Merger momentum for Islamic banks to continue in 2020

Consolidation needed in some markets which remain overbanked, says Fitch Ratings' global head of Islamic Finance

KFH suspended the acquisition of Bahrain’s Ahli United until December. Andrew Henderson / The National

Mergers and acquisitions (M&A) in Islamic banks in the GCC are expected to continue in 2020 as Sharia-compliant lenders look to carve out market share in an increasingly competitive environment, a senior executive of Fitch Ratings said.

"We've seen the trend of GCC Islamic banks M&A in 2019 and we expect that to continue next year," Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, told The National in an exclusive  interview.

“Islamic banks are searching for market position. Secondly, they are looking for growth opportunities to cement their positions and third, you have overbanking in some countries and the consolidation is something that is happening in these countries - to have a number of financial institutions at the lower level than it is currently.”

The comments come as a number of sharia-compliant lenders in the Gulf hold talks to combine their operations to boost revenues.

Dubai Islamic Bank, the biggest Sharia-compliant lender in the UAE, is in the process of taking over its smaller rival Noor Bank, while National Commercial Bank in Saudi Arabia is pursuing a merger with its competitor, Riyad Bank.

National Bank of Bahrain, a majority government-owned lender, last month firmed up its bid for Bahrain Islamic Bank. It is looking to acquire at least 40 per cent of BIB in a deal which values it at 124 million Bahraini dinars (Dh1.41bn).

Earlier this week, Kuwait Finance House said it had gained approval from the Central Bank of Bahrain for its acquisition of Ahli United Bank - a deal that will create a combined Islamic banking entity with $96.7 billion (Dh354.7bn) in assets.

“You could have various scenarios in mergers and acquisitions. You could have an Islamic bank with an Islamic bank or you could have a conventional bank with an Islamic bank. Each of these have their own challenges,” said Mr Al Natoor.

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The credit outlook for Islamic banks is stable, driven by sovereign support, he said, adding “the growth in Islamic banks in the past 10 years has been in double digits and [they] have been growing significantly at higher rates compared to conventional banks".

However, as the industry matures, he expects this outperformance gap to narrow.

“The growth itself in the past two years is in single digits and in some cases around 5 per cent. Islamic banks do not operate in a cocoon from the operating environment [which] is having its own challenges.”

The sukuk market is also set to continue its recent growth as both governments and corporates focus on diversifying funding sources and plugging budget gaps caused by lower oil prices. A high oil price is not conducive to sukuk issuance, but a low oil price discourages investors, Mr Al Natoor said.

“There is a sweet spot in the middle between $55 to $65 per barrel where there is still need for diversification in funding and still some comfort for investors.”

Sukuk issuance is set to rise 6 per cent to $130bn this year, rival ratings agency Moody’s Investors Service said in August.

Mr Al Natoor said Islamic finance is gaining traction all over the world with new entrants like Morocco, which recently introduced laws to govern Islamic banks as well as the takaful industry. Turkey is trying to establish state-owned Islamic banks and Indonesia is planning to roll out a road map to boost the Islamic finance sector, he said.

“We are seeing new entries to the market like Morocco and other countries but the top 10 countries for Islamic finance continue to be six GCC countries plus Malaysia, Turkey, Pakistan and Indonesia,” Mr Al Natoor added.