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Monday, 22 September 2008

Islamic finance: Japanomics -- Turkeynomics?

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.

* Paul Wouters is a consultant to Bener.
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