Japan moves carefully toward Islamic finance

Asahi Shimbun:The Japanese government has taken a small but important step toward introducing Islamic finance here amid the global financial crisis triggered by unsustainable subprime loans in the United States.

Earlier this month, the Financial Services Agency (FSA) amended financial regulations to let bank subsidiaries handle Islamic finance operations.

The Islamic finance market has become increasingly attractive for Japanese, having already grown to about $1 trillion with a potential to reach an estimated $4 trillion.

Obviously, "oil money" has been undermined by the global financial crisis. Yet the latest push forward by the FSA strongly suggests that Japan has a growing interest in Islamic finance as a competitive way to attract huge amounts of petro-funds.

Last year, the Japanese government revealed its Asia Gateway Initiative, which includes the promotion of Islamic finance as a method to develop the Asian bond market.

The Ministry of Economy, Trade and Industry also touched upon Islamic finance in last year's White Paper on Trade.

Other countries, like Britain and Singapore, are way ahead of Japan in the field, having made moves to use Islamic finance to enhance their own financial markets.

Bringing in oil money

Yoshihiro Watanabe, managing director of the Institute for International Monetary Affairs, said the significance of Islamic finance is "to bring in oil money to Japan and stimulate the Japanese economy."

Etsuaki Yoshida, deputy division chief at the Policy and Strategy Department for Financial Operations at the Japan Bank for International Cooperation (JBIC), is known as one of the few specialists in Japan.

"Although this is my personal view, the current (global) situation actually heightens the relative significance of getting involved (in Islamic finance)," he said.

Although only a few books on Islamic finance have been published in Japan, Yoshida has already written two of them.

Experts acknowledge that Islamic finance is also important for starting projects in the Middle East and can serve to enhance the Asian bond market.

Despite the various barriers remaining in Japan, the private sector has been participating in a number of overseas projects through Islamic financing methods. This year, a Mizuho Corporate Bank subsidiary in the Netherlands became a lead manager of a syndicated loan for a Saudi Arabian project to mine and refine phosphate ore. Part of the loan was made through Islamic financing.

In Malaysia, a subsidiary of Aeon Credit Service Co. and Toyota Capital Malaysia Sdn. Bhd now extends car loans through Islamic financing plans, while the Tokio Marine Group sells Takaful Insurance, a type of Islamic insurance.

Islamic finance has also spread to bourses. The Tokyo Stock Exchange and Standard & Poor's jointly developed an index for Shariah-compliant companies. Daiwa Asset Management Co., meanwhile, created Shariah-compliant exchange-tradable funds that are now a feature on the Singapore Stock Exchange.

JBIC has taken the leading role in dealing with Islamic finance in Japan, participating in syndicated loan investment projects partly funded through Islamic financing in Bahrain in 2005 and Saudi Arabia in 2006.

One of JBIC's goals was to accumulate know-how and experience regarding Islamic finance. But the JBIC's role in those projects was limited to financial assistance through conventional methods.

In 2006, JBIC established the Shariah Advisory Group within its headquarters to learn from Muslim scholars well-versed in the tenets of Islam and Islamic finance. The organization has since been hosting study groups with three major Japanese banks: Bank of Tokyo-Mitsubishi UFJ Ltd; Sumitomo Mitsui Banking Corp Ltd.; and Mizuho Corporate Bank.

Furthermore, JBIC became the first Japanese organization to join the Islamic Financial Services Board (IFSB), an international organization based in Malaysia whose goal is to promote and enhance the Islamic financial services industry. JBIC also has business ties with the Central Bank of Malaysia concerning Islamic financial services.

Overcoming barriers

However, in the face of the "worst global financial crisis in 100 years" and watching crude oil prices drop sharply, skeptics doubt if oil money can really weather this financial storm. In fact, the rapid growth of Islamic finance in the Middle East has been showing signs of a slowdown since last year. Some say Islamic finance has actually started to shrink.

Watanabe, however, remains optimistic.

"A revaluation loss on oil money should have occurred, but the money (as compared to the West) is not gained through debt-based investments but rather profits from oil sales," Watanabe said.

