Malaysia's mega Islamic bank and BNM

The mega-bank talk surfaces from time to time and as I mentioned a month ago, I am a bit tired of writing about it because it has so far been just talk (despite optimistic predictions by Saleh Kamel in 2007 that by now an Islamic mega-bank called Emaar would have $100 billion in assets by now). 

However, in the last couple weeks, there have been reports that Bank Negara Malaysia, the central bank in Malaysia, would be sponsoring such an institution in Malaysia by acquiring Asian Finance Bank.  BNM poured cold water on such speculation today saying that applications for mega-bank licenses in Malaysia would be "market-driven" and "private-sector led".  Malaysian Insider, which wrote an article saying that not only would BNM take a lead role, after Petronas and the state pension fund KWAP declined to invest $100 million each, it would hand 9% of the equity to Dr. Rifaat Ahmed Abdel Karim, the former head of the Islamic Financial Services Board, and other people they described as "promoters". 

As I cautioned on Twitter when linking to earlier stories, "it is always dangerous to rely too heavily on "industry sources" and anonymous "bankers"; may have their own agendas."  With that caveat, there are recent precedents where Malaysian government-linked organizations have attracted criticism for their interactions in Islamic finance markets.  KWAP recently bought the entire RM1 billion perpetual sukuk offering from the Malaysian national airline, MAS. 

I am not an expert on the Malaysian government, its central bank or its government pension systems and their investment focus.  But when there is such a degree of activity and rumored activity to lend an extra hand to the Islamic finance industry in ways that are not typical (neither BNM or Petronas are natural start-up investors in banks, Islamic or otherwise) it raises questions for me. 

For example, I wonder, whether the government support for Islamic finance--a long-standing goal of the government--hasn't gone too far.  There are a number of very laudable ways the Malaysian government has encouraged Islamic finance in the country since the early 1980s that have created a very dynamic environment, even attracting GCC-based Islamic financial institutions (and possibly the Kazah government) who raise money in the more liquid sukuk markets in Malaysia.

However, stepping beyond the bounds of providing a supportive environment by taking a direct stake in a particular bank--particularly one so big with a planned $1 billion in paid-up capital--could lead to questions from existing market participants.  In addition, if either the mega-bank (if the reporting is true) or the MAS sukuk went sour, it could harm the overall image of Malaysia in the Islamic finance industry.