MIDF-Al Rajhi merger talks collapse on Shariah rules discord

Failed merger talks add to number of unsuccessful proposals involving other financial institutions in the country

by SHAHEERA AZNAM SHAH / pic by MUHD AMIN NAHARUL

THE merger negotiation between Malaysian Industrial Development Finance Bhd (MIDF) and Al Rajhi Banking and Investment Corp (M) Bhd collapsed due to disagreements over preferred Shariah law implementation.

On Sunday, Al Rajhi Malaysia’s parent company, Saudi Arabia-based Al Bank Rajhi — world’s largest Islamic lender by assets — notified its stock exchange Tadawul that it is no longer in talks with MIDF for the merger possibility.

The reports suggest that MIDF wanted to apply the Malaysian Shariah legislation, while Al Rajhi aimed for the more stringent Saudi Arabian law – Source: Wikimapia

The Riyadh-based lender told Tadawul last week the merger was not expected to have any material impact on the bank’s financial statements and there were no related parties involved in the proposed merger.

MIDF has remained tight-lipped on the negotiation and has yet to respond to queries by The Malaysian Reserve (TMR).

The failed merger talks add to the number of unsuccessful merger proposals involving other financial institutions in the country in the past decade.

The Al Rajhi announcement brings to close almost two years of discussions between the lenders and scraps any anticipated gains that would have been made by MIDF and its sole shareholder, Permodalan Nasional Bhd (PNB).

PNB was estimated to make some RM1 billion from the sale of a stake in MIDF and ended up with 60%-70% shares in the merged entity, with Al Rajhi holding the rest, according to reports.

As of last year, MIDF’s shareholders’ fund stood at RM1.7 billion, while Al Rajhi Malaysia at RM753.36 million, according to their respective financial reports for 2019.

News reports speculated negotiations had stalled due to differences in implementing Shariah regulation for the enlarged entity.

The reports suggest that MIDF wanted to apply the Malaysian Shariah legislation, while Al Rajhi aimed for the more stringent Saudi Arabian law.

“With Al Rajhi adopting a stricter view compared to Malaysia in terms of Shariah-compliant products, this is one of the issues expected to affect the process of the merger,” an analyst with a local brokerage told TMR.

“While it could be perceived as a loss — as the merger could have created a more diverse Islamic bank in terms of offering consumer and investment banking products — perhaps a more suitable partner with a common ground is needed to enable such merger to happen.

“Moreover, in the challenging times of Covid-19, it is probably wise for the banks to focus on their strengths,” the analyst said.

The current economic environment and depressed valuations are not ideal for consolidation exercises, particularly for the banking sector, said another analyst.

“In this state of the economy, the only benefit a merged entity can extract is from operational costs as there will be a lot of duplication, which will translate into smaller workforce size requirement.

“However, now is not the right time to fire people when the economy is weak. The last thing the employees want is to lose jobs,” Hong Leong Investment Bank Bhd analyst Chan Jit Hoong told TMR.

In addition to that, Chan said Malaysian banks’ valuations have been at a low level, with the majority of the institutions trading below their book values, citing his report in September.

“There is no reason for any banks to push for a consolidation now; the new landscape is not suitable for that,” he said.

To recap, in January last year, Al Rajhi announced it was in talks with MIDF for a merger possibility between the two parties after receiving preliminary approvals from the Saudi Arabian Monetary Authority and Bank Negara Malaysia (BNM).

BNM first gave the nod for MIDF and Al Rajhi to commence talks in January last year with extensions given, the latest was on Sept 27, all of which had failed to lead to a deal.

As at March 31, 2020, Al Rajhi Malaysia had RM6.78 billion in assets and reported a net profit of RM1.16 million in its first quarter ended March 31, 2020 (1Q20), with revenue of RM93.55 million.

Its total net financing and advances stood at RM4.79 billion as of March 31, 2020.

Based on MIDF’s interim financial report for its 2Q20 ended June 30, 2020, the lender’s total assets stood at RM7.73 billion and had a total net financing and advances of RM548.3 million.

The lender made a revenue of RM91.9 million for the quarter and a net profit of RM12.38 million.