T he majority of Islamic financial institutions have a relatively small capital base and total assets. In combination with regulatory requirements related to concentration risk and large exposure limits, this restricts the individual banks in the amount of lending they can extend to an individual counterparty or an industry. Currently this is often circumvented by the application of club deals or syndicated transactions. As the demand for Islamic financial services grows, the banks are likely to start seeing larger funding requirements from individual clients. Although they can continue to be catered for by the club and syndicated deals that we see now, there will be advantages in having a single bank involved in a transaction from a control and efficiency perspective. From this point of view, M&A may provide an opportunity, although it could also be possible for banks to increase their capital base in other ways. In the end, both small and large institutions have their own advantages and disadvantages within the industry, and any M&A activity will have to be driven by an underlying economic requirement.
DR NATALIE SCHOON:
M &A activity would be desirable to create larger and better-capitalized institutions, but it is unlikely to occur in practice. Previous merger attempts, such as that between the Al Baraka Group and the International Investor of Kuwait, failed because of a clash of management cultures, with the institutions agreeing to separate. Even the merger of Tamweel PJSC and Amlak of Dubai into a recapitalized venture is proving difficult, despite the exposure each has to the Dubai property market and the precedent set by the merger of the Emirates Bank with the National Bank of Dubai, two conventional banks. In the case of Islamic financial institutions, the need to merge separate Shariah boards is a further complication. Although the Gulf Cooperation Council is a single market, there are national legal and regulatory systems governing Islamic finance. Cross-border acquisitions are therefore complicated, and most Islamic financial institutions have focused on their national markets. Nationalistic factors may preclude foreign takeovers. Although Al Rajhi Bank and Kuwait Finance House have expanded into Malaysia by opening subsidiaries, it is unlikely that they would get permission to take over local Islamic financial institutions. Dubai Islamic Bank has only been permitted to take minority stakes in the Bank of Khartoum, in which it owns 28.4% of the equity; Bosnia International Bank, in which it owns 27.3%; and Saba Islamic Bank, in which it owns a 18.5%. It is only in Pakistan that Dubai Islamic Bank has been able to establish a 100% owned subsidiary, but this was a new start up in 2005, not a merger or acquisition. PROFESSOR RODNEY WILSON: Director of postgraduate studies, Durham University
M &A activity is always helpful if executed well. It helps strengthen the weaker players and can open up new markets and services to those able to sustain growth in this challenging environment. Most of the players are sub optimal in terms of size, so such activity will also help to create larger banks that are able to compete more effectively with the international and/or conventional banks. VINCE COOK: CEO, The Islamic Bank of Asia, Singapore
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