"Crude oil prices have gone down, but (oil) funds will continue to accumulate. (Middle East countries) are facing the major issue of where to look for safe, high-return investments."

Although bank subsidiaries in Japan can now participate in Islamic financial transactions, the environment has not reached a point where one can expect a surge in banking institutions specializing in Islamic finance.

Specialists like Watanabe and Yoshida both point to complications in the Japanese tax and legal systems that have hampered the spread of Islamic finance.

Watanabe said transactions involving commodity trade are subject to value-added tax, which makes the financial transaction too expensive.

Yoshida said it is necessary to define the nature of sukuk, or Islamic bonds. According to Yoshida, if sukuk are indeed corporate bonds, they should not be taxed. But if they are considered trust beneficiary rights, they become subject to withholding tax at the source.

Yoshida also cited the difficulty of networking. The crux lies in finding investors and matching them with suitable investment choices, he said.

Watanabe added, "If the main body (company headquarters) cannot handle Islamic finance, it will probably become an overwhelming burden."

Under the ongoing global financial crisis, money that arrived here via banking institutions in Europe and the United States is already being channeled back to the United States. And that is what is causing serious damage to stock and real estate prices.

If Japanese financial institutions could channel oil money directly to Japan, it may help to mitigate the crisis here. That is precisely why some say Japan needs to overcome the hurdles and promote Islamic finance.

Fact File: A system based on Shariah principles

Islamic finance differs in various ways from conventional financial services that have developed in the West.

The basis of all Islamic finance lies in the principles of Shariah, or Islamic Law. Thus, the Islamic form of finance is sometimes called Shariah-Compliant Finance.

Central to Islamic finance is the fact that interest, known as riba, is prohibited. All gains and risks must be shared between the person providing the capital and the business proprietor or owner. And the transactions must basically involve trade backed by assets.

Speculation (Maisir) is also forbidden, as are transactions with businesses dealing with pigs, alcohol, gambling and other items that are not Shariah-compliant.

One popular form of transaction used by banks is Murabahah financing, which is said to account for as much as 70 percent of all Islamic finance deals.

Murabahah financing involves markups on goods, such as cars and houses, mostly for personal use. A bank plays go-between for the supplier and the purchaser by buying the desired commodity from the supplier.

The bank then resells the commodity with a markup price to the client, who pays for it in installments, including the markup amount.

Conventional Japanese regulations have prevented banks from buying or selling commodities as part of their business operations. But a recent measure adopted by the Financial Services Agency allows subsidiaries of banks to take part in such transactions.

Japan's sharia interest slowly grows

Haber 27:The Japanese government is adapting its banking regulations and markets to fit with the rules of the Shari`ah-compliant lucrative industry of Islamic finance.

Japan's Financial Services Agency says it recognises the need for its financial institutions to become competitive in the area and there are amendments to the banking law slated to be in place within about six months that should make it easier, at least for these institutions' subsidiaries, to become more involved in this area of finance.

However, it may be that despite these observations, the FSA and the Ministry of Finance have more pressing issues to deal with.

"Japan, and the FSA in particular, is trying to improve the competitiveness of Japan's capital markets, both as a global/regional centre and for the Japanese market," says Stuart Porter, a partner at PwC in Tokyo. "Whilst Islamic finance is quite an interesting subject, it is simply one area they'll want to encourage.

"They have their hands full trying to break down the firewalls between the banking/securities sector, tightening up compliance, adding new opportunities for investment and access and effectively trying to stop a large part of the asset management industry migrating any further to Singapore and Hong Kong."

There has been some interest shown by companies looking to diversify funding and tap markets where they operate, but to date examples of sharia-compliant bond issues and other areas of Islamic financing are few and far between.

Last month, Toyota announced a planned foray into the Islamic bond market, saying it intended to issue M$1bn (£156m, €197m, $306m) to raise funds for its auto leasing and loans business in Malaysia.

