KUALA LUMPUR (Sept 3): CIMB Islamic, the sharia compliant unit of Malaysia's second-biggest lender, said it will pursue a larger balance sheet to help win more business, regardless of whether a proposed merger with two smaller peers happens.

In July, CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd secured regulatory approval to begin merger talks, with plans calling for the creation of a separate Islamic bank.

The enlarged entity aims to compete against conventional banks that dominate larger and more lucrative deals in Islamic finance and could prompt further consolidation in the domestic market if smaller firms see their profit margins squeezed.

"It goes back to our belief that scale is important in being effective in business, so whether that scale is achievable under the current proposed merger talks or something else, we will continue to pursue it," chief executive Badlisyah Abdul Ghani said on the sidelines of the Global Islamic Finance Forum.

"You need to have scale that allows you to have bigger firepower in the market, so when you come into a deal you can have some balance-sheet play to make it even more enticing for customers," he added.

The lenders have until Oct. 8 to finalize the pricing, structure and other terms of the merger. Details have yet to be ironed out, but the new Islamic bank could have assets worth 122 billion ringgit ($38.3 billion), according to one analyst, roughly matching those of Maybank Islamic, a unit of Malayan Banking Bhd (Maybank).

Earlier this week, Maybank dismissed rumors that it was considering a merger with Bank Islam, the country's largest, full-fledged Islamic bank.

CIMB is a major arranger of Islamic bonds, or sukuk, helping arrange a maiden deal from Hong Kong that aims to raise as much as $1 billion. In June, it helped arrange a 200 million pound ($332 million) sukuk from Britain.

But those deals are dominated by big conventional banks and the sector is attracting a growing number of Gulf-based lenders, all eager to capitalise on the expected rush of global issuance.

Last month, CIMB Islamic setup a Basel III compliant sukuk programme to raise as much as 5 billion ringgit..

($1 = 3.18 Malaysian ringgit)