Dr Zaha Rina Zahari began the session by inviting Mihir J Marfatia to share his thoughts on why Islamic finance is booming currently. Mihir replied that one of the reasons contributing to this boom is the large Muslim population (20% of world population), which represents an untapped market with high potential.

Tadashi Maeda had a different reason for Japanese interest in Islamic finance. “While the Muslim population in Japan is negligible, we see a large growth potential in the industry and would like to play a key role in the Islamic finance industry in Asia. In addition, Japanese utilities companies buy oil and gas from the Middle East. Therefore, Islamic finance would offer opportunities for these companies to use Islamic instruments for their corporate financing decisions,” he said.

Nonetheless, Tadashi said Japan do face some regulatory challenges as the current Japan Banking Act prohibits banks from entering into asset trading. Furthermore, none of the Japanese banks have the experience of issuing Sukuk. Therefore, as Japan Bank for International Cooperation is a government body and thus not subject to the Act, it would now assume the task of issuing its first Sukuk, regardless of the cost of fund, Tadashi said.

When asked if investors would be interested in subscribing to the JBIC Sukuk, Yvonne replied that an investor would always be concerned about the pricing of an instrument before deciding to subscribe or not. “Islamic papers used to trade at a premium compared to conventional papers, which means price is higher and yield is lower. However, with the increasing supply of Islamic papers lately, the price of Sukuk has converged to the benchmark. This would be a good sign for investors,” she noted.

Mohd Razlan bin Mohamed added that rating would help bridge what the investors are seeking and what the issuers are offering.

Tadashi then highlighted that JBIC will issue a Sukuk that would offer equivalent credit rating to the Japanese government’s rating (AAA),which means that yield would be narrow. However, JBIC would look at Sukuk structures that allow secondary market trading as this will provide investors with liquidity. Yvonne then noted that dollar Sukuk used to have scarcity of supply because people would hold them until maturity. However, since last year, with the increasing supply of dollar Sukuk, there is more liquidity in the market.

She also added that investors are looking for diversity in Islamic papers issued because they do not have hedging tools to manage risks.

When asked whether the JBIC Sukuk would be a success just because it is a government backed Sukuk, Tadashi emphasized that Japan is looking into protecting the Asian financial market from outside risk. Thus it would be important to develop a strong capital market to prevent another financial crisis in Asia.

“The problem with the Asian market is that we are fragmented. We do not have a standard legal and regulatory framework. With the surge of petrodollars in the Middle East, the Asian market could be looking at a new funding avenue to finance the high growth development in Asia. Between 2002 and last year, there was an estimated US$1.5 trillion worth of accumulated investments in the Middle East. Of this sum, US$500 billion was invested outside the Middle East region — 90% went to the US, while only US$60 billion was invested in Asia. Islamic finance could change this scenario and it is obviously the most prominent link between the GCC and Asia. This is among the reasons why JBIC is looking into a Sukuk issuance,” he elucidated.

In response to a question from the audience regarding the panelists’ vision of product development, Yvonne noted that it is important to develop a benchmark for Sukuk pricing and there is a pressing need to develop short-term Sukuk that covers areas like foreign exchange and swaps.

Mihir then pointed out Islamic hedge funds as another area that warrants the attention of the Islamic finance community. “These new developments would also increase the role of Shariah boards in the industry,” he noted before the session ended.