The Global Islamic Economy Summit 2016 held last month in Dubai highlighted a broad variety of topics related to Islamic finance, but it reminded also that the industry sooner or later will need a central institution or entity, commonly called “Islamic mega bank,” in order to build bridges and dismantle national barriers between the world’s Islamic finance core markets.
Such a globally active bank could act as a catalyst between the markets, pull in liquidity and attract foreign investors and security issuers.
However, the difficult question is which of the global Islamic finance core markets would be best suited to domicile such an Islamic mega bank? At present, Islamic banking assets are spread over a number of countries, namely Saudi Arabia, Malaysia, UAE, Kuwait, Qatar, Turkey, Indonesia, Bahrain and Pakistan, not to speak of Iran which has the largest Islamic finance market in the world but is de facto still disconnected from the global banking system.
Given the fact that an Islamic mega bank – meant to compete with conventional global banks such as HSBC, Standard Chartered, Citibank or the like – would boost the credentials of any hub where it is domiciled makes it of course even more difficult to agree on the location.
Dubai, for example, in its ambition to boost Islamic finance and transform into an Islamic economy hub argues that it would be an ideal place to set up an Islamic mega bank to build cross-border relationships in both retail and institutional banking between Islamic finance markets in Europe, the Middle East, Central and Southeast Asia. An Islamic mega bank located in Dubai would also benefit from the credibility of the emirate’s regulatory framework it operates under, and it could build upon the experience of large banks such as Emirates NDB which is increasingly developing towards a cross-border market player.
However, Dubai is not the only location with strong ambitions to strengthen its footprint in the global Islamic finance market which is predicted to reach a value of $1.8tn by 2019. Malaysia, Indonesia and Turkey have all registered their interest for setting up an Islamic mega bank, while Saudi Arabia has said that since it already houses the world’s biggest Islamic bank, Al Rajhi Bank with assets of around $62bn, it has enough capabilities to build an Islamic mega bank too.
However, one major problem for Gulf and Southeast Asian countries in setting up an Islamic image bank is their currencies, particularly given Gulf states’ policy to peg their currencies to the US dollar.
“None of the current Islamic finance hubs located in the Middle East and Southeast Asia have currencies considered to be global reserve status,” says Ajay Shah, Professors at New Delhi-based National Institute of Public Finance and Policy and expert on Islamic finance.
“And any aspiring hub [for Islamic finance] would need to allow for a floating exchange rate which would involve the de-tangling of pegged or loosely linked exchange rates against the US dollar,” he added.
And indeed, so far there were just setbacks in the trials to create an Islamic mega bank. Saudi Arabia’s Islamic Development Bank was seeking partners in 2012 to bring in $1bn in investments to form an Islamic mega bank which was planned to be established with Saudi-based Dallah Albaraka Group and the Qatari government, but did not materialise.
Malaysia’s vision of forming an Islamic mega bank failed in 2015 as a three-way merger between CIMB Group, RHB Capital and Malaysia Building Society was scrapped. The merger, the nation’s potentially largest ever, would have created a bank large enough to compete with the likes of HSBC and Standard Chartered but was abandoned amid tumbling oil prices last year.
How difficult it is to form an Islamic mega bank became clear when Indonesia in December 2015 put its plans on hold to create such an entity from a merger of the Shariah-compliant units of Bank Mandiri, Bank Negara Indonesia, Bank Rakyat Indonesia and Bank Tabungan Negara after two years of trying due to legal and regulatory issues related to capital requirements
Next in line is now Turkey which has said Istanbul could become the headquarters for a new Islamic mega bank. The Turkish government would set up the bank with its finance ministry and the Islamic Development Bank as the prime shareholders, Deputy Prime Minister Mehmet Simsek has said. He even suggested that either Malaysia or Indonesia carry on with their efforts to create their own Islamic mega bank, which could eventually merge with the Turkey-based mega bank to create a “mega-mega” Islamic bank serving the global Islamic finance industry.