Japan: FSA Investigates Opening Market To Islamic Finance

 Japan’s Financial Services Agency (FSA) is considering relaxing rules to allow banks to provide Islamic financial products in its local market. The financial regulator said in a statement on its website it was asking for comments from the public until March 27, 2015 and would present results of the consultation the next month.

Japanese lenders are already allowed to provide Islamic financial products through their overseas sister companies, and Bank of Tokyo-Mitsubishi UFJ (BTMU) recently became the first Japanese commercial bank to issue Islamic bonds, or sukuk. Non-Muslim countries like Luxembourg, UK and South Africa also issued Islamic Bonds last year as the model gains acceptance beyond its base markets of the Middle East and Southeast Asia, making it more useful as a financial tool.

A move to allow sukuk and similar Islamic shariah’ compliant products to be sold and bought in , Asia’s largest bond market, would give the sector a further increase. Bank Of Tokyo being Japan’s largest lender expects a relaxation of the rules after the month of April and is preparing an operational framework to start booking business as soon as possible.

“Bank of Tokyo regards this as a positive development and is keen to further promote the Islamic market around the world,” it said in a statement. Any regulatory changes would present Japan with a challenge shared by other jurisdictions new to Islamic finance: taxation.

Some Islamic finance structures, especially sukuk, can be attached with double or even three times tax duties because they require multiple transfers of title of the underlying asset. But this hasn’t stopped Japanese banks from increasing their activity in Islamic finance in other countries.

In September, Bank of Tokyo sold debut sukuk deals in two tranches under a multi-currency programme in Malaysia, including the world’s first japanese sukuk. It is now considering offering Islamic financial services through its Dubai branch, depending on approval through regulation, the lender said.

Sumitomo Mitsui Banking Corp is also offering Islamic financial products through its Malaysian subsidiary; it set up an internal sharia advisory board in December. In October, the Japan International Cooperation Agency signed an agreement with the private sector arm of the Jeddah-based Islamic Development Bank to develop sharia-compliant transactions, with a special interest in sukuk.