Egoism hampers M&As among Islamic banks

Egoism and management issues are hampering mergers and acquisitions among Islamic bank and central banks need to tighten up the M&A regulations for the consolidation of the sector, according to a top Islamic banker.
London-based BMB Islamic’s Chief Executive Humayon Dar said mergers of Islamic bank is problematic from management viewpoint. “For example, in Malaysia I’m advising on Hong Leong Islamic Bank and it is taking over EON Capital. One shareholder has gone to the court holding 20 per cent stake in EON. A merged bank would have only one CEO, and tradition is that acquiring bank CEO prevails. The question is what about the CEO of the other bank. Should we accommodate or let him go. This is not only on CEO but on each and every level – head of corporates, head of retails and even the merging of the teams as well.

“These don’t seem big issues but when you’re actually merging them, these are really big matters. In many cases, you ended up replacing the existing team because of the ego problem. In order to avoid personality clash, you let one person go. Operations are expected to be bigger but a lot of people of the team are losing and this is loss for the bank.”

BMB Islamic is the Sharia advisory and structuring subsidiary of Cayman Islands-based BMB Group which has businesses that include wealth management, infrastructure and real estate.

He said regulators are being urged to promote big banks with the underlined belief that big banks have less likelihood to fail hence huge emphasis is that there should be mergers and acquisitions to make mega banks.  Islamic banks have to either consolidate or will be taken over by others.

Though, he acknowledged, there would be teething problems but in the short-run, but consolidation is going to help the industry in the long run.

Management consultant firm AT Kearney said in a recent report that M&As should be considered as avenues by Islamic banks for sustained growth with the room for organic growth being limited due to financial crisis and slow economic growth.

UAE-based Islamic mortgage finance companies Amlak Finance and Tamweel failed to reach a deal following two years of attempts to merge them.

“When Islamic banks merge, for example, Amlak and Tamweel, these are small institutions but merging them is a huge issue. These are operational aspects of merging and acquiring. Regulators should come up with clear regulations and encourage banks to consolidate themselves. One single solution for a number of single banks is that if you don’t want to go for merger or acquisition then increase the capital. But where are you going to get the capital from is an issue. In UK, FSA came up with a requirement of capital hike for Islamic banks. It took them one-year to raise capital by 20 million pound. So-called options are there but when it comes to exercising those options becomes difficult,” Dar said.

"While traditional banks in the Middle East and North Africa region are still small compared to the big international banks, Islamic banks in the region tend to be small compared to their conventional peers, leaving them with a scale disadvantage. We expect to see more mergers and acquisitions in Islamic banking happening in the region in the future," AT Kearney analysts said in the report.

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