Islamic banking, which has also been affected by the global financial crisis, should consider mergers and acquisitions as an avenue for sustained growth, said AT Kearney, the leading management consulting firm.

The global financial crisis highlighted the need for consolidation in the Islamic banking industry in the region, it said.

Growing out of their niche and becoming mainstream business is considered one of their major challenges and if Islamic banks do not succeed, the room for further organic growth is limited as the market space in some GCC countries is already overcrowded, according to AT Kearney.

“Some Islamic banking players are currently determining long term future plans, eyeing the opportunity to grow and become stronger players. Mergers and acquisitions offer a way to build more powerful players with better chances to compete,” stated Dr Alexander von Pock, principal, Financial Institutions Group, AT Kearney Middle East.

Islamic banks are clearly in competition with conventional banks and over the years have taken away market share from their conventional counterparts. While traditional banks in the Mena 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.

In recent news some Central Banks in the GCC – notably Kuwait and UAE – are urging banks to consider mergers to strengthen the banking sector. This sentiment is obviously shared by a number of high-ranking regional bankers, who have either expressed interest in mergers and acquisitions to counter competition or commented on the favourable conditions for acquisitions. More importantly, the first domestic Islamic banking acquisition in the Mena region in years has recently been concluded, where an Islamic bank in Bahrain has acquired a conventional bank with the intention to convert the target into a Sharia-compliant business and Dubai Islamic Bank has increased its stake in Tamweel.

“We expect to see more mergers and acquisitions in Islamic banking happening in the region in the future. Islamic banks need to proceed carefully though, as most mergers fail to meet their objectives. Our experience shows that if not properly planned and executed acquisitions in financial services may reduce shareholder value up to 50.”

“A number of  key success factors will be crucial for Islamic banks that want to use mergers and acquisitions to proactively manage the new economic realities For example, a clear merger rationale, good fit as well as leadership and direction are essential when pursuing an M&A deal,” concluded Dr von Pock.-TradeArabia News Service