After leading the East Asian entry into Islamic finance over the last few years through engagement and the possible issuance of a debut international Sukuk in Malaysia, the Japan Bank for International Cooperation (JBIC) concedes that it has lost ground to the new Asian kids on the block such as Singapore, Hong Kong and Indonesia. JBIC was the first East Asian member of the Islamic Financial Services Board (IFSB) in 2006 and developed a sound practical knowledge of Islamic finance. Etsuaki Yoshida, deputy head of Africa & Middle East, JBIC, discusses the Japanese view on Islamic finance and what JBIC is doing to regain lost ground in the sector.
What is your focus in the Islamic finance sector?
Our main objective is to contribute to Japanese corporate and trade activities through our financing. With the growth of Islamic finance, especially in the Middle East and Asia, we believe that though we are a largely conventional bank, we can also contribute through Islamic financing facilities where these are required to help Japanese entities doing business with the region. There are some legal and regulatory issues relating to Islamic finance relating to Japanese banks, but we are confident we can clear this in due course.
What are the main reasons for JBIC’s involvement in Islamic finance?
There are several reasons. Some of our Japanese borrowers prefer Islamic financing, because they have a lot of exposure to the Middle East and South East Asia which are mostly Islamic countries. We also want to expand our financing to countries in these regions. Some countries here may not accept conventional facilities from us, so Islamic financial options are acceptable. If we have Islamic structures available in our offerings, then we can finance corporates and entities from these countries. Another important reason is that Japan needs to catch up with the global trend. Islamic finance is growing very fast and is now becoming part of the global financial landscape. Thus, if we are involved in Islamic finance, Japanese financial institutions may learn from us.
JBIC was one of the first institutions in East Asia to take to Islamic finance. How do you perceive the entry of potential rivals on the region such as Hong Kong, Korea, Singapore and Indonesia into the Islamic finance industry?
I must admit that Singapore and Hong Kong are very quick off the mark and are ahead of us. They have a lot of actual Islamic financial transactions under their belts as opposed to only interest in the sector. They allow Islamic banks to operate; they allow Islamic funds and a lot of Islamic financial activities. Also, the private sector is very active.
What does Japan need to do to catch up with these countries?
We need to learn from them and to foster deeper dialogue and communication with the Islamic financial industry. Japan is not very much in the global context because we are very pre-occupied with the domestic market. We need to have a more globalized sense of competitiveness and embrace Islamic finance more vigorously.
What is the state of the review of Japanese banking laws to facilitate Japanese banks from getting involved in Islamic financial transactions?
It is not really a case of laws being passed by the Diet (the Parliament). It is a question of banking regulations which can be changed without parliamentary process. In December 2008, there was a regulatory change which allowed the subsidiaries of Japanese banks to get involved in Islamic financial activities. This is the first explicit legal amendment facilitating Islamic finance in Japan. The Bank of Tokyo Mitsubishi Malaysia, in this context, was the first to set up an Islamic banking unit early this year. Similarly SMBC Europe also set up an Islamic banking window recently. In Japan we have a segregated system between commercial banks and investment banks and securities and brokers. So it is the subsidiaries of these entities that can offer Islamic finance activities.
Japan is a major player in capital markets and infrastructure development. How do you see the role for Islamic finance in this respect?
From an issuer’s perspective, it is still a bit difficult because of the legal and regulatory issues, knowledge of Islamic structures and higher transaction costs. The legal aspect pertains to a change in the ownership of an asset. It deals more with the legal procedure and costs as opposed to a change in the law itself. It is up to the Japanese law firms and accounting firms to push this agenda. From the investors’ side, I do not think there is any substantive issue in terms of law. In fact, one Japanese institutional investor is interested in buying Sukuk.
The recent Indonesia international Sukuk was priced much tighter than the Indonesia conventional Sukuk. So why should transaction costs, necessarily be considered to be higher by Japanese institutions for Islamic bonds?
This is a question of a gap in market information on Islamic finance in Japan. Also the Indonesians got much help from international institutions and the Islamic finance sector. Indonesia is also the largest Muslim country so the government is very keen on Sukuk issuance.
So no Japanese institution, not even JBIC, subscribed to the Indonesian international Sukuk?
Unfortunately, no. Japanese institutions pay too much attention to trying to attract inward Islamic finance instead of proactively getting involved in international financing activities such as sovereign Sukuk and syndicated facilities. At JBIC we are not trying to reverse this in the context of the regulatory constraints. We hope to make progress soon. Given the current market conditions, I do not foresee JBIC going to the market with a Sukuk in the foreseeable future as it might have done, say two years ago. This applies to both Sukuk and conventional bonds. We still need to finalize the Sukuk structure and the use of proceeds of the Sukuk.
