INTERVIEW-Islamic banks need mergers to fill Western funding hole

* 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)

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