Aeon Credit was the first Japanese corporate to issue a sukuk (which it did in 2007) when it raised a total of $45.3m (£23.1m, €29.2m) in two issues in Malaysia. The Bank of Tokyo Mitsubishi UFJ acted in effect as a middleman, introducing Aeon to Commerce International Merchant Bank, which was the book runner.

Daiwa Asset Management last month launched the Singapore Stock Exchange's first sharia-compliant exchange traded fund, called the Daiwa FTSE Shariah Japan 100, which includes Japan's top 100 sharia-compliant companies by market capitalisation, and screened by Yasaar, according to a press release.

Last November, Kuwait's Boubyan Bank completed what is believed to be Japan's first property deal using Islamic financing, when it bought three office buildings in Tokyo for Y4.38bn ($41.4m) - its first real estate investment in Japan. Boubyan used special purpose vehicles to buy and lease back the properties, working with the asset management company Atlas Partners Japan, and Hypo Real Estate Capital Japan.

Mitsubishi UFJ says it is preparing for when Japanese legal amendments are in place and has been building up a team in anticipation of these changes.

Nomura Asset Management, a member of the Islamic Financial Services Board, is also planning to introduce products in the area.

Standard & Poor's has a Japan 500 Sharia index, which is part of the family of S&P Sharia index series, and Sharia compliant.

Malaysia has by far the largest market share in the issue of sukuks, or sharia-compliant bonds, in the world, with a cumulative market share of 50.8 per cent worth $29.1bn, according to Thomson Reuters data. Next is the United Arab Emirates with a 29.4 per cent share worth $16.9bn.

The US ranks fourteenth, having issued $331.6m, then Australia with $264.4m and the UK follows with $238.6, according to the data. Japan's issues total $71.6m.

One issue for financial centres such as Tokyo, Singapore and Hong Kong with regards to setting themselves up as financial centres is the lack of a domestic market, given the majority of their respective populations is not Muslim.

However, Ritesh Maheshwari, a senior director at Standard & Poor's in Singapore, points out that while Malaysia has the domestic market, it still has capital controls, so is not a completely open offshore market, unlike Hong Kong and Singapore. At the very least, interest by Japanese companies and the government in tapping investors who prefer working with sharia-compliant investments should grow, not least because Japan imports the vast majority of its oil from the Middle East and shipments of its trucks, cars and other exports to the region are rising fast, creating stronger links.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide.

Islamic finance: Japanomics -- Turkeynomics?

Today's Zaman : With a population of 60,000 Muslims and close to 127.5 million Shinto and Budhist adherents, Japan hardly can be described as a Muslim country. With the complete lack of domestic market, access to Islamic finance therefore is a business opportunity only and it would be shunned if it would have even the slightest fundamentalist religious undertones.

As a matter of fact, Islamic finance is neutral and accessible to all, whatever conviction one might have. And Japanese industry has understood that and is fully engaged in the Islamic financial markets. It devotes itself with the same seriousness with which it started building cars some 40 years ago.

In his opening speech at the Nikkei Islamic Finance Symposium in Tokyo in February, Bank of Japan (BoJ) Governor Toshihiko Fukui said: "Development of the Islamic form of finance will contribute to diversifying international financial markets and transactions and help fuel an expansion in market and business opportunities. Islamic finance is now an essential factor in understanding international financial mechanisms."

The G8 sukuk race

About one year ago, the state-owned Japan Bank for International Cooperation (JBIC) announced interest in propelling the country into the vast financial resources that are available to so-called Islamic finance institutions. Spurred by the present hike in oil prices, large reserves of money are being built up in oil producing countries. Europe, Hong Kong, Singapore and others are all lining up for a piece of that cake, and the Japanese economy has decided not to miss out.

JBIC hired a team of renowned financial Shariah scholars hailing from the Gulf Cooperation Council (GCC) and Southeast Asia to help issue the first Japanese government sukuk, or Islamic bond. The acquired know-how would be freely available to all interested private banks.

