Consolidation Trends in Islamic Finance

January 25, 2012

In June we blogged about turmoil in the Middle East and how asset managers should fare well despite political instability in key countries (see blog here), and since then we’ve observed continued growth in the region.  In fact, we’ve remained committed to the region, announcing in December that PORTIA will be working with The Company for Cooperative Insurance – commonly known as Tawuniya – which is the largest insurance company in Saudi Arabia (see press release here).

Fresh into 2012, we’ve heard many predictions about how the region will perform this year.  One of the most common predictions is that Islamic banks and funds will start to consolidate, in part to take advantage of economies of scale and to extend their reach.  We believe this is good for the industry, as it should lead to greater stability and ultimately increased confidence and funds.  Because most Islamic finance organizations are small, there are concerns that even the smallest failure or instability by a handful of firms could cause a run on assets or contagion – and consolidation could prevent this.  Similarly, consolidation is a sensible way to grow for smaller banks, as few institutions in the region have the capital required to establish a newly license megabank that can grow organically. 

Here are few recent developments that indicate the environment in the region is healthy and ready for consolidation:

  • The Islamic Financial Services Board, an international standard-setting organization that promotes and enhances the soundness and stability of the Islamic financial services industry, recently announced new principles for liquidity risk management and stress testing (more details here)
  • Thomson Reuters launched the world’s first Islamic finance benchmark rate (see press release)
  • Emirates NBD Bank announced in October 2011 that it will take over Dubai Bank at the request of the government (read news story here)
  • Bahrain’s central bank pushes for five of its Islamic banks to merge in order to improve their capital bases (see details here)

There is also some evidence that Southeast Asian Islamic finance institutions are increasing cooperation with GCC institutions, and that consolidation may occur across regions.  For example, Bank Negara Malaysia is processing three applications for megabank licenses in the country, and sources indicate that all of these investors are from the GCC.  Similarly, Malaysian Islamic finance firms could serve as a good source of capital for GCC firms.

We believe that consolidation could be a key driver of growth for asset managers in the region.  It is also critical for asset managers to continue to penetrate existing markets, as assets under management remain small relative to banking deposits.  For example, in the U.S., assets under management have historically been larger than bank deposits, whereas in the GCC assets under management are a fraction of bank deposits.  Consolidation might be the catalyst needed to shorten the industry’s development curve and provide investors with the confidence needed to shift assets to asset managers.

Are you seeing signs on consolidation in Islamic finance markets?  What are your predictions for the industry in 2012?

– Matt Bellias, Director of Strategy and Marketing

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