| KUALA LUMPUR/SYDNEY, July 18
KUALA LUMPUR/SYDNEY, July 18 A proposed
three-way merger in Malaysia will create the world's first
Islamic bank that will have enough clout to challenge the
dominance of conventional, often Western, banks in the industry
and influence the way Islamic finance deals are made.
The Islamic units of market leaders such as HSBC Holdings
PLC and Standard Chartered PLC have long used
their parents' vast networks to win leading roles in global
deals. Most of such deals involve designing and distributing
Islamic bonds, or sukuk, a fast-growing segment in the sector.
By contrast, local banks in the Islamic world lack the scale
and reach to entice corporate and sovereign issuers from Europe
and Asia. Many of them are owned by wealthy families or the
state, and fear of losing control has limited mergers and
consolidation in a still highly fragmented industry.
In comes Malaysia, whose government is keen to make leaders
out of the country's banks in global Islamic finance. Last week,
CIMB Group Holdings Bhd, RHB Capital Bhd and
Malaysia Building Society Bhd secured regulatory
approval to begin their merger talks.
Their amalgamation would yield a stand-alone Islamic bank
that is separate from the conventional banking operation of the
enlarged bank. This Islamic bank will have a cross-border
presence sizable enough to win big mandates, as well as a
Malaysian model of Islamic finance that is regarded by many
investors to be simpler and less confusing, analysts say.
"The next meaningful stage for Islamic banking is a bank
with connectivity across key markets and separate markets," said
Abdul Rauf Rashid, country managing partner for EY Malaysia.
"Putting together and creating this large entity is a start, but
the next step is integrating them into one powerful unit that
can go out and build the market."
The merger would include the creation of a so-called mega
Islamic bank. Malaysia's central bank defines such an entity as
having a minimum $1 billion in paid-up capital.
A successful merger may pave the way for other Malaysian
banks to follow suit as they expand globally. That would help
internationalise the Malaysian model of Islamic finance,
Malaysia also has the capacity to standardise industry
practices, which vary due to different interpretations of
Islamic law, they say.
Malaysia has a centralised, top-down approach to creating
sharia-compliant products. Other countries have allowed sharia
boards of individual Islamic banks to decide whether their
products and activities obey religious principles. The latter
approach sometimes leads to disagreement over the design of a
product and even confusion among investors, analysts say.
Some investors have decided to stick with the big
conventional banks such as Standard Chartered. The banks have
their own Islamic scholars and the financial clout to lead in
the structuring of Islamic finance deals.
"When we have mega banks, and trim down to fewer players, it
will be easier to harmonise things. Bearing in mind that it will
go global, we are positioning Malaysia as the leader for Islamic
banking," said Johan Lee, partner at Kuala Lumpur-based law firm
J.Lee & Associates.
NO LONGER A CONCEPT
The mega Islamic bank concept has been discussed in the
industry for years. Previous efforts have failed to take off
partly because of scant interest from the private sector.
Most banks in the Middle East are retail-oriented or lack
the financial expertise to compete with large multinationals. Al
Rajhi Bank - Saudi Arabia's largest listed lender and
the world's biggest Islamic bank - has never issued a sukuk and
is only now developing its investment banking business.
Smaller Islamic banks in the region such as Qatar Islamic
Bank and Al Baraka Banking Group are hardly
in the league of Western banks when it comes to Islamic finance.
But change is in the air, with Islamic finance now holding a
greater share of the banking sector in Asia and the Middle East
- a third in the case of Qatar. Growing economic links among
these regions are also renewing a push to standardise the rules
of Islamic finance and banking.
The Bahrain-based International Islamic Financial Market -
an industry body that creates specifications for Islamic finance
contracts - is now developing its first-ever contract template
The sukuk market is forecast to grow 14 percent to $130
billion in issuance in 2014 compared with last year, a Thomson
Reuters study shows.
Efforts by Malaysia to sell its version of sukuk financing
will face a number of obstacles, particularly in
Most dollar-denominated sukuk are issued across a myriad of
markets, must be approved by scholars in each institution
wishing to buy them, and are thinly traded.
This segment is also dominated by Western banks and is
attracting a growing number of Gulf-based lenders, all eager to
capitalise on the expected rush of global issuance. Hong Kong
and Luxembourg are among the governments aiming to issue sukuk
later this year.
Size could help the proposed Malaysian mega Islamic bank win
a larger share of such business, and more crucially, lead in the
design of those deals.
"They will still have to adapt to each country's culture of
doing things...we just need to focus on the products that work
for multiple markets," said Mohamed Ridza, partner at Kuala
Lumpur-based law firm Mohamed Ridza & Co.
The question is whether a full-fledged Islamic bank of that
size can survive without support from a conventional bank as its
"Being larger does not necessarily lead to greater
efficiency, better profitability or improved bank credit
fundamentals," said Simon Chen, Singapore-based banking and
Islamic finance analyst at Moody's.
(Additional reporting by Denny Thomas in HONG KONG; Editing by