MERGERS & ACQUISITIONS
M&A in Islamic Finance Islamic Banks and Financial institutions can face vulnerabilities specific to their nature and locations. Mujtaba Khalid, Head of the Islamic Finance Centre, BIBF explains where some of these concerns arise and how M&A’s can help to strengthen the sector Mujtaba Khalid, Head of the Islamic Finance Centre, Bahrain Institute of Banking & Finance (BIBF)
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he terms merger and acquisition (M&A) although often used as though they were synonymous, mean slightly different things. A merger implies the combination of two companies into one larger company for some economic or other strategic reasons. Acquisition is gaining effective control over the management and ownership of another company, from a legal point of view, the target company ceases to exist. Given the current circumstances as well as the coming global financial condition, we can build a case for two or more Islamic banks or financial entities to merge and form a more robust Shariah compliant financial institution as was seen in the merger of Al Salam Bank Bahrain’s merger with BMI a few years back. Similarly, we can also build an equally appealing case for a conventional bank to acquire an Islamic bank, as was seen in the recent acquisition by The National Bank of Bahrain (NBB)’s of Bahrain Islamic Bank (BIsB).
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Spurred by Commodities Before moving on to the mergers and acquisitions, we need to zoom out and look at the Islamic finance industry as a whole and its prospects – the Islamic finance industry in the past has seen considerable growth. Over the past decade, it has averaged double digit growth. However, we did see this growth slow down to single digit in the past two or so years. Going forward, according to different reports including the Islamic Finance Development Report 2020, the industry is poised to grow by at least 50% in the next 5 years. I believe that there is a case for the Islamic finance industry to see more than 100% growth over the next 5 years - The last time the Islamic Finance industry was at its peak was around 2009, just at the culmination of last the global commodity super-cycle. Many countries the feed the growth of Islamic finance are dependent on commodities - be it the GCC with crude oil, Malaysia with Palm oil or countries like Pakistan and Indonesia with agriculture. There
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has always been a strong correlation between commodity prices and the growth of the Islamic finance industry. Some can argue that the correlation might not be as strong, non the less, it is very much there. Given the COVID19 pandemic, once nations start to vaccinate and economic activity starts (as has started in some countries), there will be a huge demand in commodities and raw material just to get back to the previous normal. This I strongly believe will result in a significant increase in the prices of commodities, thereby having a positive spillover onto the Islamic finance industry. If we look at the YTD increase of the S&P Commodities index, it will show that the prices of commodities have already increased significantly in 2020. The Case for Mergers and Acquisitions From an operational perspective, there are certain challenges faced especially by Islamic banks in the region that could act as a catalyst for increased merger activity –
