I am a bit tired of writing blog posts about an Islamic mega-bank because it has been so many years of talk with very little to show for it (I called it an 'elusive dream' in my annual predictions at the beginning of 2011). Back in 2007, I presented a quote from an article where Sheikh Nizam Yaquby said that an Islamic mega-bank was needed because there was "no collective efforts are seen at the institutional or regulatory levels to formulate a strategy on developing liquidity management tools. Well, we are still waiting for the IILM to issue the first global liquidity management sukuk it has planned later this year, and there are others out there, including Islamic repo in the UAE, which are attracting limited interest so far. However, this collective effort seems to be the most likely to succeed so far and I have questions about whether another effort would do as well as one backed by a number of central banks.
Even as late as last summer, there were questions about where an Islamic mega-bank would be headquartered. The most likely location is Bahrain because that is where the headquarters of the Albaraka Banking Group reside. Albaraka is headed by Adnan Yousif, who has been the most public face behind the Islamic mega-bank. However, the civil unrest in that country continues and it is unclear whether it is the suitable location for what is supposed to be a global bank that would represent in some ways the Islamic finance industry. There has also been a notable decline in talk of the mega-bank becoming an Islamic Goldman Sachs after that august investment bank ran into a PR buzzsaw, and its sukuk attracted significant controversy. There was even a name for the Islamic Goldman Sachs, Istikhlaf which the Economist noted was "Arabic for “doing God’s work”.
The size of the Islamic mega-bank has also been adjusted over time as expectations for its founding have moderated. As late as last summer, the bank was expected to start with $10 billion in capital, with plans to raise this to $100 billion in the first 10 years. Recently, this has been paired back to $1 billion, with $600 million coming from Arab Islamic banks and the remaining $400 million being publicly raised.
If the bank were successfully incorporated and raised a large amount of capital, how would it fare? Would it be able to contribute to the Islamic finance industry in a way that other large banks like Al Rajhi Bank cannot? Would it be able to compete effectively with global financial institutions that have Islamic windows or engage in Islamic investment banking? Most importantly, if you have a $100 billion or larger Islamic bank with the Islamic finance industry where it is today (with at most $1.1 trillion in assets), does that institution not represent a systemic risk to the industry (something I pondered last August when the idea generated some media buzz?
I hope to avoid the idea of an Islamic mega-bank until one is actually launched (and to be a mega-bank worthy of my attention, it would have to have a serious likelihood of substantially exceeding the roughly $50 billion in assets of Al Rajhi Bank).