of substitute, notable alternatives that customers may opt for are informal financial institutions, employers that provide loan programs, or complete abstinence from banking entirely. Another threat is the bound of capital from the country. (5) With regard to rivalry among active players, the tendency of banks to be large tends to lead them to avoid small borrowers and savers, as such the government has had to develop the banking system so as to include such institutions as thrift and rural banks which cater to the needs of small borrowers and savers who would otherwise resort to informal institutions. In order to counter the threat o f oligopoly the government competes in the financial sector via the Development Bank of the Philippines (DBP) and the Land Bank of the Philippines (LBP). (Isnaji, 2003)As a requirement of the Development Bank of the Philippines (DBP) acquisition of the Al-Amanah Islamic Investment Bank of the Philippines (AAIIBP), the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) required the DBP to submit a 5-year rehabilitation plan for the bank. The initial plan, submitted on 23 April 2008, was deemed inadequate by the BSP. As such a draft of the revised plan was submitted on 18 March 2009. The revised plan was divided into tetrad pliberal arts (1) a brief background elaborating on the institutions legal basis, purpose, and present situation, (2) a summary of its business plans, (3) details on the implementation of said business plans, (4) and five-year financial projections. (Panganiban, 2009)The revised rehabilitation plan of the Amanah Bank centers around 4Rs, specificallyRecapital ization via capital infusions from the DBP and domestic and foreign investors this is aimed at covering the expenses of the banks rehabilitationRestoration of financial viability focuse on aggressive marketing efforts to introduce AAIIBPs new products and services, liquidation of non-performing assets and the sourcing of contingent fundsReorganization foc utilize on building up institutional capacity, particularly with regard to Sharia compliance involves organisational restructuring, relocation and refurbishing of bank offices, expansion and automation.Reforms institutionalization involves strengthening of corporate culture and governance, monitoring system, risk management and audited account system, and review of product and operating manuals.Particular emphasis has been given to the recapitalization strategy which would provide the funds needed for the other three points of the rehabilitation. (Development Bank of the Philippines, March 2009)Islamic BankingChong and Liu (200 6) attempted to determine how different Islamic banking is from conventional banking by examining Islamic banking practice in Malaysia using the Engle-Granger error-correction methodology. In their study they find that despite creation theoretically different, in practice Islamic banking in Malaysia is not very different from conventional banking. According to their study, only a negligible portion of Islamic bank financing in Malaysia is based on the profit-and-loss (PLS) sharing paradigm and that Islamic deposits are not avocation-free, but are based on non-PLS modes that are permitted under Sharia law, but ignore the spirit of the usury prohibition. This parallels Islamic banking experience in other countries. The authors conclude that Islamic banking practices cannot differ too greatly from conventional banking practice due to stiff competition that pass ons interest-free Islamic deposits closely pegged to conventional deposits. This conclusion can have implications for the b rand is Islamic banking, particularly with regard to its often touted non-interest-based character. However, it also has analytical and regulatory implications the similarity of Islamic banking practices to conventional banking practices would simplify the task of both studying and regulating Islamic banking.The findings of this study reverberate an earlier paper by Movassaghi and Zamans (2002). In it, they attempt to re-examine the concept of riba in light of Islamic jurisprudence. In that paper they compare Islamic banking practices with conventional banking practices in order to highlight that uncomplete all conventional practices are usurious, nor are modern Islamic banking practices significantly different from those of conventional banks. They also adduce that some differences between the profit/loss sharing paradigm of Islamic banking and conventional interest-based merely superficial.In addition to questions of practice, Chong and Lius study also asked the question of wh ether or not the growth of Islamic banking over the past some(prenominal) years was due to the comparative advantages of the Islamic banking paradigm, or to the Islamic resurgence that began in the 1960s. found on their findings, the authors are inclined to adopt the latter view.This view is also compatible with the findings of a study cited by Isnaji (2003), done by the Meezan Bank of Pakistan which determine several key success factors in the experience of Islamic banks in other countries (1) strong religious consciousness among the Muslim population, (2) support from the government in the form of financial infrastructure and favorable regulations, (3) promotion, (4) maturations in individual wealth, and (5) a wide variety of financial products and services. humanity Enterprises/Public Enterprise ReformBasu (2005) gives an overview of the background and concept of world enterprise, highlighting the