Now, one year later, the issuance has repeatedly been postponed. JBIC recently got caught up by the fatwa of the Bahrain-based Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI). According to the AAOIFI, many sukuks were too synthetic and resembled the pure lending of money. Therefore, their basic understanding of the asset-based and profit-sharing way of financing in sukuk structures were repeated. Whilst most of the GCC-based finance world appears to be willing to follow that guideline, the Southeast Asian scholars tend to be more flexible, and JBIC got stuck between the two points of view.

It indeed got clear that JBIC had opted for -- according to the AAOIFI ruling -- a non-admissable variation of a commodity murabahah sukuk structure that was denominated in Malaysian ringit.

A more important reason for the delay, however, is the present turbulance in the financial markets caused by the fallout of the US subprime mortgage crisis. Most likely the Japanese offer will realign to a generally accepted form of musharakah sukuk (partnership structure), denominated in US dollars and issued when financial markets are more favorable again.

For the moment it is therefore not clear whether Japan or the United Kingdom will win the race for the first G8 sukuk. Indeed, London is also eager to attract some of the business and is trying hard to become the Islamic finance hub for Europe. Talks about a first UK government sukuk have been in the air for some time now.

Already at the end of 2006 the Malay subsidiary of Japan's Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad had entered into a strategic partnership with CIMB (Malaysia), which offered its Japanese clients access to Islamic financial resources.

In early 2007 Aeon Credit was the first Japanese corporate to issue a sukuk when it raised a total of 800 million ringit in two issues in Malaysia. The Bank of Tokyo-Mitsubishi UFJ acted in effect as a middleman, introducing Aeon to CIMB, which was the book runner.

In May 2008 Toyota announced it intended to issue Islamic bonds worth 1 billion Malaysian ringit ($306 million) to raise funds for the expansion of its auto leasing and loans business in Malaysia, until then financed with cash from local compliant banks.

The financial unit of Toyota Motor Corp. intends to boost operations in Asia amid strong automobile demand. The proceeds of the musharakah-based sukuk will be used for Islamic-style auto loans and leasing services. Toyota has offered compliant loans in Malaysia since 2005 and compliant leasing since 2007.

In June 2008 Mizuho Corporate Bank was reported to have led/managed a $3.85 billion syndicated ijarah (lease) facility for a Saudi Arabian mining and refining phosphate ore project, and in the same month Okachi Malaysia, the Malaysian subsidiary of a Japanese futures commission merchant with active membership in all Japanese commodity exchanges, was appointed as the commodity trader for the Alliance Islamic Bank's new fixed deposit product, Alliance Fixed Investment AFI (tawarruq structure-based).

Further expansion -- foreign traded ETF

Investors might be reluctant to invest in your foreign stock exchange, or in your foreign currency. And then again, they might even be interested in investing in your compliant companies, but may not be adequately equipped to do sufficient research to screen eligible companies.

The first answer to this problem is to have indexes of Shariah-compliant companies. In December 2007, the Tokyo Stock Exchange launched the S&P/TOPIX 150 Shariah Index. And the more recent FTSE-SGX ASIA Shariah 100 Index also includes relevant companies from Japan, Singapore, Taiwan, Hong Kong and South Korea, just to name of few of the compliant indexes where Japanese companies are included.

The second answer is to go abroad with your investment offers and service foreign investors by listing an Exchange Traded Fund (ETF) on their local stock market and in their local currency comprising just those targeted companies.

In June 2008 Daiwa Asset Management launched the Singapore Stock Exchange's first Shariah-compliant exchange traded fund, called the Daiwa FTSE Shariah Japan 100. The EFT includes Japan's top 100 Shariah-compliant companies by market capitalization.

Deutsche Bank has an ETF based upon the S&P Japan 500 Shariah Index traded on the London Stock Exchange. The Frankfurt Stock Exchange is soon to follow.

Islamic indexes help the compliant investor choose eligible target companies and keep track of them. Next to the industry selection, they solely reflect on objective financial data from the underlying companies. On the Dow Jones Islamic Market Turkey (DJIMTR) traded on the İstanbul Stock Exchange (İMKB) for instance, one can find companies such as Vestel Beyaz, Petkim, Turkcell, Tüpraş, Aygaz, Acıbadem Sağlık Hizm., Akcans, etc.

