LONDON,  Japan's Financial Services Agency (FSA) has submitted an amendment to the banking law to the Diet (Japanese parliament) which may allow Japanese banks to offer Islamic finance products through a subsidiary. Tadashi Maeda, director general and special adviser for energy & resources at the Japan Bank for International Cooperation (JBIC), confirmed that currently Japanese banks are prohibited to do so under Article 12 of the banking law.
"The implication of this amendment," said Maeda, "is to allow the Japanese bank to do some asset trading, which implicitly includes Ijara (leasing), Murabaha (cost-plus financing) or Istisna (construction finance) products in Japan. Through our conversation with the private sector, they are trying to get involved through a step by step approach. First they are trying to engage in the business of Sukuk as an arranger, say through their foreign subsidiary in London, Kuala Lumpur or Dubai. These Japanese banks have already approached the FSA in Tokyo to get permission to do this. The FSA did not give them any expressed permission but at the same time said that it did not have any objection to them arranging Sukuk."

Maeda is confident that the amendment to the law will be adopted in the current session of the Diet, which ends on June 20, 2008. He predicts that within three years we may see Islamic financial products being offered to ordinary Japanese customers by local high street banks.

However, the current activities of Japanese banks will be confined to offerings in the international markets, because it would be easier to do so. The real obstacle of offering these products in the domestic market is the tax issue, in the absence of fair treatment for Islamic finance products to make it level playing field with conventional financial products. This would put an extra cost on Islamic finance products, thus rendering them uncompetitive.

Maeda also revealed that the long-awaited Sukuk issuance by Japan Bank for International Cooperation (JBIC) has been delayed because of differences in interpretation of the permissibility of the Murabaha Sukuk structure by the Shariah Boards of the two advisers to the issuance, Citigroup in the GCCGCCLoading... and CIMB group in Malaysia.

"We tried to issue a Sukuk based on the commodity Murabaha structure in Malaysia. We initially wanted to issue ringgit-denominated issuances but Bank Negara Malaysia, the central bank, persuaded us to do a US dollar denominated one. It will be in the region of US$500 million. We should have already issued the Sukuk, but because of some disagreements over the Shariah structure, we have had a delay. Therefore, we may need some restructuring. We may change the structure to a Musharaka Sukuk structure," he explained.

There is also concern from JBIC's treasury department about the spread for the issue and the timing, because it may be a little "difficult to sell in a global market at this moment" because of the credit crunch as a result of the subprime mortgage crisis.

JBIC is a AAA rated institution by the international credit rating agencies. Normally for its conventional bond issues, JBIC can issue on a Sub-LIBOR basis. But this would not be possible for a Sukuk issue, stressed Maeda. He thinks a JBIC Sukuk would more realistically be priced between LIBOR plus 15 or 20 basis points.

JBIC would be marketing the issuance primarily in the Gulf Cooperation Council (GCC)Gulf Cooperation Council (GCC)Loading... countries, UK and Europe, Malaysia, Singapore and Hong Kong. The asset pool for an Ijara or Musharaka structure would most likely be in Malaysia, where there has been talk about securitizing the buildings of the state-owned Malaysia Islamic Center. Alternatively, there may be asset pools in Singapore which could be used.

In Japan, it's the Finance Ministry, instead of the FSA, that has the power to change the laws regarding tax treatment for financial products. But JBIC's Maeda acknowledges that this kind of coordination is very difficult in Japan, where lobbying is not as great a feature of the governance process as say in the US and UK.

"This is a very difficult process in Japan. We need to create more awareness of Islamic finance in Japan, especially through the mass media and the general public. There is much misunderstanding on Islamic finance. Many popular newspapers refer to Islamic finance as illegal in Japan, which is not true. Even the governor of the Bank of Japan did not understand the intrinsic principles of Islamic finance," he explained.

However, things are changing with Nikkei, which is the top economic newspaper in Japan, for instance, taking up the challenge of promoting and explaining Islamic finance to the market and stakeholders.

Maeda also revealed that JIBIC is forging alliances with various entities such as Bank Negara Malaysia and the Jeddah-based Islamic Development Bank (IDB)Islamic Development Bank (IDB)
Islamic Development Bank.