Newsletter No. 489
News-Analysis
January 22, 2007

 

This newsletter examines Japan’s most recent moves toward the Islamic banking market. First, we have a short report from Sandra R. Leavitt (Shingetsu Member No. 55) of Georgetown University; Second, an opinion piece that was carried in today’s Asahi Herald. We learn from the second article that the first initiative toward getting Japan involved in Islamic banking may have come from the Gulf countries themselves.

JBIC TO OFFER ITS FIRST ISLAMIC BONDS IN MALAYSIA

According to the Business Times of Malaysia, the Japan Bank for International Cooperation (JBIC), the government's main overseas lender, plans to sell its first Islamic bonds in Malaysia in a “bid to attract oil wealth from Muslim investors.”

International investors will be offered bonds valued from $200 to $300 million as early as mid-year.

The IMF has estimated that Arab states earned $500 billion in 2006 from petroleum sales. These sales produced a record $16.8 billion of Islamic bonds sold worldwide in 2006, more than doubling the $7.6 billion issued in 2005.

JAPAN BANKS WANT A PIECE OF ISLAMIC FINANCING
By Manabu Hara
Asahi Shinbun Staff Writer

With more oil money circulating on the world's financial markets, an increasingly important subject for developed countries is how to funnel the oil dollar into their own markets. So banks are turning their attention to the Islamic financing market, which Islamic nations favor in using their oil money.

Among developed countries, Britain has already moved to deal in this type of financing, which is much different from conventional financial practices in most countries. Now, the Japanese banking industry, led by the Japan Bank for International Cooperation (JBIC), is hoping to follow suit.

The JBIC on Monday and Tuesday will hold seminars with the Islamic Financial Services Board, a Malaysia-based international organization for Islamic finance, to study this unfamiliar form of financing. For the past few years, the JBIC has increasingly shown interest in entering the Islamic finance market, which has been largely untapped by Japanese banks. In March last year, the JBIC joined in a syndication loan for an oil and petrochemical-related project, which was partly covered by other banks' Islamic financing. The JBIC also participated in a syndication loan for a project with Bahrain, which partly used other banks' Islamic financing in February 2005. The JBIC has formed what it calls a "Shariah" (Islamic law) advisory group through which the government-affiliated bank plans to gain information and know-how on the Islamic financing structure. It has also formed a task force with Japanese commercial banks to study the system.

The move was apparently prompted by the prime minister office when Junichiro Koizumi was in charge. Sources close to the office said Middle East countries asked Koizumi to cooperate in Islamic financing.

Only a few Western banks have extensive knowledge on Islamic financing, including Hong Kong and Shanghai Banking Corp., although Islamic financing has been expanding around the world. Penetrating into the Islamic financing market is difficult for non-Islamic banks, including the JBIC, for a number of reasons. One is the philosophy of financing based on the Koran. Anything that might possibly violate the teachings of the Koran is not permitted. For example, it is understood among Japanese experts that the Koran prohibits some important financial items of the non-Islamic world: interest and speculation. Islamic financing tends to have both investors and financial institutions share the risks. Thus, many financial activities, such as simple lending or derivatives trading frequently practiced in the modern banking industry, are either impossible or at least extremely difficult under Islamic rules. Still, conventional banks are groping for ways around these rules.

One typical financial activity in Islamic financing is Murabaha, a kind of cost plus sales. A bank, for example, buys an asset, such as real estate, and resells it at a profit. The buyer can pay the bank in installments, but is not charged interest. In modern banking methods, the bank loans money to the buyer who directly pays the seller for the asset. According to JBIC, Murabaha transactions make up 70 percent of Islamic financial deals. Other transactions include Ijara, a kind of lease financing, and Musharaka, a way of sharing profits and losses in a joint venture.

The JBIC plans to become the first Japanese bank to issue Islamic bonds, in cooperation with a local bank, such as RHB Islamic in Malaysia, the world's most active country for Islamic financing. The JBIC is studying whether the money procured by that method can be used for environmental improvements in Asia or the development of the Asian bond market.

But Japanese bankers face many problems. They are not at all familiar with the Koran and depend heavily on Muslim advisers. Moreover, interpretations of the Koran change from time to time, which affects the rules for Islamic financing. Unified rules for the system have yet to be established. In addition, Malaysia has set strict controls on the dollar since the country's bitter experience in the Asian financial crisis of the late 1990s. Exchanging the ringgit, the Malaysian currency, into greenbacks is costly. So issuing Islamic bonds in Malaysia is not so attractive.

Some Japanese experts hope that Islamic bonds will be issued on the Japanese financial market. But Japan must establish a financial framework for such transactions through legal revisions. That won't be easy. Turf battles between the Finance Ministry, the Financial Services Agency and the Ministry of Economy, Trade and Industry could erupt over jurisdiction.

Still, Islamic financing is an attractive option for Japan. Currently, Islamic financing has spread to more than 75 countries, and at least 250 financial institutions are involved in these transactions. Estimates put total assets for Islamic financing at around $400 billion (48.5 trillion yen). In 2005, oil dollars were worth $900 billion, of which $400 billion was funneled into oil-producing countries in the Middle East.