Mergers and acquisitions (M&A) among Islamic banks across the GCC region are expected to pick up pace to boost their competitive position in an increasingly overbanked region, according to a recent report from Fitch Ratings.
“Islamic bank mergers and acquisitions in the GCC region are likely to increase as many Islamic banks still lack the market position needed to compete with large established peers, particularly in overbanked markets such as the UAE,” Fitch Ratings said.
Consolidation, according to the rating agency, should ultimately be positive for the Islamic banking sector by creating larger, stronger and more efficient Islamic banks.
GCC Islamic banking M&A is driven by the search for competitive advantage to access growth opportunities and build low-cost deposits, as well as by cost synergies. Deals usually need government backing given the significant stakes that governments hold in most banks.
Most Islamic bank M&A is between Islamic banks or involve a conventional bank acquiring an Islamic bank as a subsidiary. Islamic banks cannot easily acquire conventional banks. Integration risks can be high, especially when both Islamic and conventional banks are involved.
“Islamic banking has been a growth area for the last ten years with most GCC countries trying to build their Islamic financing capabilities and create domestic Islamic finance hubs. Accessibility to Islamic products and instruments has grown rapidly with product innovation. However, in an overbanked region, some of the newer franchises have struggled to find good growth opportunities and to attract cheap and stable deposits, given the strength of existing competition. They have also been hindered by the ability of conventional banks in some countries to offer Islamic financing and take Islamic deposits,” Fitch said.
The development of Islamic banking is following various paths in the GCC region. Kuwait restricts Islamic financing to Islamic banks to ensure clear separation between Islamic and conventional activities. According to Fitch, higher level of clarity has helped to develop a strong banking system split between five conventional and five Islamic banks, all with reasonable franchises and growth opportunities.
Fitch notes that there are a number Islamic banking M&A deals in the pipeline in the region. Kuwait Finance House’s aim to acquire Bahrain’s Ahli United Bank and its Islamic franchise in Kuwait, if achieved, would make Kuwait Finance House the leading domestic Islamic bank in Kuwait and a big Islamic player in the region.
In the UAE, Dubai Islamic Bank and Noor Bank are likely to merge, which would create a more sophisticated leading Islamic player, benefiting particularly from cost efficiencies and product and business development. Dubai Islamic Bank is the oldest Islamic bank in the world with a 9 per cent financing market share in the UAE.
Source: Gulf News