The sharaai union

The last few years saw several Pakistani commercial banks amalgamate to meet the central banks minimum capital requirement and to compete within the banking industry.
The Islamic banking sector has followed suit with the merger of Emirates Global Islamic Bank Limited (EGIBL) and Al Baraka Islamic Bank, the first merger of Islamic banks in the country.
A consolidation between Islamic banks was on the cards for quite some time, particularly due to SBPs minimum capital requirement (MCR) and low advance-to-deposit ratio of Islamic banks, which had declined to 53.4 percent from 66 percent at the end of March 2009, according to the SBPs last available banking sector review (March 2010),.
Having failed to meet its MCR, and having requested SBP for a one-time extension, an amalgamation was much needed by EGIBL. Owing to declining asset quality and increase in non-performing loans (NPLs), PACRA had remarked on a dicey outlook for EGIBL in its last rating, claiming it to be critically dependent on its ability to meet the MCR.
Al Baraka, on the other hand, only has branch operations in the country with merely 29 branches - a status that had to be changed to that of a locally incorporated bank under revised SBP regulations. Merging with EGIBL and its network of 60 branches across 30 cities, will offer Al Baraka an extensive presence, besides enabling it to be registered as a licensed bank in Pakistan.
SBPs requirement of establishing 20 percent of all new branches in rural areas will be easier to meet thereafter. Roger Dawood Bayat, Head of Investor Relations and Corporate Communications at EGIBL, says, "the commitment to increase branches would be initiated in 2011-12".
While increasing branch networks is a step in the right direction towards the untapped retail market of Islamic banking, both players also have to work towards building a strong brand identity of the new entity - likely to be named Al Baraka Bank Pakistan Limited (ABBPL) - in line with Islamic principles to leave a lasting impression on retail customers.
Since Al Baraka gets to hold all the aces being the majority stakeholder in the deal, representatives in the Islamic banking industry look at the consolidation as an acquisition in the guise of a merger.
Industry players believe that the new entity will have to pull up its socks to offer a tough competition to existing players since the key banks are relatively amateur; EGIBL having started operations only in 2007, and Al Baraka turning over a new leaf as a fully incorporated bank in the country.
Nevertheless, the union of the two will help the new Al Baraka Bank Pakistan Limited (ABBPL) occupy the second position in Pakistans Islamic banking industry in terms of asset size.
With its asset base of over Rs48.4 billion, the new entity will be approximately Rs77 billion behind the asset size of Meezan Bank - the countrys biggest Islamic lender. With respect to branch networks, ABBPL will also take the third place after Meezan and BankIslami with 89 branches across 40 cities.
The Islamic banking industry is likely to be on the receiving end since a stronger player promises a healthy competitive environment. However, substantial efforts will have to be made in order to establish a sound market presence for the new entity.