July 28, 2010
After a hiatus of over three years largely due to inertia from regulators and head offices, Japanese institutions are finally going to the market to raise millions of dollars in Islamic financing. The good news is for Malaysia because much of this activity is centered in or out of Kuala Lumpur.
Over the last two weeks Nomura Holdings, Inc. appointed Kuwait Finance House (Malaysia) as the mandated lead arranger for its debut $100 million Sukuk Al-Ijara. The two-year issuance will be the first US dollar denominated issue by a Japanese corporation out of Malaysia.
Similarly Sumitomo Corporation, according to Malaysian banking sources, plans to go one step further by issuing the first yen-denominated Shariah-compliant paper in Japan. The paper will not be a classical Sukuk because Japanese regulations and tax laws do not facilitate the issuance of Sukuk currently, but may mirror an asset-backed Islamic bond type structure.
These developments follow the successful closure of Nomura’s $70 million syndicated commodity murabaha facility, which was lead, arranged by ABC Islamic Bank, the Islamic finance subsidiary of Arab Banking Corporation. Due to increased demand for both short-term investments and for investment grade Japanese risk, the issuance was increased from the original target of $50 million.
The Nomura issuance however is bound to set the pace for increased Japanese involvement in the Islamic finance industry. Not that Japanese institutions have been absent from the sector. Several Japanese sogo soshos have in the past accessed the odd commodity Murabaha structured primarily through London banks. Nomura itself was the fund manager for Al-Tawfeek Investment Company’s Islamic Japanese Equity Fund. Daiwa Securities two years ago launched an Islamic ETF (exchange-traded fund) which is listed on the Singapore Stock Exchange and which tracks the FTSE Asia Shariah 100 Index. In the Takaful sector, Tokyo Marine & Fire Insurance Company has a thriving joint venture in Malaysia with Hong Leong Islamic Bank and has a regional company in Dubai serving the GCC markets.
Japanese government agencies such as the Institute of Developing Economies have for the last two decades been studying Islamic finance and collating research on the industry. More recently the Islamic Financial Services Board (IFSB) organized the first Islamic banking seminars in Tokyo. Since then several have been held in Japan.
The Japan Bank for International Cooperation (JBIC) seriously raised expectations in 2007 when it announced that it plans to issue a debut Sukuk in Malaysian ringgit to fund its activities in Malaysia and the ASEAN region. JBIC appointed lead arrangers CIMB and Citigroup with the hope of attracting investors from both Asia and the GCC markets. Unfortunately, the proposed issuance was dragged out due to differences between the two lead arrangers over the appropriate Sukuk structure. Then the credit crunch and financial crisis set in which put paid to any JIBIC issuance.
However, privately, JBIC managers keen on tapping the Islamic finance market have been frustrated by the lack of Japanese government involvement and facilitation of Islamic finance in Japan and the lack of enthusiasm shown by the powers that be at JBIC itself. Because of Japan’s complex system of government, it seems that only the ruling prime minister can initiate changes in primary legislation to facilitate say the introduction of Sukuk and other Islamic finance products.
In the meantime, the Japanese Ministry of Finance in cooperation with the Bank of Japan, the central bank, did amend last year some of the provisions relating to the foreign subsidiaries of Japanese financial institutions, which are now allowed to conduct certain activities in the Islamic finance sector including the issuance of Sukuk in local currencies and the launching of investment funds.
With the global sukuk market now getting a second wind in the wake of the financial crisis and with Asia leading the way, does it mean that JBIC will also change its strategy, especially after the Nomura sukuk issuance and the planned one by Sumitomo?
Takumi Shibata, deputy president and chief operating officer of Nomura Holdings, could not be more to the point, stressing that “with this landmark transaction, Nomura has further diversified its funding sources and tapped the large and growing Islamic finance market for the first time. This issuance is part of Nomura’s ongoing push to diversify its funding sources to drive growth. Islamic investors and Islamic finance are a very important and rapidly growing sector globally and this transaction is highly significant for Nomura and for corporate Japan.”
The book for the issuance was opened on July 5 and closed the next day, according to Jamelah Jamaluddin, CEO, KFH (Malaysia). But Jamaluddin, a controversial doyen of the Malaysian Islamic finance sector and the first woman to head an Islamic bank in the world, RHB Islamic Bank, also threw down the gauntlet to other potential Japanese issuers: “I am pleased to inform you that this sukuk marks Nomura’s first step in diversifying its funding sources to include Islamic financial solutions. It involves financing the purchase of two aircrafts. I hope that Nomura’s sukuk will pave the way for more discerning Japanese clients, as well as other international corporations, to consider migrating or co-opting Islamic finance products in meeting their investment and financing requirements.”
The Nomura Sukuk is also listed on Bursa Malaysia, just becoming the second foreign listing on the bourse and the first sukuk listing by an Asian and a Japanese international entity. At the listing signing ceremony, Yusli Mohamed Yusoff, chief executive officer of Bursa Malaysia, explained that “Malaysia remains the world’s single most active corporate Sukuk market at present. We certainly have made great strides in the sukuk market and the listing of Nomura’s sukuk is a further demonstration of foreign players’ confidence toward Islamic securities and instruments issued out of Malaysia. The sukuk listing from Nomura will further strengthen Bursa Malaysia as a preferred Sukuk listing destination, elevating the overall position of Malaysia as an international Islamic financial hub.”
With this listing, Bursa Malaysia’s total Sukuk listings amount to $20.9 billion comprising 15 sukuk listed by 13 issuers, of which two are international issuers.
Nomura is of course elated by the investor demand to its two forays into the Islamic market this month — the sukuk and the Murabaha facility. According to Takuya Furuya, chairman of Nomura Middle East and Africa, “It reflects the strength of the Nomura brand and its reputation in the region. The issuance is part of Nomura’s strategy to diversify funding both geographically and by product and comes at a time when we have simultaneously launched a Sukuk in Malaysia. This Murabaha facility marks the first Islamic funding exercise by a Japanese corporate in the region and we hope that it will strengthen the financial ties between the Far East and the Middle East.”
The Murabaha facility has a three-year tenor and offers a profit margin of 175 basis points per annum. The facility will be used for general liquidity management purposes. Participants in the syndication included ABC Islamic Bank, Islamic Development Bank (IDB), Samba Financial Group, Sumitomo Mitsui Banking Corporation Europe Limited and Ahli United Bank.
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