Competition amongst smaller Islamic banks set to intensify

That is if the Malaysia Building Society-Asian Finance merger will push through.

Moody's Investors Service says that if the merger between Malaysia Building Society Berhad (MBSB) and Asian Finance Berhad (AFB) is successful, competition for deposits amongst smaller Islamic banks in Malaysia will intensify.

And, such a deal will likely lead to the larger of the two financial institutions, MBSB, emerging as the surviving entity.

"MBSB's credit profile would be enhanced because the acquisition of AFB and its Islamic banking license would give MBSB access to cheaper funding and broaden its revenue stream," says Simon Chen, a Moody's Vice President and Senior Analyst.

"The entry of MBSB into the current and savings account deposit market would further intensify competition for low-cost deposits among institutions that are not part of big integrated banking groups," adds Chen.

"Nevertheless, while competition among Islamic banks is growing, their profitability remains robust."

Moody's analysis is contained in its just-released report titled "Islamic Banking — Malaysia: Potential merger is credit positive for MBSB but will raise funding pressure on sector," and is authored by Chen.

Moody's report says that broader sector consolidation is unlikely for now, because the favorable operating environment will allow standalone Islamic institutions to fare well on their own. Moody's explains that the MBSB-AFB proposed merger is driven by unique circumstances that are not shared by the other Islamic banks in Malaysia.

And, the growth potential for Islamic banks in Malaysia is strong, given the availability of well-established infrastructure and growing consumer awareness of Shariah-compliant products. The stable macroeconomic environment is also supportive of credit demand for all banks in the country.