The global financial crisis has put an end to the heydays of growth in the banking sector and the current market outlook suggests that these days are not returning quickly.
Islamic banks, which traditionally grew faster than their conventional peers, are also affected, according to a new report by management consultants A T Kearney.
With the room for further organic growth being limited, mergers and acquisitions should be considered as an avenue for sustained growth, the report says.
The global financial crisis highlighted the need for consolidation in the Islamic banking industry in the region.
Growing out of their niche and becoming mainstream business is considered one of their major challenges and if Islamic banks do not succeed, the room for further organic growth is limited as the market space in some GCC countries is already overcrowded.
"Some Islamic banking players are currently determining long-term future plans, eyeing the opportunity to grow and become stronger players, said A T Kearney Middle East financial institutions group principal Dr Alexander von Pock.
"Mergers and acquisitions offer a way to build more powerful players with better chances to compete.
"Islamic banks are clearly in competition with conventional banks and over the years have taken away market share from their conventional counterparts.
"While traditional banks in the Middle East and North Africa region are still small compared to the big international banks, Islamic banks in the region tend to be small compared to their conventional peers, leaving them with a scale disadvantage.
"We expect to see more mergers and acquisitions in Islamic banking happening in the region in the future," he added.
"Islamic banks need to proceed carefully though, as most mergers fail to meet their objectives.
"Our experience shows that if not properly planned and executed, acquisitions in financial services may reduce shareholder value up to 50 per cent.
"A clear merger rationale as well as leadership and direction are essential when pursuing an M&A deal," he added.
source: Gulf Daily News