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Japan's FSA explores opening market to Islamic finance

[DUBAI] Japan's Financial Services Agency (FSA) is considering relaxing rules to allow banks to provide Islamic financial products in its domestic market for the first time.

The financial regulator said in a statement on its website it was asking for public comments until March 27 and would present results of the consultation a month afterwards.

Japanese lenders are already allowed to provide Islamic financial products through their overseas subsidiaries, 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, Britain and South Africa also issued sukuk last year as the structure gains acceptance beyond its core markets of the Middle East and Southeast Asia, making it more useful as a funding tool.

A move to allow sukuk and similar products to be bought and sold in Japan, Asia's largest bond market, would give the sector a further boost.

BTMU, Japan's largest lender, expects a relaxation of the rules after the spring and is preparing an operational framework to commence booking business as soon as possible. "BTMU regards this as a positive development and is keen to further develop the Islamic market globally," it said in a statement to Reuters.

Any regulatory changes would present Japan with a challenge shared by other jurisdictions new to Islamic finance: taxation.

Certain Islamic finance structures, particularly sukuk, can attract double or even triple 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 outside of Japan.

In September, BTMU sold debut sukuk deals in two tranches under a multi-currency programme in Malaysia, including the world's first yen-denominated sukuk.

It is now considering offering Islamic financial services through its Dubai branch, subject to regulatory approval, the lender said.

Sumitomo Mitsui Banking Corp is also offering Islamic financial products through its Malaysian subsidiary; it set up an in-house 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 focus on sukuk.