Bells are not ringing, for nowBy Shahriman Johari
The idea of a mega Islamic bank is still alive and well but the days of arranged marriages are over.
IT APPEARS to be a marriage that was not meant to be. BIMB Holdings Bhd, parent of Bank Islam, has decided against pursuing a merger with smaller rival Bank Muamalat. It cited Bank Islam's strategic plans and positioning as reasons for not going ahead with a deal.
On the face of it, the Malaysian Islamic banking industry sorely needs to consolidate. With a population of 27 million people, we already have nine local conventional banking groups. In contrast, there are 11 local Islamic banks.
The Bank Islam-Bank Muamalat deal looked interesting from the start. Khazanah Nasional Bhd holds 30 per cent of Bank Muamalat and it is not a core investment, meaning the state investment arm wants to sell it. DRB-HICOM Bhd, which has the balance, must pare its stake to 40 per cent under an undisclosed deadline. They also talked about how the merger could create a mega Islamic bank, something that experts argued is vital for the industry's development.
On the surface, a deal makes sense but it would not add much value. Size is often mentioned when deals are done but takeovers are mainly about buying something that a company doesn't have. CIMB Group Holdings Bhd took over Southern Bank due to its lucrative credit card business, among others. Earlier this year, Malayan Banking Bhd decided to buy Singapore stockbroker Kim Eng to quickly expand in Southeast Asia.
But company executives said a deal between Bank Islam and Bank Muamalat would create a bigger group, but not necessarily stronger. There is no clear cut area where, for instance, Bank Islam is weak and Bank Muamalat is strong and vice-versa.
Another hurdle is probably differences in opinion of how a deal should be done. DRB-HICOM said it wants a merger but not to sell its stake in Bank Muamalat. It obviously sees the deal as a way to reduce its stake, which is the condition set by Bank Negara Malaysia in 2008. What this means is that it still wants to have a stake in the Islamic banking business.
But BIMB may have other ideas. Why should it not buy 100 per cent of a smaller rival? It may want to be in the driving seat too.
While the Bank Islam-Bank Muamalat deal appears to be over, we should not discount other mergers. Bank Negara is due to release its second 10-year development plan for the financial industry in June and it may decide to spur mergers in the Islamic banking space.
Industry executives have given their feedback to the central bank about what they feel should be done in the next 10 years. There are strong views that Islamic banks should merge and Bank Negara may give incentives to make it happen.
With the right carrots, deals are bound to happen, but this should be left to the market to decide. What we don't want are forced mergers like what happened in the late nineties.
This is what Datuk Tong Kooi Ong, founder of PhileoAllied Bank, said about the episode in his 2003 book, The Phileo Story. (PhileoAllied was initially told to merge into Multi-Purpose Bank but was later taken over by Maybank).
" ... the manner in which the banks were forced to merge, without regard for this market mechanism, without any transparent reason or rationale, remains distasteful; in fact, it is wrong".
So let's be clear about our priorities and how to get them. The idea of a mega Islamic bank is still alive and well but the days of arranged marriages are over.