Due to the nature of the sector with many deals being conducted on a private basis, Islamic mergers and acquisitions can be difficult to quantify in terms of size and scale. They can, however, often be used as an economic bellwether and 2013 was anticipated to be a year of growth in the sector as a global economic recovery was cautiously welcomed. REBECCA SIMMONDS explores merger and acquisition opportunities in Islamic finance.
M&A in Islamic finance
The Tawarruq structure, involving the sale of a commodity to a customer on deferred payment at cost plus profit to the original seller, following which the customer then sells the commodity on for immediate payment from a third party, is a structure used for M&A transactions in Malaysia and occasionally in Saudi Arabia and the UAE.
It has however incited considerable debate as to its Shariah compliance, despite AAOIFI standards providing the specific conditions where the use of the Tawarruq or commodity Murabahah can be used. In April 2009 the International Islamic Fiqh Academy ruled against organized Tawarruq and in December 2013 Bank Negara Malaysia released an exposure draft for feedback on the Shariah requirements and optional practices of Tawarruq.
Indonesia & Malaysia
In January 2014 Indonesian Bank Tabungan Pensiunan Nasional announced plans to acquire a 70% stake valued at IDR600 billion (US$49.8 million) in Bank Sahabat Purba Danarta. The bank which currently has a focus on microlending, will be turned into a Shariah compliant bank following the acquisition.
In January 2014 Affin Holdings signed an agreement to purchase 100% of HwangDBS Investment Bank, 70% of Hwang Investment Management, 49% of its Islamic fund management business and 100% of its futures dealing arm in a cash deal worth RM1.36 billion (US$409.86 billion). The deal is expected to be concluded by October 2014.
In 2013 Bank Negara Malaysia also introduced the Islamic Financial Services Act which has and will continue to have an effect on the M&A landscape of the country’s Takaful market, in the regulator’s efforts to grow the General Takaful market in Malaysia. All composite Takaful operators have been compelled to separate their general and Family Takaful businesses, with five years granted for the transition.
Bahrain
In April 2013, Rasheed Mohammed Al Maraj urged the financial institutions in Bahrain to consider merging as a strategy as a way of easing the country’s issues with overbanking and to achieve fair competition between Bahrain’s conventional and Islamic banks. This request followed the joint purchase by the National Bank of Bahrain and Social Insurance Organization Asset Management Company, a local pension fund, which bought a 51.6% share in Bahrain Islamic Bank.
The acquisition was made from Investment Dar for BHD34.9 million (US$92 million) and was followed by announcements of merger talks between Khaleeji Commercial Bank and Bank Alkhair and Al Salam Bank and BMI Bank. The Al Salam/BMI Bank merger was confirmed in February 2014 with an increase of Al Salam Bank’s capital with the issuance of 643.87 million new ordinary shares at a value of 100 fils (US$0.26) per share for BMI Bank shareholders at the agreed exchange ratio of 11 Al Salam shares for every BMI Bank share.
The Khaleeji Commercial Bank/Bank Alkhair merger discussions are continuing, with a steering committee established by both banks to direct valuation and due diligence process and carry out the merger transaction. The resulting financial institution will have an estimated paid-up capital of approximately US$500 million and assets of up to US$1 billion.
One of the biggest mergers in 2013 was the amalgamation of Capivest, Capital Management House and Elaf Bank into Ibdar Bank, the world’s first three-way Islamic bank merger. The newly-formed bank has an approximate US$300 million in paid-up capital, US$329 million in equity and an asset base of US$360 million and operates under a wholesale Islamic banking license issued by the Central Bank of Bahrain, but has also established a branch of the bank in Malaysia.
Qatar
One of the most significant mergers outside of Bahrain was Qatar National Bank’s (QNB) US$2.6 billion acquisition of Egypt’s National Societé Générale Bank (NSGB) in February 2013.
Previously owned by France’s Societé Générale, QNB’s wholesale purchase of NSGB was prompted by the Egyptian Financial Supervisory Authority, after the bank initially proposed the purchase of a 77.2% share of the bank. QNB made the purchase at EGP38.65 (US$5.53) a share, however as of October 2013 reports stated that QNB was looking for a buyer for NSGB due to political tension between Egypt and Qatar.
Masraf Al Rayan completed its acquisition of the Islamic Bank of Britain from previous majority shareholder, Qatar International Islamic Bank in January 2014, with a cash offer of GBP24.1 million (US$39.26 million) given approval by the regulators and the bank’s shareholders. The capital increase of IBB following the acquisition will be used by the bank to develop its retail and commercial business as it aims to aid Gulf companies interested in investing in the UK.
Outlook
Despite recent economic turbulence, 2014-15 are predicted to be successful years for M&A in the Middle East. According to a recent survey by Thomson Reuters the sectors predicted to experience the most M&A deal volume in 2014 are the financial, media and telecoms sectors. The Takaful market will also be an area for M&A interest in Malaysia, the Middle East and in new markets such as Africa as interest in Islamic finance takes hold in new markets such as Morocco and Libya.