Japan banks venture deeper into Islamic finance business

A customer walks past a Bank of Tokyo Mitsubishi UFJ branch in Tokyo. The bank, Japan’s largest, in September issued its first sukuk under a multi-currency programme in Malaysia, including the world’s first-ever yen-denominated sukuk. It will also start offering Shariah-compliant deposit and loan services at its Dubai branches this year.By Arno Maierbrugger/Gulf Times Correspondent /BangkokJapan, which has become a lot more Muslim-attentive in the recent past, mulls issuing regulations that would allow Japanese banks to provide Islamic financial products on the domestic market for the first time.The move comes after Japan’s Financial Service Agency, the country’s financial market regulator, allowed major banks as early as in 2007 to offer Islamic finance services at their branches abroad, an opportunity that has been seized by some of the largest financial service companies and lenders. The first sukuk was issued by Aeon Credit Services in Malaysia in 2007, followed by a US dollar sukuk issued by Nomura Investment Company in 2010. Toyota Capital Malaysia sold two US dollar sukuks in 2012, and Bank of Tokyo-Mitsubishi UFJ in September last year issued its first sukuks under a multi-currency programme in Malaysia, including the world’s first-ever yen-denominated sukuk. The bank, Japan’s largest, as well as Sumitomo Mitsui Banking Corp, will also start offering Shariah-compliant deposit and loan services at its Dubai branches this year. Another lender, Mizuho Financial Group, plans to make its London branch its operational centre for Islamic finance in the Middle East. As for domestic Islamic banking services, the Financial Service Agency posted a statement on its website where it is asking for public comments until March 27 and said it would release the results of an internal consultation by the end of April. Bank of Tokyo-Mitsubishi UFJ is reportedly expecting a “positive” outcome that will lead to a further relaxation of the rules.While Japan with its 127mn people does not have a large Muslim population that would make Islamic retail banking worthwhile – estimates suggest a Muslim population between 70,000 and 100,000, of which probably 90% are resident foreigners and the rest native Japanese –, the country is the largest bond market in Asia which would likely give the sukuk business in East Asia an enormous boost and would also threaten Malaysia’s current role as Asia’s largest market for Islamic bonds. According to Camille Paldi, CEO of the Dubai-based Franco-American Alliance for Islamic Finance, a consultancy firm servicing clients in Islamic banking, finance and takaful, “Japan is an emerging Islamic finance powerhouse and East Asian hub for the trillion-dollar Islamic finance industry.”She added that she is “confident that Japan can become a major player in the Islamic finance industry” because “in addition to the Japanese government, the Japanese business conglomerates, or keiretsu, are interested in issuing sukuk to raise capital for Japanese businesses and to increase their competitiveness in domestic and global financial markets.”Paldi’s opinion on the so-called “J-sukuks” is echoed by RAM Ratings, Malaysia’s largest homegrown credit rating agency. “There is a growing role for Japan in the development of the Islamic finance market, the agency said at a recent Islamic finance conference in Kuala Lumpur. Tax reforms introduced in 2011 have also helped facilitating the issuance of “J-sukuks,” RAM Ratings said.With Islamic bonds, Japanese banks want to tap funds and investors mainly in Malaysia, Indonesia and the Middle East. Bond issues in yen are also seen to attract more interest from investors seeking securities with high liquidity and good ratings (Japan’s Standard & Poor’s rating for sovereign debt is currently AA-, one notch higher than Malaysia’s A-).