particular experience of India in this matter. distinguishing it from the broa der term public sector by adopting the definition adopted by the International plaza of Public Enterprises (ICPE) Any commercial, financial, industrial, agricultural or promotional undertaking ingested by public authority, either wholly or through majority treat holding which is engaged in the sale of goods and services and whose affairs are capable of being recorded in balance sheets and profit and loss accounts. much(prenominal) undertakings may have diverse legal and corporate forms, such as departmental undertakings, public corporations, statutory agencies, established by Acts of Parliament or fit Stock Companies registered under the Company Law. The author then goes on to elaborate these three categories. Basu further elaborates on the theory of public enterprises by elaborating on quadruple types of economic activity based on the concept of remuneration as well as that of natural monopoly. (Basu, 2005)Basu highlights the personify importance of accountability and effi ciency in the management of public enterprises, stating the important role of institutional arrangements in this matter. The author then elaborates on the creation of public enterprises with regard to government policy in terms of the strategies of nationalization or introduction of a new activity and states that most post-independence cases consisted of the latter. Basu emphasizes the idea that neither the state nor the market is immune to failure and that current emphasis should be on the idea of public- sequestered synergy, and that attention should be put on both on public-private partnership and competition to achieve the objectives of efficiency and welfare. He then highlights the link between public finance and public enterprise, stating that shortsighted preludees of several developing countries including India to reduce fiscal deficit by selling public enterprises- which follow from inadequacies of public finance management could be disastrous in the long run (Basu, 2005) .Stiglitz (2000) identifies cardinal major categories in which public enterprises may consistently be much inefficient than private enterprises organizational and individual. Under the former are sub-categories regarding organizational incentives, personnel restrictions, procurement restrictions, and budget restrictions. These pertain to public enterprises organizational rules and procedures which may hamper those enterprises efficiency and performance. The nature of public firms can mean that they may not inevitably need worry about incurring losings in their operations since any such losses may be covered by public funding. The bureaucratic nature of these enterprises may also think of strict procedures with regard to the hiring and firing of employees and the appropriation of needed materials, increasing transaction cost for both the demanding firm and possible suppliers (private forms and individuals). Lastly, there is the issue of budget restrictions due to governments havi ng to allocate limited financial resources among various agencies and projects. (Stiglitz, 2000)The latter category pertains to the behavior of individual bureaucrats under the incentive structure of public enterprises. Low wages and credential of tenure may provide disincentives for bureaucrats to perform efficiently. Bureaucrats are also argued to be budget maximizers in that they seek to maximize the size of their bureaucracies by encouraging change magnitude expenditures on their respective agencies. Stiglitz cites Niskanen with regard to principal-agent problems in bureaucracies wherein government bureaucrats act in their own interests and not necessarily in the interests of the citizens whom they are supposed to serve. (Stiglitz, 2000)Chang (2007) presents a raillery of the issue of state enterprise reform. Chang argues that theoretically there is no clear case with for or against state-owned enterprises (SOEs) by citing businesss for (natural monopoly, capital market fail ure, externalities, equity) and against (principal-agent problem, free-rider problem, soft budget restrains), the author also points out that large SOEs and large private sector firms often face similar (principal-agent) problems.This mirrors Stiglitzs statement that Principal-agent problems arise in all organization, whether public or private and are particularly acute in large organizations. In both private and public cases, managers often have large amounts of discretion allowing them to track their own interests. (Stiglitz, 2000)In citing the issues of public enterprises in comparison to private enterprises, many often assume away the agency problems of private firms, thus comparing idealized private firms with real-life SOEs, the former of which would obviously come out on top (Chang, 2007). Chang 92007) points out that privatization is not the only solution to the problems of many SOEs, and that many intermediate triad way solutions exist. The author elaborates that privati zation as an option has its be and limitations and should only be taken on certain conditions, many of which are not met in pragmatism leading to many failed attempts at privatization that cause more problems than they solve. As such, the third way options (organizational reform, increasing competition, political and administrative reforms) ought to be considered before privatization. (Chang, 2007)Rational excerption Theory/Institutional EconomicsRational/Public Choice TheoryRational