Malaysia Islamic banks ripe for consolidation

Malaysia’s Islamic banks are ready for consolidation as they seek ways to cope with rising operational costs, a top official with Bank Muamalat Malaysia Bhd (BMMB) said, signalling a greater acceptance in US$143.64 billion sector for MandAs.

Islamic banks in the past have often been reluctant to merge, in part due to resistance from powerful shareholders who fear a loss of control while strains in global financial markets discourage risk-taking.

Islamic finance has grown in leaps and bounds to account for 23.7 percent of Malaysia’s total banking assets although a major aspect is missing and#8212; the development of megabanks that can issue ground-breaking products in the same way as conventional banks.

“I think consolidation is imminent and we will see a lot of Islamic banks getting together,” BMMB Chief Executive Officer Redza Shah Abdul Wahid told Reuters.

“Costs have risen easily by 20 to 30 percent mainly due to the shortage of human capital and increased regulatory costs.
Margins are falling and the only way to counteract this is to become bigger and more efficient,” he added.

BMMB is now the target of a potential acquisition by financial group Affin Holdings Bhd, which may buy a stake from Malaysian sovereign fund Khazanah Nasional Bhd and DRB-Hicom Bhd to create the country’s fourth largest Islamic bank by assets.

DRB-Hicom holds 70 percent of BMMB while the Khazanah holds the remainder. Affin, which received the greenlight from the Malaysia’s central bank to begin negotiations, said the matter will conclude by end-2012.

The combined entity of Affin and BMMB would elevate both banks to a stronger market position. Affin would grow to the fourth largest Islamic bank by assets from ninth currently, the bank said last month.

“(With consolidation) we would be able to take in all these costs and do bigger deals, I think this is the way forward,” Redza said.

DRB-Hicom, controlled by reclusive tycoon Syed Mokhtar Al-Bukhary, purchased a controlling stake in BMMB in 2008 with a mandate to reduce its holding to 40 percent.

The company last attempted to divest to Bank Islam Malaysia Bhd and Bahrain-based Al Baraka Islamic Bank.

BMMB is one of the country’s remaining domestic standalone Islamic banks next to Bank Islam Malaysia Bhd, which has retained its leading position in the market. – Reuters