Malaysian Merger ‘Could Trigger Islamic Banking Boom’

Ongoing negotiations that could lead to a merger between CIMB Group Holdings, RHB Capital and Malaysia Building Society might, in turn, potentially allow Malaysia to build on its regional dominance in the Islamic finance industry says Business Monitor International (BMI).

The London-based research firm, which is part of Fitch Group, says that Malaysian government is keen to promote overseas expansion of Sharia-compliant banking, and is looking to almost double its share of assets in the domestic banking system. The proposed merger would be a significant step towards these goals.

A merger between the trio has the potential to provide a significant boost to Malaysia’s Islamic banking around the region. BMI believes that Sharia-compliant financial products will grow in importance in Malaysia, supporting banking sector assets at a time when traditional lending growth is set to wane amid high levels of household debt.

A successful three-way merger “could provide a major shot in the arm in this regard,” says BMI. In line with the government’s long-term goals of creating regionally dominant banks in the Islamic finance space, while consolidating the banking industry, the Malaysian authorities gave the green light to merger discussions.

While talks at an early preliminary stage, the large stakes held by the Employees Provident Fund (EPF), Malaysia’s largest pension fund, in each of the three banks, could facilitate any deal. The EPF owns 14.5% of CIMB, 41.3% of RHB, and 65.0% of Malaysia Building Society.


Malaysia: Islamic Banking Assets (MYRbn)


BMI Islamic Banking in Malaysia

Source: BMI, BNM

The combined entity would have assets of ringgit (MYR) 597bn (US$188bn) at the end of 2013, overtaking Maybank’s MYR560bn. It would also rank as the Association of Southeast Asian Nations’ (ASEAN) fourth-largest bank after Singapore’s top three: DBS, United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC).

With the continued integration of ASEAN economies ahead of the ASEAN Economic Community (AEC) to be launched by end-2015, opportunities for cross border lending are likely to grow, says BMI.

Islamic ‘Megabank’ Would Open New Doors

The idea is that a merger would create a stand-alone Islamic banking unit, separate from the conventional banking operation of the enlarged bank, says BMI. This would have significant regional presence, allowing it to gain a greater foothold in the fast growing global industry.

The creation of a so-called mega Islamic bank (defined by Bank Negara Malaysia as a banking entity with a minimum of US$1bn in paid-up capital), would not only allow the bank itself to gain access to lucrative deals, such as designing and distributing Islamic bonds (or sukuk), but it would also pave the way for other Malaysian entities to expand.

Given the regional scope that a merger between CIMB, RHB, and Malaysia Building Society would have, there would be significant potential to internationalise Malaysia’s model of Islamic finance, allowing the country to become the dominant player in an industry that is set to rise rapidly over the coming years.

Given the varying interpretations of Islamic law, industry practices tend to differ, and Malaysia has an opportunity to internationalise its own brand of Islamic finance, which is considered to follow a more straightforward method.

The new entity would have the financial clout to compete against the Islamic finance arms of large Western banks, which have had some success in winning large sukuk issuances in recent years. Meanwhile, there is scope for penetration into markets in the Middle East, which, despite boasting the largest Islamic banks by assets, lack the financial expertise in areas such as sukuk issuance.

Ambitious Plans

BMI concludes by noting that Malaysia is by far the largest centre in Asia for Islamic finance, driven by its majority Muslim population and strong financial and political links with the Middle East. Sukuk issuance is forecast to grow by roughly 14% globally this year.

The Malaysian government’s strategy is to increase the proportion of Islamic financing to 40% of total domestic financing by 2020 from the level of 24% at the end of May 2014.

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