Introduction
Japan has been talking about Islamic finance for several years with Japan Bank for International Cooperation leading the way in terms of local research and development. However, up until recently, only a small number of Islamic finance deals have been done in this market. This is all changing - Japan has made headlines in the Islamic finance market over the last couple of months with the issuance of US$100 million sukuk - al - ijarah, listed on the Bursa Malaysia, as well as the establishment of commodity murabaha facility (which, due to strong investor demand, was upsized from US$50 million to US$70 million). Following closely on Nomura's heels, Sumitomo Corporation has announced that it is planning to launch Japan's first yen - denominated Islamic funding deal.
These transactions are particularly remarkable in view of the fact that unlike other countries such as Singapore and Hong Kong, Japan has not, at the present time, amended its regulatory and tax legislation to take into account the requirements of Shariah compliant transactions. The absence of such a framework has not deterred these major Japanese multinationals from diversifying their funding sources by tapping the Islamic finance market. This is not only a significant step for corporate Japan but also for other corporates in the Asia Pacific region who may be encouraged to closely consider Islamic financial products as viable alternative methods of raising finance.
Background
On a global scale, borrowers have recognized that there is a significant pool of Islamic finance institutions and investors, who as a result of their constitutions and beliefs, are prohibited from investing in conventional debt instruments but who may invest in instruments which are structured in a way which meets Shariah principles. Over recent years, Sukuk (economically similar to conventional bonds) have grown in popularity since while they mirror the economic effect of a conventional bond, they also meet Shariah principles. The key differential being that the profit made on the investment is generated from the returns from an underlying asset, project or venture rather than being a simple debt paper.
Although there has been a great deal of interest in Sukuk globally, the Sukuk market (and the Islamic finance market as a whole) has been dominated by Malaysia, closely followed by the Gulf countries. It is highly likely that Malaysia will continue to be the centre of Islamic finance in the Asia Pacific, not only because the majority of its population is Muslim and the fact that it has a large number of Islamic financial institutions, but also because the Malaysian government has ensured that the appropriate regulatory and taxation framework is in place to encourage Islamic finance transactions. The government / regulator also strongly supports the industry and leads the way in its promotion. Nevertheless, this has not deterred non-Muslim countries in the region such as Singapore and Hong Kong from trying to establish themselves as regional "hubs" for Islamic finance by amending their laws to ensure that Shariah compliant transactions are given equal regulatory and tax treatment vis - a - vis conventional debt.
The Japanese example
There is no doubt that Japan has recognised the opportunities presented by the Islamic finance market. In December 2008, the Financial Services Agency of Japan amended the banking regulations to permit the subsidiaries of Japanese banks to engage in Islamic finance transactions. These amendments have permitted Japanese banks such as SMBC Europe (London) and Bank of Tokyo - Mitsubishi UFJ (Malaysia) to structure and place Islamic deals. However, Japan's banking regulations have not yet been amended to permit murabahah (cost - plus financing) or ijarah (leasing) transactions, both common Islamic financing structures. As such, Japan was viewed as not having the necessary tax and regulatory framework in place to actively promote Sukuk or other Islamic finance transactions by Japanese entities.
However, the recent transactions by Nomura and the announcement by Sumitomo have shown that the lack of local framework for Islamic finance structures should not necessarily be an impediment to issuers who are keen to tap the liquidity of Islamic finance investors in Malaysia and the Gulf. Nomura managed to structure the transactions using a commodity based murabahah for its banking facility and an ijarah for the Sukuk despite the fact that there were no specific regulations covering these structures.
The future
Nomura's and Sumitomo's launch into the world of Islamic finance is not merely symbolic but demonstrates to other Asian corporates that there are genuine opportunities and viable methods for accessing the Islamic markets. Even though certain countries, like Hong Kong and Singapore, acted rapidly to ensure that the proper tax and regulatory framework was in place to cater to certain types of Islamic financing structures, it may in fact be countries like Japan, China, Indonesia and Australia, which are more likely to seek funding opportunities from the Islamic finance market. It is these countries which have large property, energy, high tech and infrastructure sectors which tend to have, or involve the development of tangible assets, which naturally lend themselves to Islamic finance structures.
The fact that the Australian federal government is seeking to amend its banking and finance regulations to allow Islamic finance to operate on an equal footing with conventional debt is encouraging. There will of course be issues that need to be resolved (such as the concern that ijarah transactions may attract double stamp duty). However, as the Japanese corporates have shown, the lack of a local framework does not mean that Islamic finance methods should be dismissed; rather many of these obstacles may be overcome with a little innovation.
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