THE planned merger between Malaysian Industrial Development Finance Bhd (MIDF) and Saudi Arabia-owned Al Rajhi Banking & Investment Corp (M) Bhd (Al Rajhi Malaysia) is stalled over differences in shariah rules to be applied for Islamic banking.

Sources said Bank Negara Malaysia (BNM) declined to proceed with giving approval for the joint submission to merge until the two parties resolve differences over the application of shariah banking rules.

BNM, the sources said, saw no compelling reason to continue with the joint submission and would only consider the application once it has clarity on the resolution of the shariah issues.

The differences were said to be over the application of shariah rules. MIDF wanted Malaysian shariah law to be applied while Al Rajhi Malaysia wanted to apply Saudi Arabian legislation. The latter is more stringent and will restrict considerably the kind of business the merged entity would do, the sources said.

The planned merger between Al Rajhi Malaysia and MIDF is to be effected entirely through a share swap and values the latter at about RM1.7 bil, according to reports. MIDF’s shareholders’ funds stood at roughly RM1.7 bil as at the end of last year, while Al Rajhi Malaysia’s amounted to RM726 mil.

Permodalan Nasional Bhd, which wholly owns MIDF,  was to end up with 60%-70% stake in the enlarged entity, according to various reports. The balance would be held by Al Rajhi Malaysia’s owner, Saudi Arabia-based Al Rajhi Bank, the world’s largest Islamic lender by assets.

The two parties, which first started negotiating a merger in early January 2019, finally submitted their proposal to BNM on Sept 25, 2019, the reports said.

There are currently 16 Islamic banks in Malaysia. A merger between MIDF and Al Rajhi Malaysia, neither of which is a public-listed company, would result in combined assets of RM13.43 bil – still small compared with Bank Islam Malaysia Bhd, the country’s largest standalone Islamic bank (RM64.24 bil), and Maybank Islamic Bhd (RM229.42 bil), the largest Islamic lender in the country, reports said.

MIDF, a development financial institution that does some Islamic banking but cannot collect deposits, was keen on the merger to gain Al Rajhi Malaysia’s Islamic banking licence.

Al Rajhi Malaysia’s commercial and retail banking as well as wealth management operations are supposed to complement those of MIDF which has investment banking, stockbroking and research operations that Al Rajhi Malaysia does not have.

Al Rajhi Malaysia reportedly made a net profit of RM11.73 mil for the year ended Dec 31, 2018 (FY18), an 8.1% increase from the year before. In 1H19, net profit stood at RM7.15 mil, a 43.4% drop from a year earlier. It had total assets of RM7.19 bil and a gross financing book of RM4.83 bil, with the bulk of it (67%) comprising corporate financing, followed by home and personal financing, reports said.

As for MIDF, it slipped into a net loss of RM67.27 mil in FY18 compared with a net profit of RM50.14 mil a year earlier. Impairment losses made on loans, advances and financing that year stood at RM111.89 mil compared with a writeback of RM7.67 mil in FY17, according to reports.

The last banking merger in Malaysia, reports say, was that of Malaysia Building Society Bhd and Asian Finance Bank Bhd in February 2018. Prior to that, Hong Leong Bank Bhd acquired EON Capital Bhd in a protracted takeover that was completed in May 2011. – Feb 14, 2020

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