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MEAGER MERGERS? The major obstacle facing Islamic banking

islamic banking

Islamic finance is still growing, but a major aspect is missing: the development of big cross-border banks that could spread ground-breaking products and best practice around the region, as multinational banks have done in conventional finance

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June 10, 2012 5:58 by



MERGERS

 

Strains in the global financial system over the past few years are one reason for the slowness of Islamic banks to form wide regional networks. But they are not the main reason; after all, the volume of Islamic finance has managed to continue growing rapidly despite, and perhaps because of, the crisis of conventional banking. Islamic financial assets worldwide rose 150 percent over the past five years to around $1.3 trillion, according to an estimate by financial lobby group TheCityUK.

 

Another factor is restrictions on the entry of foreign banks into many national markets, said Alexander von Pock, principal at consultants A.T. Kearney.

Capitalisation requirements in markets such as Oman and Kuwait limit regional expansion, making it difficult to justify deploying large amounts of capital from already-strained balance sheets, a senior Islamic banker told Reuters. Conventional banks have coped with such obstacles in many cases, however.

The underlying problem, bankers and analysts say, is that Islamic banks tend to be younger than their conventional peers and multiple launches have left the sector fragmented, making economies of scale harder to achieve. Islamic banks now command a 25 percent share of the banking market in the Gulf Cooperation Council, but their average asset base is a third the size of conventional banks, according to Ernst & Young.

Mergers could change this, but Islamic banks have often proved reluctant to merge. In many cases, powerful shareholders have constrained merger plans, fearing loss of control, said Abdul Rahman Mohammed Al Baker, executive director of financial institutions supervision at Bahrain’s central bank.

 

“Look at the nature of the boards…these are family-held businesses,” he said.

 

Last year Bahrain’s central bank urged five local Islamic banks to merge early in 2012 as a way to strengthen their capital bases. But in February this year, Bahrain Islamic Bank and Al Salam Bank ended their merger talks because of disagreement over valuations, while CAPIVEST, Elaf Bank and Capital Management House have not yet achieved a union.



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