This report was prepared as part of theWorld Bank engagement in the Philippines to support IslamicFinance and Financial Inclusion. It provides an overview onthe context for the development of Islamic finance in thePhilippines and is accompanied by two focused reportsproviding further detail and suggestions on enhancingfinancial inclusion in the Philippines through Islamicmicrofinance and assessment of the status of financialinclusion in Autonomous Region in Muslim Mindanao (ARMM)andthe proposed Bangsamoro territory. The term Islamic financeis used to refer to financial activities conforming toIslamic Law (Shari‘ah). One of the main principles of theIslamic finance system is the prohibition of the payment andthe receipt of ribā (interest) in a financial transaction. Apure debt security is replaced with an “asset-based”security, direct financing of a real asset, and differentforms of partnerships of which equity financing is the mostdesirable.The following key principles guide IslamicFinance: i) Prohibition of interest on transactions (ribā);ii) Financing must be linked to assets (materiality); iii)Engagement in immoral or ethically problematic businessesnot allowed (e.g., gambling or alcohol production); iv)Returns must be linked to risks. Table 1 provides a summarydescription of basic financial instruments.Over the pastdecade Islamic finance has emerged as an effective tool forfinancing development worldwide, including in non-Muslimmajority countries. Discussion and interest in Islamicfinance has also appeared on G20 discussions. Majorfinancial markets are discovering solid evidence thatIslamic finance has already been mainstreamed within theglobal financial system – and that it has the potential tohelp address the challenges of ending extreme poverty andboosting shared prosperity.In summary, Islamic finance isequity-based, asset-backed, ethical, sustainable,environmentally- and socially-responsible finance. Itpromotes risk sharing, connects the financial sector withthe real economy, and emphasizes financial inclusion andsocial welfare.