Regulating Islamic Finance in Japan

Important Points to Consider

Having a miniscule Muslim population and, correspondingly, insufficient customer base, Japan currently has no Islamic financial establishments. Hence, traditional financial products & establishments still remain prevalent. However, the recent changes to the bank regulatory framework in Japan have created a legal basis for the utilization of Islamic products.

Regulation of Islamic Banking in Japan

There’s no legislation in Japan which is specifically related to Islamic banking & finance. Therefore, these two activities are governed by general laws & regulations & the tax regime applicable to their ordinary equivalents. However, the recent legislative amendments have rendered operations with Islamic finance instruments & products in Japan much simpler:

• banking institutions are now able to offer Sharia-compliant products & carry out Islamic finance operations in Japan via the use of subsidiaries.
• sukuk & ordinary bonds are now neutral in terms of taxation;
• issuance of sukuk in Japan can now be done through a resale & lease scheme;

Japan’s Financial Regulatory Structure

Japan has no centralized authority entrusted with regulating transactions or products’ compliance with Sharia law.  Under Japanese legislation, IFIs aren’t required to create Sharia councils domestically or abroad. However, it should be borne in mind that IFIs created as insurance companies or subsidiaries should comply with Shariah law as per the rules applicable to them. There are three main financial regulators in the country:

• FSA;
• SESC;
• Finance Ministry.

Setting up a banking establishment in Japan & using Islamic financial products requires obtaining a license of a qualified bank or a foreign bank’s subsidiary. It will be impossible for entities that aren’t covered by insurance or banking laws to extend loans using Murabaha & Ijara in Japan. To be able to do so, they will have to be registered as as a borrowing entity under Japan’s Lending Act. Please note that such companies will not be allowed to accept deposits.

Takaful & Retacaful

Under the laws governing financial activities in Japan, operations with takafuls & retakafuls are defined as insurance activities & must be licensed.

Normally, foreign insurance companies seeking to open a subsidiary in Japan are required to obtain an insurance license in Japan. Takaful operators must also comply with this requirement. However, because the country’s legislation centers around the regulation of traditional insurance activities in Japan, there may be some difficulties with applying it to Sharia-compliant activities.

Drafting of an Islamic Finance Contract in Japan

• Mudarabah
  
  Transactions involving murabaha are permitted under Japanese law. However, there’s they aren't’ liable to any tax exemptions, which is why each transfer of respective assets may be taxable. Carrying out transactions involving murabaha may also require applying for registration.
• Musharakah
  
  Under Japanese legislation, musharaka can be created as a partnership. To be able to do so, the partners must conclude an agreement whereby each of them undertakes to contribute a certain amount of funds. Unlike TC, this kind of partnership provides the partners with an opportunity to participate in all its business activities. Gains & losses are going to be distributed according to the agreement’s provisions & might or might not be  proportional to the amount of their contributions.
• Ijarah
  
  Being a leasing transaction, Ijara isn’t currently governed by any rules or regulations. Why? Because there is no legislation regulating the leasing industry in Japan at the moment. However, if a leased asset is transferred to the lessee by the end of a leasing period, this kind of  transaction can be regulated by the Installment Act.
• WadiahIf
  
  properly drafted, wadi agreements may fall under the definition of bank deposits. Under Japanese legislation, wadia operations can only be performed by licensed banking institutions. It should be remembered that financial products designed under the concept of sharing profit & risk aren’t covered by a deposit insurance.

Those seeking to open a company in Japan should keep in mind that the country’s judicial system is only comprised of the Supreme Court, district courts & high courts. All of them are authorized to resolve disputes involving Islamic finance.