Compttitiveness: Japan-Malaysia formed “Islamic Banking” alliance & the Impact of Middle East Emerging Democracis?

Blog Note:

Japan turns to Malaysia  financing to drive corporate growth?

Businessmen and economist, agree, the banking industry is an important “Pillar” of society.

What happens to that “Pillar” is crucial.

There has been very little analysis done on the emerging business environment in the Middle East as totalitarian regimes gives way to democracy.

Economist magazine recently touched on the subject-showing that in autocracies, the net-work is king to businesses. But with the fall of the Egypt regime, for example, that old-established net-work gives way to new businesses to emerge. The the Economist also touched on the subject that the people, in democracies, becomes the engine of businesses and also the focus of businesses.

The people of the Middle East have raised up, namely, because of being deprived economically.

In Thailand, with the ongoing the political crisis, many said it stems from the forgotten grassroots against the establishments.

One does not have to look far to the price the Thais have paid to keep the royalist, elite and military rulers going. Every global level indicators and rankings, on a great variety of subjects, sees a Thailand deteriorating.

The much touted Thailand’s growth rate of 8% last year, is just about what every other ASEAN country achieved.

But to keep up its popularity and deflect the crisis impact, the current Thai government of Abhisit have borrowed more money than the past 20-30 governments of Thailand combined-to subsidize a great many things and give away many freebies.

Many Thais have been pacified by that spending.

But a “Palm Oil” crisis in Thailand, where about 70% of the Thais use the oil, that saw severe shortages-that is traced to corruption as the main cause-is a clear reminded of the problems with net-work lead autocratic rules.

The same can be said of the Thai banking and finance industry-the main core supporter of Thai autocratic rule-where the sector profit have rocketed up massively in recent years, based on the industry’s monopolistic nature-much freed of any regulations-and at the same time, businesses, such as SMEs, complain of a lack of funding.

To put it bluntly, the “Pillar” of the Thai banking industry-is not there to serve the people and businesses of Thailand.

But the Middle East is moving towards democracy.

How will that impact things like consumers goods and the banking industry in the region? Will goods flow better? Will industry such as banking becomes savings and lending friendly?

Over the past 10-20 years, the Islamic Banking industry had been rising-backed by oil richness. Many globally are tapping it. In SE Asia, Malaysia has emerged as the focal point for Asian finance to make contact with Islamic Banking of the Middle East. Will Islamic Banking of Middle East, both in repressed regimes and in emerging democracies, re-focus on the Middle East own region’s needs and starve off global corporations?

The question is, “What will happen to this important pillar, the Middle East Banking Industry, in the foreseeable future?”

The following is from COMTEXT NEWS Network, published in 2010:

Japanese institutions go for Islamic financing


Arab News – McClatchy-Tribune Information Services via COMTEX News Network)

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.

(The banking industry is an important pillar of society for people to lean on)

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