One of the major characteristics of the recent development of Islamic finance is that non-Muslim western financial institutions are becoming more actively involved in this rapidly growing industry. The UK, the US, Germany and other Organization for Economic Cooperation and Development (OECD) countries have major financiers that are expanding Shariah-compliant businesses. Unfortunately, this is not the case with Japan, which has only a small Muslim population at the moment. However, Asia’s largest economy will not be silent for much longer. Islamic finance in Japan has now begun to dawn.
Growing Knowledge
The fiscal year of 2006 (April 2006 – March 2007) marked a new epoch in the history of Japan’s financial industry. During this period, Japanese bankers and investors gradually deepened their familiarity with Islamic finance. Before 2006, the Japanese’s knowledge of Islamic finance came mainly from the field of investment. They came to know a little about Islamic investment when the skyrocketing growth of petrodollars was said to be the major source of the continuous rise of the Nikkei Stock Index, especially in late 2005. In the same year, some Japanese paid attention to the news of an influx of Islamic money into the country. The investment was transacted by a property fund ARCAPITA, which was established jointly by CapitaLand, a real estate developer in Singapore, and a Bahraini Islamic investment bank.
Islamic finance became more popular in June 2006 when the former Bahrain Monetary Agency (now the Central Bank of Bahrain) hosted an Islamic finance conference in Tokyo. It became even more familiar when the Financial Times reported in August 2006 the possible issuance of Sukuk by Japan Bank for International Cooperation (JBIC), the government’s finance arm for enhancing international trade and investment.
In addition, on 22 January this year, a seminar on Islamic finance was held in Tokyo, jointly hosted by Islamic Financial Services Board (IFSB) and JBIC. Originally, the number of attendees had been expected to be around 150, but eventually more than 250 took part in the first-ever international event on Islamic finance in the country. Also, the NIKKEI, the most popular business paper in Japan, has occasionally published articles on Shariah-compliant finance on the front page of its daily issues. Japanese business magazines have also discussed Islamic economies and their financial industries.
Banking Action
In such circumstances, where increasing numbers of people in Japan are showing their strong interest in financial services that comply with Shariah principles, JBIC is taking the lead among Japanese financial institutions and government bodies. First, JBIC initiated the above-mentioned seminar, with strong support from IFSB. Secondly, the bank has made a strategic decision to issue Sukuk regularly, with the first issue in the first half of 2006. Thirdly, four eminent Shariah scholars became advisors to JBIC last year. With their help, JBIC organises a study group on religious finance with other major financial institutions in Japan. Fourthly, a memorandum of understanding (MoU) was signed this year between JBIC and Bank Negara Malaysia, one of the leading regulators in this field. Under this MoU, JBIC will collaborate with and contribute to the sound development of Islamic finance, especially in the Asian region.
JBIC has taken such action in order to enhance the stability of the international financial order, as well as to promote economic and social development in developing countries. JBIC strongly believes that Islamic finance can be an effective key for fulfilling these objectives. Non-conventional finance can encourage investment from the Gulf into Asia, giving variety in terms of types of funds, from which we can expect more financing to a wider range of people in the region. Higher liquidity and more diversity can also contribute to financial stability, which is a lesson we learned from the Asian financial crisis in 1997.
In this sense, the authorities in Asian nations, including Japan, should cooperate to promote this from a regional perspective. This idea is in line with the vision known as the Asian Bond Markets Initiative, an attempt by Asian financial ministries to promote the accumulation and circulation of funds within the region, and which was established as one of the measures for coping with possible crises. The issuance of Sukuk by the World Bank and International Finance Corporation partly intended this point; JBIC’s plan to issue Sukuk can be interpreted likewise.
Although JBIC has taken the lead in consolidating the environment for Islamic finance in Japan, it is not alone. The Malaysian subsidiary of Bank of Tokyo-Mitsubishi UFJ (BTMU) and Mizuho Corporate Bank both took up observer memberships at IFSB this March. Bank of Japan, the nation’s Central Bank, has also applied for membership.
On the business side, Sumitomo Mitsui Banking Corporation (SMBC) set up a branch in the Dubai International Financial Center in March this year, to encourage regional transactions in the Middle East, including Islamic business. Other banks are reportedly planning to follow SMBC. Also, the Malaysian BTMU made a strategic alliance with CIMB Group last year, aiming at strengthening local business, including Islamic finance. With regard to Islamic investment, some asset management houses in Japan already provide Shariah-compliant investment funds. A Japanese hedge fund based in Singapore has already set up an Islamically structured property fund, with assistance from a Shariah scholar.
Takaful
Turning to the area of Takaful, the situation in Japan is more advanced. Tokio Marine and Nichido Fire Insurance Co (Tokio Marine) launched a Takaful business targeting local customers in the Kingdom of Saudi Arabia in 2001. Seeing the tremendous opportunities available in the Takaful business, Tokio Marine then opened a Takaful branch under the existing Tokio Marine Indonesia in 2004. In addition, it created a re-Takaful company in Singapore in the same year. In 2006, Tokio Marine established a joint Takaful operation in Kuala Lumpur in collaboration with Malaysia’s Hong Leong Group. With the exception of the re-Takaful company, those businesses are all targeting local retail markets in the respective countries.
Tokio Marine’s success suggests that a Japanese financial institution managed by non-Muslim Japanese could successfully enter into Islamic finance business. It is highly possible that other financial institutions in Japan, not only insurers, but also banks and securities companies, may be inspired by the success of Tokio Marine.
Regulatory Difficulties
Japanese financial institutions, including JBIC, are eager to commit themselves further to Islamic finance. When pursuing the initiation and expansion of Shariah-compliant business, however, Japanese banks may face legal difficulties, since the existing Banking Act in Japan restricts the non-financial activities of a bank. In this regard, the Japanese government should refer to the measures taken by the Monetary Authority of Singapore, which explicitly approve a bank to buy goods on behalf of its customers under the Murabahah concept, so that now a bank based in Singapore can legitimately offer Murabahah-based financing services.
Conclusion
In conclusion, the status quo of Islamic finance in Japan is still in the incipient stages in terms of actual development. However, with policy measures as well as the involvement of private institutions, including the commitment from JBIC, Japanese Islamic finance will surely mature and grow from dawn into a bright day.
This article was first published in Islamic Finance news (Volume 4, Issue 16).
