Islamic bank mergers and acquisitions (M&A) in the GCC region are likely to increase as many of them lack the market position needed to compete with large established peers, Fitch Ratings said in a new report.
Consolidation should ultimately be positive for the Islamic banking sector by creating larger, stronger and more efficient Islamic banks, it added.
However, banks' “Issuer Default Ratings” will typically be unaffected, given that most GCC bank ratings are driven by Fitch’s assumption that sovereign support will be provided to banks, if needed.
Islamic banking has been a growth area for the last ten years with most GCC countries trying to build their Islamic financing capabilities and create domestic Islamic finance hubs. Accessibility to Islamic products and instruments has grown rapidly with product innovation.
However, in an overbanked region, some of the newer franchises have struggled to find good growth opportunities and to attract cheap and stable deposits, given the strength of existing competition, Fitch said.
They have also been hindered by the ability of conventional banks in some countries to offer Islamic financing and take Islamic deposits, it noted.
While many Islamic banks still lack a competitive market position, some strong Islamic franchises do exist. In Saudi Arabia, Al Rajhi Banking and Investment Corporation, the largest bank in the Kingdom with a 17 percent market share of domestic credit, is also the world's largest Islamic lender, with total Islamic financing assets of $97 billion at end-2018.
Saudi Arabia's second-largest bank, National Commercial Bank, is another example of a strong Islamic franchise. It is almost entirely focused on Islamic financing, although not all other assets are Sharia-compliant.
“It is pursuing a merger with a conventional bank, Riyad Bank, although it may have to abandon its plan to fully convert to an Islamic bank if the merger proceeds,” the report said.
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