KUALA LUMPUR, (Reuters) – Malaysia’s central bank said on Wednesday it was still reviewing offers to set up mega Islamic banks, suggesting it could miss its target of awarding a licence this year as the industry struggles to create a well-capitalised sharia lender.
Bank Negara Malaysia is offering up to two new Islamic banking licences to foreign firms to set up banks with at least $1 billion of paid-up capital, a move that the industry hopes will spur more lending and create bigger Islamic banks that can compete with global lenders.
Malaysian central bank chief Zeti Akhtar Aziz had said the authority hoped to announce in 2010 at least one licence for a big Islamic bank.
“Bank Negara Malaysia is still assessing the applications for mega Islamic bank licences,” it said in a statement in response to a Reuters query. “The announcement of the licences will be made on completion of the assessment.”
Bankers say the bid to create a well-capitalised Islamic bank, which dates back to at least 2006, has been fraught with difficulties such as a struggle to raise sufficient capital and disagreement as to where the lender should be located.
One of the project’s main backers is Saudi Arabia’s Sheikh Saleh Kamel, founder and chairman of Bahrain-based Islamic bank Al Baraka .
Malaysia’s central bank has not disclosed the applicants for the licences but there has been market speculation that the Islamic Development Bank and Al Baraka could be keen.
Islamic finance has become a popular source of alternative funding after the credit crisis but most sharia banks lack sufficient capital to compete with Western lenders on mandates to syndicate financing, arrange bonds and supply project finance.
The sharia finance industry’s assets are estimated at $1 trillion, a fraction of the conventional sector’s $232 trillion, excluding derivatives. Most Islamic banks are small or mid-sized entities and Saudi’s Al Rajhi , which has $4 billion in paid-up capital, is one of the world’s largest Islamic banks.
“We need big Islamic banks with the balance sheet and the muscle that can compete with the likes of BNP and JP Morgan,” said Mohamad Safri Shahul Hamid, deputy chief executive at Malaysia’s MIDF Amanah Investment Bank, a sukuk arranger.
“I wouldn’t be surprised if no announcement (on the licence) is made by Friday. The central bank needs to be sure it does a proper due diligence to make sure the new bank can help open up the market and come up with innovations.”
Some bankers say limited capital has hampered the ability of Islamic banks to expand and diversify their sources of revenue, exposing them to greater volatility in their earnings.
Islamic banks’ profitability declined more sharply than that of other banks last year, largely due to higher provisions and lower investment income, McKinsey & Co said in a recent study.
In some markets, Islamic banks’ profitability dipped for the first time below that of conventional banks, as banks could not command sufficient pricing premiums or access to low cost funding to cover their higher expenses, the study showed.