Recent changes to the Japanese banking regulations on Islamic finance


The Japanese Financial Services Agency recently published the draft of a bill for the amendment of the banking regulations which allows subsidiaries of Japanese banks to conduct certain types of Islamic finance. This article will briefly explain the current situation of Japanese banking regulations and the banking regulations to be amended. Japanese banking regulations with regard to Islamic finance Regulations on banks In principle, Japanese banks are only permitted to conduct the activities that are listed in the banking law and the ancillary activities to such listed activities. Other than permitted exceptions, for example, the banking law does not permit banks to buy products. In a Murabaha (cost-plus-sale) transaction, banks purchase merchandise from a broker, and in an Ijara (lease-to-own) transaction, banks own the merchandise for the leasing period. Under the current banking law, therefore, banks themselves cannot usually participate in Murabaha and Ijara transactions. The new banking regulations do not change the above regulatory situation. Banks are allowed to invest in securities; interests in Mudaraba and Musharaka can be considered securities under the securities regulations. Banks, therefore, are considered to be able to invest in general Mudaraba and Musharaka transactions, provided that their position is considered to be as pure investors. If the bank’s role goes beyond that of pure investor, however, the act might be prohibited under the Japanese banking regulations. If a bank acts as a real-estate adviser to a partnership that gives advice on the types of real estate the partnership should invest in, for example, such act might be prohibited. Banks should take careful note of this. Mudaraba or Musharaka might be treated as subsidiaries or associated companies under consolidated accounting rules if banks invest more than a certain percentage, or have more than a certain level, of controlling rights in the transaction. Some burdensome banking regulations might be applicable to subsidiaries and associated companies of banks. If banks wish to avoid these issues, they should carefully consider how the structure is set up. The new bill and regulations on subsidiaries of banks Subsidiaries of Japanese banks are also prohibited from being involved in activities other than particular kinds of listed activities and ancillary activities. The activities which subsidiaries can deal with are broader than those of banks, and it is notable that there is a possibility that subsidiaries can deal with some types of Ijara and Murabaha, even under the current banking regulations. The FSA recently published a draft of a bill for the amendment of the banking regulations which allows subsidiaries of Japanese banks to conduct “lending” type Islamic finance transactions. This bill is now under public comment procedures and it is likely to come into effect from December 2008. The bill stipulates that subsidiaries can handle such business if the transaction satisfies the following conditions: Regulations on foreign banking subsidiaries of Japanese banks Japanese banks are allowed to have foreign banks (foreign companies that engage in banking business) as subsidiaries (hereinafter “foreign banking subsidiaries”). Japanese banking regulations in principal allow foreign banking subsidiaries to engage in business which is allowed under the respective foreign jurisdiction — provided that such business does not seek to evade the substance of the Japanese banking law. If local regulations permit foreign banking subsidiaries to engage in certain Islamic financial business, therefore, establishing such foreign banking subsidiaries is a possible way for Japanese banks to participate in Islamic financial business. The Japanese mass media conveys the message that the new bill “opens” Islamic finance to Japanese banks; however, the bill does not change any regulations that apply to banks themselves. The subsidiaries will be allowed to conduct “lending” type transactions under the new bill in addition to certain “equity” type Islamic finance which is already permitted under the current banking regulations. The enactment of the new bill is a monumental step because it is the first law which is intended to directly target Islamic finance in Japan. The new bill is hoped to further promote the development of Islamic finance in Japan. So Saito is a partner at Nishimura & Asahi in Tokyo, Japan. He specializes in securitization, Islamic finance, Basel II finance, risk finance, derivatives, acquisition finance, and compliance with banking and securities regulations. He is licensed to practice law in Japan and New York.

  1. The transaction is deemed equal to money lending, although not money lending itself.
  2. No interest should be charged because it is prohibited by religious discipline.


  1. The board that consists of members who have professional knowledge of the religious discipline of such non-lending transactions accepts such transaction.

The bill itself contains some ambiguity, and there are various kinds of Islamic finance transactions, from more “lending” type transactions to “equity” type transactions, therefore, each subsidiary has to decide by itself what kind of transaction falls into the category of “equal to money lending”.

source jurist jp

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