In spite of a lack of local regulations, Kuwaiti Bank Boubyan completed in November 2007 what is believed to be Japan's first compliant real estate deal using Islamic financing when it bought three office buildings in Tokyo for Y4.38 billion ($41.4 million) -- its first real estate investment in Japan.

Become a member of international organizations

Without offering Islamic finance products, without a domestic market and even with a lack of regulation, the BoJ, Nomura Asset Management and other Japanese financial institutions have already become observer members of the Islamic Financial Services Board (IFSB), based in Malaysia. The IFSB aims to be an important prudential standard-setting organization for regulatory and supervisory agencies in the world of Islamic finance. It strives to complement the works of the Basel Committee on Banking Supervision (BIS), International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS). Feel the beat of the evolutions at the regulators' pulses and respond quickly is the message.

Government initiatives

Trying to reverse the move of money and knowhow out of Japan to other financial hubs, such as Hong Kong, Singapore and Kuala Lumpur, the Japanese authorities embarked on a thorough overhaul of the existing financial and tax regulations.

One of the legal amendments proposed by the Japanese Financial Services Agency (FSA) in June 2008 stretched to allow the Japanese banks to engage in Islamic finance activities through subsidiaries.

It is clear that the Japanese private sector is not waiting for its government to pave the way. In fact, the government is running behind and trying to catch up. Pioneering private companies are leading the track for an expansive policy that at the same time catches the available money where it is in different ways. When the foreign investor does not come to you, then you go to him with your offers and needs.

Only two years ago Japan seemed far behind in catching some Islamic petro-dollars. Now they seem light years ahead. The Turkish economy should learn and benefit from these observations and move on, before the best chances pass by. Likewise, the Turkish government should not hesitate. Certainly not when the İstanbul Financial Center wants to become more then just a dream.

Japan Adjusting to Islamic Finance

CAIRO — The Japanese government is adapting its banking regulations and markets to fit with the rules of the Shari`ah-compliant lucrative industry of Islamic finance.

"Whilst Islamic finance is quite an interesting subject, it is simply one area they'll want to encourage," Stuart Porter, a partner at PwC Tokyo, one of the world's largest professional services firms, told the Financial Times on Monday, June 16.

As Islamic finance grows by leaps and bounds, Tokyo hopes to one day join a handful of capitals competing to become the industry hub.

To do that, the government has been working to adapt the financial rules to that of Islamic finance.

The Financial Services Agency (FSA), the government's body overseeing banking, securities and exchange, has introduced amendments to the banking law slated to be in place within about six months.

The amendments would make it easier for Islamic finance institutions to operate.

Last September, Japan's central bank joined the Islamic Financial Services Board, an international standard-setting body, as an observer to deepen its knowledge about Islamic finance.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Interested

The Japanese private sector has increasingly been showing an interest in Islamic finance.

Mitsubishi UFJ financial group said it is preparing for when Japanese legal amendments are in place and has been building up a team in anticipation of these changes.

Nomura Asset Management, Japan’s leading investment company, is also planning to introduce products in the area once the amendments are in place.

Other companies have already taken steps to join the Islamic finance drive.

Last month, Toyota, the giant Japanese car manufacturer, announced a planned foray into the Islamic bond market.

It intends to issue $306 million to raise funds for its auto leasing and loans business in Malaysia, the hub for Islamic financial services.

Also last month, Daiwa Asset Management, the second largest asset management firm in Japan, and the global index provider FTSE Group launched the FTSE Shari`ah Japan 100 Index, which includes Japan's top 100 Shari`ah-compliant companies.

In 2007, Japan's largest insurer and credit provider Aeon Credit was the first financial service corporation in the country to issue Islamic bonds or sukuk.

Islamic finance is one of the fastest growing sectors in the global financial industry.

In defiance of the credit crunch, the global Islamic finance market has grown about 15 percent in each of the past three years, and is now worth about $700 billion worldwide.

Its assets are predicted to grow to $1 trillion by 2013.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide.