Choice Theory refers to those theories of the social sciences which utilize the analytical tools of neoclassical economic science, particularly, the internality guess of rational (utility-maximizing) and self-interested individuals. (Hindmoor, 2006)Hindmoor (2002) states that rational choice theorists employ an instrumental conception of rationality in which actions are judged as being rational to the extent that they appoint the best way of achieving some goal. He identifies two conceptualizatio ns of rationality The first (the axiomatic approach) conceives a rational person as someone whos preference-ordering over bundles of goods and services is reflexive, complete, transitive and continuous. The second (the optimizing approach) conceives the rational person as one who possesses optimal beliefs and acts in optimal ways given those beliefs and desires. (Hindmoor, 2006)Hindmoor writes that rationality is a controversial assumption in political science, particularly in light of the concept of bounded rationality. As such, he says that such an assumption must be justified and looks at the two approaches in order to determine which is more defensible.Under the umbrella heading of rational choice theory can be found the sub-theories of public choice, which, in turn, constituted transplanting the general analytical framework of economics into political science. (Tullock, 2002)Tullocks primary contribution to rational/public choice theory is his theories on rent-seeking, which he defines as the use of resources for the purpose of obtaining rents for people where the rents themselves come from some activity that has negative social value. Tullock continues The concept of rent seeking as popularly perceived refers to legal and illegal activities to obtain special privileges such as seeking monopoly status, special zoning, quantitative restrictions on imports, protective tariffs, bribes, threats, and smuggling. (Tullock, 2002)Indeed, rent-seeking has actually come to find the literature of rational choice theory. Hindmoor (2006) cites the plethora of studies done on various countries, on various topics to emphasize this point. He looks to three possible explanations for this (1) the name-recognition of the term rent-seeking itself, (2) the adaptability and extendibility of Tullocks tilt which can be extended to cover the analysis of any and all special economic privileges, and (3) the fact that it offered a hostile theory of state, which could be used to cou nter welfare economists arguments for government intervention. On the second reason, Hindmoor supplements Tullocks original argument by pointing out that interest groups also spend resources to prevent rivals from obtaining rents and to secure their own and that governments may also practice rent-extraction. (Hindmoor, 2006)Tullock (2002) identifies several costs involved in rent seeking The first being the actual cost of obtaining the special privilege. Of which the author provides the example of the costs of lobbying in Washington D.C. Greater costs are incurred from the distortion of the voting process, wherein public officials who are elected to pursue certain policies or projects often also pursue other less beneficial projects of which the true cost cannot be typically counted due to those politicians not disclosing the details of deals they have made. The superlative costs, however, are the indirect costs caused by rent seeking behavior. In particular, the involvement of int elligent and energetic people in an activity that contributes either zero point or negatively to society. The opportunity cost of such activities, he argues, far exceed their direct costs. (Tullock, 2002)Tullock (2002) argues that the development of rent seeking activities is influenced by many factors, in particular the structure and design of government. In general, he argues, any rule that complicates and makes the functioning of the government government decisionmaking process less smooth depart lower the amount of rent seeking. He concludes his give-and-take on the topic by emphasizing that there are as of yet no good measures of the costs of rent-seeking (Tullock, 2002).Hindmoor (2006) cites Von Mises in defining bureaucracy as any organization which specialises in the supply of those services the value of which cannot be exchanged for money at a per-unit rate. Such organizations, Von Mises suggests, find themselves effectively exempted from the demands of economic calculat ion and are, as a result, usually inefficient. He also cites Tullock the crucial feature of bureaucracies is not simply that they are hierarchies, but pyramidal hierarchies with fewer people at the top than in the lower ranks. This leads to a principal-agent relationship, with all its problems of information asymmetry (Hindmoor, 2006).In his section of Public Choice, Tullock also discusses bureaucracy. He writes that Bureaucrats are much like other people and, like people in general, are more interested in their own well-being than in the public interest. The problem is in designing institutions in such a way as to harness bureaucrats self-interest to serve the public interest (Tullock, 2002).The core problem with bureaucracy is encapsulated by Tullock in one paragraph In most bureaucracies the executive whether in General Motors, the Department of State, or the Exchequer is in a position where only to a minor extent is his or her own interest involved. Bureaucrats will make many decisions that will have little or no direct effect on