Three-way bank merger in Malaysia to disrupt old ways of Islamic finance

By admin-s On Jul 22, 2014

(ALB) – 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 standalone 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, analysts say.

Malaysia also has the capacity to standardise industry practices, which vary due to different interpretations of Islamic law, they say.