Interview: Mohammed Ebrahim Mohammed
What are the advantages to be gained from mergers in the Islamic banking sector?
MOHAMMED EBRAHIM MOHAMMED: To compete these days, banks should have a strong capital base, which helps in making new transactions and growing the business. For us, as an Islamic bank, the capitalisation would be the biggest achievement. Also, any merger or acquisition helps reduce the fear of competition in the market.
Once a strong capital base is established by merging two banks, then one can easily go outside Bahrain, which is the goal of all local banks as Bahrain is a very small market. Entering new markets, like Turkey, for example, where one could acquire a stake in a bank, requires a lot of capital and would not be possible without a merger to create a strong capital base.
When it comes to mergers people should think about the future of the bank and not their positions within the bank. This is one of the main hindrances to mergers within the Islamic banking industry. This mentality has to change. Also, all levels of the bank should be involved when in comes to mergers and acquisitions (M&As). It should be a combination of both the board and the management working together to pursue any opportunities. Finally, there is the issue of share price and the valuation of the banks. For Bahrain Islamic Bank and Al Salam Bank, the cancellation was due to the share price matter. For both banks it was never a liquidity issue, but the merger was pursued to increase the capital base.
Has the shareholding structure of Islamic banks limited the appetite for M&As?
MOHAMMED: It is not the shareholders that have hindered M&As, but the positions individuals hold on the board. It is only indirectly the shareholding structure, as the board represents the shareholders. However, board members are generally limiting M&As out of their own personal interest and not in the interest of the shareholders they represent. Our merger plan did not even make it to that stage where the shareholders are involved, which is the annual general meeting.
It is not only the board, sometimes even the management of one of the banks in a merger might fear for their position and make it difficult for the merger to move forward. Shareholders as well do not want to be diluted when it comes to their controlling stake. Even if both banks have agreed to a merger and their boards agree as well, the final decision has to go to the AGM for the final yes or no.
It is a very difficult and time-consuming process with a lot of different players involved, which could be why we do not see many M&As moving forward, even though there is a lot of discussion in the market about consolidation. The Central Bank of Bahrain has been very supportive and has cooperated as much as it can, but it wants to leave it up to market forces. I think it will have to get involved in the future if it wants consolidation to occur, but I think it is something the bank would like to leave up to the market.
How can greater coordination of Islamic banking activities across jurisdictions be reinforced?
MOHAMMED: Strategic alliances are key to entering new jurisdictions. Islamic banks that want to do this, and which have the objective of growing Islamic activities and the industry across jurisdictions, should further cooperate and look to bring opportunities to each other. Conventional banks can enter into Islamic transactions, but Islamic banks are not allowed to enter into any non-Islamic transactions. Therefore, so as to increase Islamic banking activities across jurisdictions, Islamic banks should offer opportunities or activities within their particular country to Islamic banks worldwide or in their region. This will help to further grow Islamic transactions and cooperation.
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