themselves and hence can be made with the best interests of General Motors or the American or the British people at heart. Unfortunately bureaucrats, in general, have only weak motives to consider these problems carefully, but they do have strong motives to purify their status in the bureaucracy, whether by income, power, or simply the ability to take leisure while sitting in plush offices. They are more promising to be more concerned with this second set of objectives than the first, although they may not put very much effort into it because not much effort is required (Tullock, 2002).Tullock then further draws parallels between public and private bureaucrats. He argues that both will attempt to maximize gains for their respective employers if it pays off for them. But in neither case does the institutional structure lead bureaucrats to maximizing the well-being of their superiors. He qualifies, though, that private corporati ons have a much easier time in pursing their goals efficiently than do governments. He cites three reasons for this the comparatively simple objective of stockbrokers (profit maximization), the reasonably accurate methods of measuring the performance of corporate managers (bureaucrats) in the form of accounting, and the difference in the monomania of benefits from the efficient management of bureaucracies (private profit vs. public interest) (Tullock, 2002).Lastly, Tullock elaborates upon several proposals with regard to bureaucratic reform decentralization, depriving bureaucrats of the vote, and downsizing the size of bureaucracy. He discusses how it is often in the interest of bureaucrats to increase the size of their departments , although in some cases downsizing does occur without the objection of senior bureaucrats due to such measures not affecting them aversely or even benefiting them by, for example, leading to more highly paid positions at the top while cutting down from below. Most intriguing is his characterization of bureaucratic behaviour as resembling that of people with hobbies, albeit with two major differences it does not cost bureaucrats very much since they are predominantly using other peoples resources and that most bureaucrats honestly think that whatever it is they do is not for their benefit alone, but for the country or their bureau. (Tullock, 2002)This mirrors Niskanens theory on bureaucracy, wherein he asserts that bureaucrats find it in their interest to maximize their budgets and that they are often successful in doing so. Niskanen, himself defines bureaucracies as non-profit-making organization whose revenues derive from periodic grants (Hindmoor, 2006). Niskanen also follows Downs in assuming that bureaucrats value a range of goods including power, monetary income, prestige and security. Yet he cuts through the complexities o Downs argument by suggesting that nearly all of these variables are positively related to the size of t he bureaucrats budget (Hindmoor, 2006).Tullock (2002) elaborates goes on to the relationship between bureaucrats and two other major groups of political actors politicians and pressure groups. Tullock focuses on the ability of bureaucrats to often lord over their superiors thanks to their security of tenure. Two bureaucratic tactics are discussed the use of leaks to undermine or embarrass superiors, and the use of essential programs as proverbial shields in the fact of budget cuts. With regard to pressure groups, the collusion is the cited issue, wherein bureaus and interest groups work together to gain mutual benefits from government. (Tullock, 2002) With regard to this relationship Niskanen argues that the bureaucrats have two advantages over politicians which allow them to increase their budgets (1) greater information on the costs involved in their bureaucracies provision of goods, and (2) the ability to make take-it-or-leave-it offers to their political patrons (Hindmoor, 2006) . Politicians on the other hand are attributed four capacities (1) the ability to select the bureaucracys overall output, (2) the ability to ensure that bureaucrats fulfill their promises in return for an agreed budget, (3) the ability to ensure that the total benefits individuals derive from consuming whatever output it is that the bureaucracy provides are equal to or greater than the total costs of providing it (Hindmoor, 2006) and (4) the ability to ensure that the marginal benefits of any output are not negative (Hindmoor, 2006).As Hindmoor points out, however, Niskanen has accepted the argument of Jean-Luc Migue and Gerard Belanger (1974) that bureaucrats do not so much maximize the size of their budget, but rather that of their discretionary budget, defined as the difference between their budget and the nominal costs of supplying their expected output. They argue that though this discretionary budget cannot be used by the bureaucrat for personal profit, it can be used to gain greater power, patronage, prestige, and so on (Hindmoor, 2006). Regardless of this distinction, however, the conclusion is still that the bureaucracies are inefficient because their budgets are too large. (Hindmoor, 2006)Hindmoor further critiques Niskanens argument by citing several whole kit by multiple authors who point out that (1) politicians actually hold great power over bureaucrats, so much so that bureaucrats can be deterred from making excessive demands (2) politicians can trick bureaucrats into revealing information on minimal costs by asking them how much output they would be voluntary to