Al Baraka Bank completes due diligence of Burj Bank

KARACHI: Al Baraka Bank has finished due diligence for the proposed merger of Burj Bank thereby paving way for the strengthening of capital bases of both the banks, a central bank official said on Saturday.

“Al Baraka was given permission for due diligence of Burj Bank and they have completed the process,” said Abid Qamar, chief spokesman at the State Bank of Pakistan (SBP) told The News. “Summit Bank and Bank of Khyber were also interested in Burj Bank, but they did not carry out any due diligence process.”  

Sources, familiar with this development, said Bank Al Baraka and Burj Bank were likely to win approval for a merger to create an Islamic bank, part of the central bank’s plan to manage capital shortfalls of under-capitalised financial institutions.     

Sources also said after legal and financial due diligence, the respective boards of the companies would approve the scheme of amalgamation in their board meetings scheduled for next week.   

Thereafter, necessary regulatory approval would be sought for the merger scheme.  

“The deal is expected to be completed within next three months,” said a source, but the complete integration of both entities would take six to eight months.

The transaction price and structure were believed to have been finalised but the analysts presumed that it would be a share swap deal. However, they said times had changed; mergers and acquisitions were no longer carried out at five times the book value of banks.   

This would be the second merger within the Islamic banking industry. Earlier, Emirates Global Islamic bank merged with Al Baraka Islamic Bank in 2010.

Industry experts said it was likely to be positive news for the industry that the capital issue of both banks were near resolution.

“The proposed merger will create a bank with the financial strength, expertise, and a nice network to support the growing customers of Shariah-complaint finance,” said Ahmed Siddiqui, Senior Executive Vice President at Meezan Bank. 

Currently, five full-fledged Islamic banks operated in the country. It was expected of Islamic finance in Pakistan to reach Rs4 trillion by 2020, attaining a market share of 20 percent of the local banking sector. 

According to Islamic Banking Bulletin released by the SBP recently, assets and deposits of Islamic banking industry were recorded at Rs1,625 billion and Rs1,336 billion respectively by end March 2016.

Market share of Islamic banking assets and deposits in overall banking industry stood at 11.4 percent and 12.9 percent respectively by end March 2016.

The potential deal would be a part of the significant efforts, currently being made by the SBP, to fix the problem of the small banks that fell below the minimum capital adequacy ratio requirement and minimum paid-up capital requirement.   

Banks in Pakistan were required to maintain a minimum paid up capital (MCR) of Rs10 billion and also subject to capital adequacy ratio requirement of at least 10 percent of the risk weighted assets.

As of March 31, Al Baraka Bank’s MCR was at Rs8.178 billion and capital adequacy ratio at 14.54 percent, respectively. Burj Bank’s MCR amounted to Rs4.252 billion as of March 31, 2016. The bank posted a loss of Rs174 million in the first quarter of the current calendar year, compared with Rs60 million in the same quarter of last year.

Al Baraka Bank posted a profit of Rs8.923 billion in first quarter 2016, against Rs112.206 billion in same quarter in 2015.