Tuesday, 28 July 2009

Japan islamic finance


LONDON: Etsuaki Yoshida, deputy head, Africa and the Middle East, at the Japan Bank for International Cooperation (JBIC), cuts a very frustrated figure these days. Last year before the global financial crisis set in, JBIC was still on course to issue the first international Sukuk by a Japanese entity, albeit in Malaysia.

These days, any talk of an imminent Sukuk origination out of Japan by a Japanese utility is quietly dismissed. Yet the reasons for this are not that clear or that forthcoming.

Japanese institutions watch with both envy and trepidation the progress being made by regional countries including Singapore, Hong Kong, Korea, Indonesia and even Australia in facilitating Islamic finance in their jurisdictions or the statement of intent pronounced by regulatory authorities and governments in these countries relating to promoting Islamic finance in their markets.

One explanation for the official Japanese ambivalence to Islamic finance, according to Yoshida, is the market environment in Japan. The country has a Muslim population of a mere 10,000 compared with 2 million in the UK and 12 million in France. Japanese banks also historically do not have strong ties with the Middle East. No Middle Eastern banks have branches in Japan. Only one Qatari bank has a representative office in Tokyo. Even Malaysia’s CIMB Group recently closed its Tokyo office.

At the same time Japan does not have truly global banking majors such as HSBC and Japanese banks mainly service the business of overseas Japanese companies. At best Japan’s economic relations with the Middle East are overshadowed by its oil and petrochemical imports from the region.

“Islamic finance is difficult for the Japanese,” stressed Yoshida in London last week during a Sukuk conference. “Japan is isolated from international communities, and there are unique language and cultural barriers.

The Japanese tend to think that Islamic finance is mysterious — something only for Muslims and that interest-free banking is not profitable for banks. They also believe that Shariah advisories live in mosques.” Yoshida believes that harmonization of Shariah interpretation and modes of financing would help in demystifying Islamic finance to non-Muslim markets such as Japan.

However, Japanese banks and corporates have long been involved in Islamic finance where as fund mangers for Islamic equity funds; raising short-term funds through commodity Murabaha facilities arranged through London and using contracts on the London Metal Exchange; launching Islamic exchange-traded funds; setting up joint ventures in Takaful (Islamic insurance) and participating in Islamic syndications.

Entities such as Mitsubishi, Sumitomo, Mitsui and others have been active in raising Islamic facilities through London for almost two decades. Nomura, for instance, is the fund manager of the Al-Nukhba Japanese Equities Fund, launched by Jeddah-based Al-Tawfeek Company for Investment Funds, part of the Dallah Albaraka Group. DIAM is another asset manager active in Islamic investment fund market. Last year, Daiwa Securities launched the Daiwa Islamic Exchange-traded Fund (ETF) off the FTSE Shariah 100 Japan Index and which is listed on the Singapore Stock Exchange.

Japanese insurance company, Tokio Marine & Fire Company, is probably one of the most active non-Muslim companies involved in Takaful. It started a Takaful operation with a local partner in 2001 in Saudi Arabia. Since then it has a Retakaful operation in Singapore; a Takaful operation in Indonesia; a Takaful joint venture with Hong Leong Islamic bank in Malaysia called Hong Leong Tokio Marine Takaful; and last year the company got a Takaful license in Egypt.

There have been some encouraging signs recently, especially in the changes in the financial regulations of the country. According to Yoshida, the Financial Services Agency of Japan amended the banking regulations in December 2008. Under the amendments, the subsidiaries of Japanese banks can now get engaged in Islamic financial transactions.

But Murabahah and Ijarah-type of financing that involves asset trading is not permissible for Japanese banks under the current Banking Act.

The above amendments do require that any financial transaction must be regarded as equal to financing, and that the financial transaction must be Shariah-compliant with approval by a Shariah board.

According to Yoshida, the amendment has already resulted in positive developments in the market. For instance, SMBC Europe (London) and Bank of Tokyo-Mitsubishi UFJ (Malaysia) have set up a dedicated team to structure and place Islamic deals. He believes that this paves the way for greater future involvement in the Islamic finance sector by Japanese banks and securities firms. Already 10 Japanese firms are members of the Kuala Lumpur-based Islamic Financial Services Board (IFSB), the international body which sets prudential and supervisory standards for global Islamic finance.

But on whether JBIC is still in the market to issue a Sukuk, Yoshida remains coy and non-committal.

Sukuk, he suggests, is still not clarified under the Japanese law whether they constitute bonds or trust beneficiary rights. Other issues that still need to be resolved include those relating to the assets transferred to the SPC (special purpose company) in the Sukuk structure; harmonization with the conventional government bond framework and governmental procedures for asset transfer in asset-backed Sukuk.

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