provide at various per unit prices. (3) constituents and interest-groups may raise alarms about with regard to ineffective bureaucracies, (4) administrative rules and standard operating procedures keep bureaucracies in line, and (5) that congressional Committees have the formal power to hire and fire senior bureaucrats, ring-fence particular investments and hold investigations and pu blic-hearings into an agencys performance (Hindmoor, 2006).In his discussion, Tullock concludes by emphasizing that bureaucrats are not necessarily bad people, but that the institutional arrangement often frees them of the constraint of efficiently carrying out the tasks to which they have been assigned. The author then iterates that both large governments and large private corporations necessitate bureaucracies, and that such bureaucracies can be both conducive and/or obstructive to good government. (Tullock, 2002)Now, while rational choice theory certainly dominates discussion of government inefficiency Field (1979) argues that while it provides an easy framework for analysis, it is incapable of providing explanations. He argues that since rational choice models are as incapable of providing sufficiently restrictive predictions, which provide accounts which tell why a certain outcome was reached instead of another. He points to the inability of neoclassical economic analysis in ex plaining oligopolies, citing that Economists can analyze an existing cartel by pointing to the benefits which participating companies receive as the result of restricting output and raising prices. But economist can equally well analyze the absence of a cartel by pointing to the benefits individual members would obtain by violating such an agreement. (Field, 1979)Field goes on to critique the idea of explaining social outcomes based on the conception that they spring from economic forces. He mentions that while rational choice models have the comparative advantage when it comes to understanding outcomes which are caused by economic forces, they do not take into consideration the ways in which social forces affect the operation of markets. (Field, 1979)Field thus argues that the inherent limitations of rational choice/economic models in explaining systems of rules mean that they are no replacement for institutional economists qualitative approach, which holds historical understanding of the laws and customs organizing the process under investigation as essential. However, he does make the consideration that while rational choice models cannot satisfactorily explain institutions by themselves, they can help. (Field, 1979)Institutional EconomicsR.A. Gordon (1963) attempts to outline the characteristics of institutional economics in the form of several propositions (1) Economic behavior is strongly conditioned by the institutional environment (in all its manifestation) within which economic activity takes place, and economic behavior in turn affects the institutional environment. (2) This process of mutual interaction is an evolutionary one. The environment changes, and as it does, so do the determinants of economic behavior. Hence the need for an evolutionary approach to economics. (3) In this evolutionary process of interaction, a key role is played by the (largely conflicting) conditions imposed by modern technology and by the pecuniary institutions of modern c apitalism. (4) Economics is more concerned with conflict than with a harmonious order in which unconscious cooperation results from the free play of market forces. (5) Since conflict underlies so many economic relationships, and since these relationships are not immutable, there is room and need for social control of economic activity. (6) We need to learn all that we can from psychology, sociology, anthropology, and law if we are to understand why human beings act as they do in their economic roles. People are not maximizing automata reacting mechanically in an institutional vacuum. (7) Granted the preceding assumptions, much of orthodox economic theory is either wrong or irrelevant because it makes demonstrably false assumptions and does not ask the very important questions. A new, broader, evolutionary theory based on behavioral assumptions derived from the other social sciences and on detailed knowledge of the evolution and present characteristics of the institutional environm ent needs to be constructed. A wide variety of empirical studies must precede the attempt to construct such a broader, evolutionary, and more virtual(prenominal) corpus of theory (Gordon, 1963).Thorstein Veblen is commonlyregarded as the founding father or guiding spirit of American institutionalism. (Ayres, 1964) In Institutional Economics, Ayres argues that the central idea of Veblens works was a call for a completely different ontology of economics with a completely different conception of what constituted the economy. Whereas the conception of mainstream economics has been that the economic system is centered on the concept of the market and tied together by individuals self-interest. Instead, Ayres asserts that Veblen took on an anthropological conception of the economy. One where in it is the state of industrial arts that gives occasion to exchange, so the extent of the market must always be limited by the state of the industrial arts. This was the direct opposite of the thi nking of mainstream economics at that point that the various aspects of civilizations development could be attributed to market forces. (Ayres, 1964)Ayres puts Veb