An Islamic megabank slated to open this year is expected to spur bank mergers in the Gulf region, where lenders are struggling to compete with large financial institutions.   

Ernst & Young partner Sameer Abdi told the Reuters Islamic Finance Summit last month the firm expected to see an Islamic megabank launched within the next six to 12 months.

The megabank, which is being promoted by Sheikh Saleh Abdulla Kamel, chairman of Al Baraka Banking Group, has been in the works for years but has been delayed by the economic crisis.

The launch of a megabank would put pressure on the smaller banks in the region and increase the prospects of consolidation in the market, analysts said.   

Despite Islamic finance being a $1 trillion industry, the market is fragmented into mostly small players. These banks, with an average capitalisation of about $200 million, are finding it more and more difficult to compete with the Islamic divisions of larger conventional banks.

'The Islamic finance industry is in initial phases of its development and there hasn't been a pressing need for well thought out sophisticated strategies,' said Jarmo Kotilaine, chief economist at NCB Capital.    

Kotilaine said the industry needed to pursue other business models and strategies to grow. Consolidation would be one option to pool strengths and overcome weaknesses.   

'Consolidation is one of the things we've been expecting in the (Gulf) or broader Islamic finance for some time,' he said. 'But it is like waiting for Godot. It hasn't happened yet.'    

Hatim Tahir, director of Deloitte & Touche's Islamic Finance Knowledge Center, consolidation was certainly on the cards but it was unlikely another megabank would be launched in the Gulf Cooperation Council (GCC) region any time soon.

'The one we have in hand has taken four years so I don't see another big bank coming,' Tahir said. 'But I think the megabank in itself is a step towards consolidation as small banks will be forced to either merge with other banks or with banks from other different countries.'         

Tahir said the fact that many Islamic banks in the region were owned by large families or groups of investors could slow down consolidations. He said, in the meantime, he expected more joint ventures between banks in the region and established Islamic finance markets.   

Michael McMillen, a partner at Fulbright & Jaworski, said the time was very good now for a megabank, given the number of Islamic banks popping up in the Middle East and the growth of Islamic finance in markets like Asia. However, he warned there were challenges to consolidation as the balance sheets of many banks in the region were opaque.

'It's very hard to determine the exact asset and liability compositions of a lot of banks,' he said. 'A lot are private and haven't been audited publicly. There are different accounting systems so the comparative analysis is a little harder and slows people down.'   

There has been some interest in consolidation in the Islamic sphere, with banks eyeing regional and international deals. Al Baraka Bank is in talks to buy a stake in Malaysia's Bank Muamalat, a moved aimed at diversifying its earnings sources given the maturity of the domestic market.

Bahrain's Unicorn Investment Bank said in February it was mulling buying Dubai Group's stake in Malaysia's Bank Islam.

Dubai's Noor Islamic Bank, set up in 2008 with the aim of becoming one of the world's top five Islamic lenders, has said it would pursue international acquisitions as part of its growth strategy. - Reuters