Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on June 1, 2020 - June 7, 2020

THERE has been no progress on the planned merger between Al Rajhi Banking & Investment Corp (M) Bhd (Al Rajhi Malaysia) and Malaysian Industrial Development Finance Bhd (MIDF). Yet, neither party is calling it quits just yet.

According to sources, shareholders of the two financial institutions (FIs) have yet to resolve an impasse relating to the application of shariah rules in the merger. Adding to the complication is the Covid-19 pandemic, which has changed the banking landscape.

If the merger were to proceed, a review of some of the terms may be necessary, the sources say.

“There has been no tangible movement [on the merger front]. Things are moving at a glacial pace,” one source tells The Edge.

That does not mean, however, that the planned merger is off, he adds. “It’s [being] kept on hold, but I think, given all that has happened now, with the pandemic and [ensuing impact] on banks, it would be prudent to just have a relook at the whole merger rationale again.”

Another source says shareholders from both sides have held some discussions during the Movement Control Order/Conditional MCO period, but have not made any headway.

Al Rajhi Malaysia is owned by Saudi Arabia-based Al Rajhi Bank, the world’s largest Islamic lender by assets; MIDF is owned by Permodalan Nasional Bhd.

The two parties, which started negotiating a merger in January 2019, submitted their proposal to Bank Negara Malaysia in September. Under the plan, Al Rajhi Malaysia, the slightly bigger of the two FIs in terms of assets and the one with the Islamic banking licence, would acquire MIDF through a share swap that valued the latter at about RM1.7 billion, The Edge reported last November, citing sources.

“However, Bank Negara did not want to waste time reviewing the application until the parties resolved some issues, which are primarily the application of the shariah [principles]. So, that’s where they’re at now,” one source says.

According to another source, there are two sticking points. One involves some of MIDF’s assets that are based on Bai Inah, a dated Islamic financing contract shunned by scholars and investors in the Gulf states. It is understood that the Saudi shareholder wants those assets carved out of the merger.

“Back when [MIDF] put those financing [structures] in place, they were perfectly acceptable concepts [in Malaysia], but are discouraged now. Al Rajhi has never had any Bai Inah structures in its books. Therefore, the discussion now is, if a merger is intended to create a pure-play Islamic bank, then shouldn’t it start off on a clean slate, without those assets in the books?” states the source.

Bai Inah involves the sale and subsequent repurchase of assets on a deferred-payment basis.

The second obstacle is what becomes of MIDF’s conventional assets.

“[They were] to be sold to another entity, but now they are proposing for the merged entity to manage those assets on [their] behalf, which the other party thinks is not acceptable by shariah standards,” the source adds.

Even if the parties manage to resolve their differences on these matters, there are other pressing issues.

“Due diligence was done last year, [but] today, the industry is not in a BAU (business as usual) situation because of the pandemic. Whatever standards or methodologies that were used to assess portfolio, liquidity and profitability risks are, to a certain extent, not accurate anymore. In any [merger and acquisition] done today, all this has to be relooked,” a source says.

Given the challenges, it will be difficult for the merger to proceed. Nevertheless, the industry is watching closely, as bank M&As have been few and far between in Malaysia. Moreover, it is one of the rare M&As still on the table, notwithstanding the Covid-19 lockdown.

The last M&A was that of Malaysia Building Society Bhd and Asian Finance Bank Bhd in February 2018. Prior to that was Hong Leong Bank Bhd’s takeover of EON Capital Bhd in May 2011.

Al Rajhi Malaysia’s net profit stood at RM36.98 million in the first nine months of last year, double the RM18.49 million made in the same period a year earlier. MIDF made a net profit of RM46.73 million in the same period compared with a loss of RM21.49 million before.

MIDF, a development FI that does some Islamic banking but cannot collect retail deposits, is keen on the merger to obtain an Islamic banking licence so it can widen its business scope.

Al Rajhi Malaysia has commercial and retail banking as well as wealth management operations, which MIDF does not have, while MIDF has investment banking and stockbroking and research operations that Al Rajhi Malaysia does not have. Hence the merger was expected to be complementary.

A merger of the two, neither of which is a public listed company, would result in combined assets of RM12.97 billion — still small compared with Bank Islam Malaysia Bhd, the country’s largest standalone Islamic bank (RM65.5 billion). There are currently 16 Islamic banks in Malaysia, making it a highly competitive industry.

 

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