The heavyweights of global finance, including Citigroup, HSBC, Deutsche Bank and others, have affiliates devoted to Islamic finance.

Toyota to launch Islamic bonds in Malaysia

By Martin Foster

TOKYO: Toyota is considering issuing a bond that complies with Islamic law to help its expanding business in Malaysia, a company spokeswoman said.

The Malaysian financial authorities have given UMW Toyota Capital, based in Petaling Jaya, Malaysia, permission to issue up to 1 billion Malaysian ringgit, or $312 million, in Islamic bonds.

Under Shariah, or Islamic law, interest is banned and purchasers of Islamic bonds, or sukuk, instead would receive a dividend from UMW Toyota Capital.

"We are looking to issue Islamic bonds with a view to expanding our loan and lease business in Malaysia," said Mio Sugito, an assistant manager at Toyota Financial Services. "We are considering when to issue, and could go ahead as early as this month."

The company began offering Islamic loans in Malaysia in November 2005, and it started leases in August 2007, using cash borrowed from banks under Islamic law.

Apart from reducing the dependence on bank loans, the move would make it easier for local people to take out a loan with the company, Sugito said.

These loans and leases make up about 15 percent of Toyota's total of ¥50 billion, or $484.6 million, in loan and lease business in Malaysia, and Sugito estimates Toyota's business in Islamic finance could expand to approximately 20 percent of all business "over the next year or two."

This would be the first time Toyota has raised money using Islamic finance.

The Malaysian unit of AEON Credit Service issued a series of Islamic bonds in 2007, and other companies are expected to follow to answer the religious and social needs of an expanding Islamic middle class in countries like Malaysia and Indonesia.

Oil exports rose significantly from 2002 to 2006 in the area, and rising prices for crude oil have made the Middle East a lucrative source for companies and organizations looking to raise cash.

Sukuk issues rose from $800 million in 2002 to $20.5 billion in 2006, with an outstanding issuance of $50.5 billion as of the end of 2006.

Total worldwide assets of Islamic financial institutions exceeded $250 billion as of December 2005 and are growing 15 percent annually, according to the International Monetary Fund.

UMW Toyota Capital is 70 percent owned by Toyota Financial Services of Nagoya, Japan. Toyota Financial Services is the finance arm of Toyota Motor. The Malaysian financial services provider CIMB Group is set to be lead manager of the bond issue.

Credit crisis delays new plant

A senior Toyota executive said Monday that plans for an auto assembly plant in Mississippi were being delayed by the U.S. credit crisis and worries about U.S. auto sales, The Associated Press reported from Tokyo.

The vehicle assembly plant, being built in Blue Springs, Mississippi, had been expected to be running in late 2009 or early 2010, said Toyota Motor's executive vice president, Mitsuo Kinoshita.

That date has been changed to mid-2010 after Toyota reviewed the plans and considered the slowdown in the U.S. car market after the subprime mortgage crisis, Kinoshita said in Tokyo.

"We made adjustments within a certain range of time," he said. "The change wasn't that critical."

Toyota had been on a roll with its small cars and gas-electric hybrids as oil prices rose.

But the company expects rough months ahead because of an expected decline in U.S. sales and a weak dollar that will lower the value of its overseas earnings.

Last week, Toyota forecast that for the financial year ending March 31, 2009, its annual sales will drop for the first time in nine years and its profit will decline for the first time in seven years.

Toyota's list of problems is growing and includes rising material and energy costs and a stagnant auto market in Japan.

Islamic finance is gaining importance in non-Muslim nations

By Jasim Ali,

I wrote this article in Tokyo during a week-long visit to Japan. The trip was partly designed to provide me the opportunity to appreciate the Japanese model of economic development. As it happened, the Japanese side wanted to benefit from my knowledge about the economies of Gulf Cooperation Council.

Among other things, I was asked to deliver a speech on Islamic banking at the Japan Institute of International Affairs (JIIA). I had to research the subject and meet with several specialists in the field during the course of preparing for the lecture. These are some of my key findings.

