* Challenges ahead for Islamic banks to fill funding gap
* Could see mergers of small-to-medium sized banks
* New opportunities in MENA
LONDON, Feb 23 (Reuters) - Small and medium-sized
Islamic banks may need to merge if they want to become bigger
regional players capable of filling the funding hole left by
shrinking Western banks, the head of Islamic finance at Deutsche
Bank, told Reuters.
"There are mismatch challenges," Salah Jaidah said on the
sidelines of the Euromoney Islamic finance summit in London.
"Their size, their appetite for long term funding, their
ability to finance at competitive pricing. I see this as a big
challenge and not happening already now," he added.
Most Islamic banks in the Middle East and North African
region hold less than $13 billion in assets. Conventional banks,
by comparison, hold an average of $38 billion in assets, a
report by Ernst and Young estimated.
In the past, said Jaidah, it was the international banks
which led oil and gas development and infrastructure projects in
the region because they had the balance sheet, pricing
mechanisms and appetite for long term funding.
Whilst Islamic banks might not immediately be able to face
the challenge, Jaidah believes that within time they will be
able to reposition themselves.
"They might raise capital, might have more competitive
prices and ultimately there might be some mergers between
small-to-medium sized banks who want to become bigger players
regionally."
The Gulf Cooperation Council area has over 100 Islamic
banks, ranging from Al Rajhi Bank of Saudi Arabia with a $25
billion market cap to small unlisted lenders, a Deutsche Bank
report published in November said.
Deutsche Bank selected a list of potential winners which
included Al Rajhi -- the world's largest Islamic bank -- and
Alinma bank in Saudia Arabia, AMMB Holdings in Malaysia and Bank
Mandiri in Indonesia.
The idea of a so-called Islamic "mega-bank" has already been
touted in the region by Bahrain-based Al Baraka banking group
.
READY TO REPOSITION
Islamic finance prohibits the lending of money for interest
and other activities such as speculation that violate religious
principles.
Deutsche Bank, which first established a presence in the UAE
in 1999, says that despite the current global economic turmoil
there are still opportunities within the industry.
"With the changes taking place in MENA and our eagerness to
reposition ourselves as a lead player within the industry, I
expect that the portion of profit and earnings will be lucrative
and will grow year after year," said Jaidah.
He sees encouraging signs from Oman, home to around 3
million Muslims, where the central bank last year reversed its
secular stance on finance, allowing Islamic banks and
subsidiaries to establish themselves in the country.
There might also be new geographic openings in North Africa,
following the upheaval in the region and countries such as
Turkey where the government plans its first-ever issue of
Islamic bonds this year.
Globally, Islamic bond issuance rose to $23.3 billion last
year from $13.9 billion in 2010, according to Thomson Reuters
data.
On the corporate front, Deutsche Bank, which has advised on
deals including Saudi Aramco Total Refining and Petrochemical
Company's (SATORP) $1 billion sukuk also sees more non-Islamic
corporates tapping Islamic finance.
"Now more than ever we see a growing demand from
conventional corporates for sharia structures," said Jaidah.
Dubai shopping mall developer Majid Al Futtaim, which is the
sole franchisee for Carrefour in the Gulf, hopes to raise
between $350 million and $500 million from its debut sukuk
offering.
Emirates airlines said it is looking at the Islamic finance
market to fund aircraft deliveries as international banks back
out of plane deals. Goldman Sachs is also planning a $2
billion sukuk.
Dana Gas has appointed Deutsche Bank to
advise on its $920 million convertible sukuk, three sources told
Reuters in January, in a move to address investor concern over
how it will repay the Islamic bond.
Jaidah would not comment on the deal.
Deutsche Bank estimated in a report in November that Islamic
finance would almost double to $1.8 trillion in assets by 2016
as stagnant conventional lending pushed companies to seek
alternative financing methods.
(Editing by David Cowell)