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MEAGER MERGERS? The major obstacle facing 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
June 10, 2012 5:58 by Reuters
Some mergers in the Gulf have gone ahead. Last month Al Salam Bank and Bahraini Saudi Bank, both Bahrain-based, completed a merger of their operations.
The Dubai government ordered Emirates Bank and National Bank of Dubai to join in 2007, and the combined entity, Emirates NBD , is now absorbing Dubai Bank, a debt-laden Islamic lender, at the behest of United Arab Emirates authorities.
All these mergers are domestic rather than international, however, and Emirates NBD’s takeover of Dubai Bank was viewed primarily as a way to heal a weak spot in the banking system rather than as a step to expand Islamic banking across borders.
In the long term, the rise of large, multinational Islamic banks is inevitable, many bankers say – but it could take many years.
“Ultimately there might be some mergers between small-to-medium sized banks who want to become bigger players regionally,” said Salah Jaidah, head of Islamic finance at Deutsche Bank.
Al Baker at Bahrain’s central bank said governments should consider offering incentives such as tax exemptions or subsidies in order to entice Islamic banks to merge.
Ultimately, competitive pressures may prove to be the biggest factor encouraging mergers. The margin of Islamic banks’ growth above conventional banks’ growth has been decreasing across the Gulf, said an April report by A.T. Kearney. Meanwhile, staff expenses at Islamic banks have been growing faster than for conventional banks, according to Ernst & Young.
As Islamic banks finish penetrating their natural customer bases of loyal Islamic banking customers, they may need to seek growth by targeting the “floating mass” – clients who base their choice of bank only partly on religious permissibility, and are also swayed by factors such as pricing and service quality. To attract these customers, Islamic banks may have to compete head-on with the regional networks of conventional banks.
The need for Isalmic banks to become more efficient will eventually outweigh other factors when they consider mergers, said Moinuddin Malim, chief executive of Dubai-based Islamic lender Mashreq Al-Islami.
The rise of regional players will happen when “the industry realises what we are missing,” he said.