The merger of Islamic banking units in Malaysia is crucial as the market is becoming overcrowded with the players hungry for growth, outgoing BIMB Holdings Bhd Group Chief Executive Officer Zukri Samat proposed.
He said the creation of a couple of mega Islamic banks could rival not only other Islamic banks in the country, but also the "big boys" from the conventional side such as Maybank and CIMB.
On a larger scale, mega Islamic banks will have huge potential to spread their wings off the Malaysian shores into Indonesia, Cambodia and Singapore to become a regional champion, he said.
"All together, we have 16 banks offering Islamic financial products. For a small country like Malaysia, it's a bit overcrowded. So long as we are small and fragmented, it is difficult to grow.
"Probably there could be some form of merger among Islamic banks, just like the conventional banks did during the 1997 financial crisis. The time is right for a merger," he told Bernama.
In the aftermath of the 1997-1998 Asian financial crisis, Bank Negara Malaysia took stronger measures by calling a massive consolidation of 58 financial institutions, comprising 21 domestic commercial banks, 25 finance companies and 12 merchant banks, into 10 anchor banking groups.
The anchor banks comprised Malayan Banking Bhd, Bumiputra-Commerce Bank Bhd, RHB Bank Bhd, Public Bank Bhd, Arab-Malaysian Bank Bhd, Hong Leong Bank Bhd, Perwira Affin Bank Bhd, Multi-Purpose Bank Bhd, Southern Bank Bhd and EON Bank Bhd.
Intense competition
The intervention, which concluded by end of 2000, helped improve Malaysia's banking sector in terms of market position, efficiency and capital.
Similarly, Zukri believes that the consolidation of Islamic banks through a merger exercise could boost industry growth and help achieve the country's aspiration to become a global hub for Islamic banking.
Zukri said the intense competition has slowed the average growth rate of Islamic banks in Malaysia from 15 to 20 per cent about 10 to 15 years ago to only five per cent in the past five years.
Even foreign Islamic banks such as Kuwait Finance House, Asian Finance Bank and Al Rajhi Bank Malaysia are feeling the pinch from the stiff market.
"If you look at the numbers today and 10 years ago, they have not moved very much. They are merely inching their way," he explained.
Mega bank
In 2014, three of Malaysia's largest financial institutions - CIMB Group, RHB Capital and Malaysia Building Society Bhd - were in talks to combine their business and create a mega Islamic bank, that could potentially be one of Southeast Asia's biggest lenders by assets.
The three-way merger will not only leapfrog Maybank, the country's largest bank by assets, but is large enough to compete with global giant financial instutions such as HSBC and Standard Chartered.
However, the plan was scrapped and abandoned amid tumbling oil prices in 2015.
Efforts to create a mega Islamic bank in the region in Malaysia faltered. Likewise, Indonesia was also considering forming a mega Islamic bank in 2015.
Nevertheless, the plan to create a US$8 billion worth giant entity involving Shariah-compliant units - Bank Negara Indonesia, Bank Mandiri, Bank Tabungan Negara and Bank Rakyat Indonesia - was put on hold due to legal and regulatory issues pertinent to capital requirements.
Zukri said the aspirations to create a mega Islamic bank would not become a reality if market players were to remain silent, with no effort put it.
"It should be market driven, rather than forced by the authority," he pointed out.
As at end of 2016, Islamic banking assets accounted for 27 percent of Malaysia's total banking system worth of RM2.44 trillion.
The government has called for 40 percent of all banking assets nationwide to be Shariah-compliant by 2020.
- Bernama