To begin with, in Islamic finance, money can only earn returns if used in productive or real investments. This explains why deposits in banks cannot earn interest. Still, prohibitions are made against guaranteed and predetermined rates of return. Conversely, Islamic finance encourages risk-sharing and entrepreneurship.

The Islamic banking sector is big. As of January, some 300 Islamic Financial Institutions (IFIs) operated in 75 countries, managing some $500 billion. The GCC has the largest concentration of IFIs due to the simple fact that the region is the primary source of funding for Islamic banking activity.

In addition, I explained to the audience some of the primary Islamic banking products. These include Murabaha or cost plus financing, which accounts for 75 per cent of Islamic financial activities such as purchase of cars and houses.

Another well-known product is that of Mudaraba, or profit sharing, in turn used for general investments. Yet another product is Musharaka, or equity participation, used in joint ventures.

Other emerging products include Ijara (leasing), Salam (deferred payment or delivery of goods) and Sukuk (Islamic bonds).

IFIs have been credited with undertaking mega projects, as they usually are not under pressure to bring in quick returns.

For example, Arcapita is developing the $2 billion Bahrain Bay, a project that should transform Manama once completed in 2010. The amount is substantial for a small economy like Bahrain, which has a GDP of $16 billion and state budgeted expenditures of $5.5 billion in 2008.

Growing demand

Furthermore, there is a growing demand for Islamic banking in non-Muslim countries. Established in 2004, the Islamic Bank of Britain (IBB) offers financial products compliant with Sharia. And it is suggested that the UK government is contemplating issuing sukuk.

France is seeking to get a share of Islamic finance on the back of its considerable Muslim community. Against this background, I urged the audience at JIIA to ensure that Japan is not left out of a growing industry. By one account, Islamic banking is growing at the range of 15 to 20 per cent per annum.

Nevertheless, Islamic banking must overcome certain challenges. These include developing short-term products to absorb demand and to help develop a secondary market.

The second concern deals with ensuring the availability of Sharia scholars with knowledge of conventional and Islamic finance. The third matter deals with ensuring availability of qualified human resources meeting the requirements of an ever growing industry. It is believed that demand exceeds supply in all three cases.

Another test deals with ensuring uniformity of application of accounting principles for Islamic banks. The Accounting and Auditing Organisation for Islamic Financial Institutions sets accounting and auditing standards for IFIs. Yet no single body has jurisdiction over Islamic finance houses to implement standards.

I ended my talk at JIIA urging Japan to join the bandwagon of Islamic banking.

Japan banks focusing on Islamic funds

Doha • From a simple oil sellers and buyers trade relationship, Japan has adopted a more sophisticated approach towards the Gulf based on a two-way traffic of capital flow, according to Japan’s Energy and Natural Resources Finance Department Director General, Tadashi Maeda.

Maeda, who also addressed a session on investment generation between Asia and the Gulf States said: “Oil and gas is the primary sector for us and our dependence on Gulf oil still accounts for up to 80 percent of our needs. But, the Japanese Government underscores the importance of investment into the downstream sector, such as petrochemicals. This is a very strategic investment from the Japanese side.”

He said several Japanese companies have made significant investments in petrochemical and power sector in the region as a means for a two-way capital flow approach. On the other hand there has been significant investment from the Gulf to Asia totaling some $16bn with the largest portion going to Japan, he said.

Maeda also said that Japan can play the role of a gateway internationally in a regional market from Asia which would help strengthen inter-regional linkages between Asia and the Gulf.

In this regard Japanese banks have been focusing on the importance of Islamic funds because “we recognize the importance of Islamic finance with total assets reaching some one trillion dollars,” he said.

Therefore, Japan along with Muslim countries in Asia, in particular Malaysia, has signed a memorandum of understanding (MoU) with the Central Bank of Malaysia to create an integrated Islamic Financial Market in Asia.

The Financial Market would attract more investments fro the Gulf including the sovereign wealth funds in the region and strengthen ties between the Gulf and Asia which is very important in terms of the energy security, Maeda, who is also Japan Bank for International Cooperation Director General, said.