Can the Exim-Padma merger work?

In February 2019, the merger between BB&T Corporation and SunTrust Banks, Inc. was announced, and was completed by December of the same year. 

This merger stands out as one of the most successful in recent memory, as it led to the establishment of Truist Financial Corporation, which became the sixth-largest commercial bank in the United States in terms of assets.

The success of this merger can be attributed to several factors. To begin with, both BB&T and SunTrust were financially stable institutions with robust balance sheets, laying a strong foundation for the merged entity. This financial stability instilled confidence in customers, shareholders, and regulators regarding the viability of the merger.

Furthermore, they possessed complementary geographic footprints, with limited overlap in their branch networks. This enabled expanded market reach and access to new customer segments without the need for extensive branch closures or redundancies.

However, there have been numerous instances of failed bank mergers as well. One example is the attempted merger between Germany's Deutsche Bank and Commerzbank in 2019, which ultimately collapsed due to a number of reasons.

One major reason was the possibility of significant job losses, with estimates suggesting around 30,000 jobs could be affected. This concern sparked considerable opposition and played a pivotal role in ending the merger discussions. 

Additionally, the lack of sufficient extra capital to cover restructuring expenses, along with a shortage of profitable business areas, diminished the merger's appeal in terms of long-term viability and profitability.

The key takeaway from these examples is that bank merger is easier said than done, and it bears fruit mostly if both banks concerned are financially stable and open new horizons of sustainability for both their staff and customers without pushing either of them to the edge.

Now, with the impending merger of Shariah-based Exim Bank with the debt scam-ridden Padma Bank which is unable to repay depositors, the question arises as to how viable this merger could be. 

Apparently, even though there is potential in the merger between financially strong and weak banks, what makes this particular event more complicated than it should have been is the marriage between a conventional bank and a Shariah-based bank. 

Dr Abdullah Al Mahmud, a professor of Banking and Insurance at Dhaka University, welcomed the merger initiative, as he believes Bangladesh doesn't need so many banks in the first place.

Currently, Bangladesh has 61 scheduled banks. Just last week, Bangladesh Bank identified 38 banks, including six state-owned banks, as weak lenders, out of the 54 analysed.

"Rather than closing down, merging the weaker banks with the stronger ones is preferable, as it would reduce the total number of banks and enhance competition," Dr Abdullah said. 

However, he acknowledged that the conflicting policies of the two entities would pose a significant challenge for the Exim-Padma merger.

Padma Bank follows conventional banking with fixed interest rates for loans and deposits, while Exim Bank, operating on Islamic principles, uses profit-sharing instead of interest due to Islamic prohibitions against interest.

Dr Abdullah believes that reconciling these opposing policies would require significant restructuring of the banks' systems. Additionally, even if no one loses their job, training the officials about new kinds of banking will also pose a big challenge. 

"And still, it remains to be seen how the investors and customers of Exim Bank will take the merger. But we can't draw any conclusion right now. We will need to observe the situation for six months to a year," he opined.

Notably, central bank officials suggested the merger process may take 12 to 18 months, while some others said it could extend to 30 months due to the complexity of the steps involved.

The chances of job losses too cannot be totally erased either, as bank mergers often lead to branch closures, when multiple branches in the same area become unnecessary after the merger.

Meanwhile, Dr Ouarda Merrouche, a professor of Economics at Paris Nanterre University and co-author of a paper on Islamic versus conventional banking for the World Bank, also anticipated challenges during the initial stages of the Exim-Padma merger. 

It was stated that Exim Bank would take on full responsibility for Padma Bank's liabilities, committing to settle all outstanding debts.

Dr Merrouche mentioned that the primary challenge for Exim Bank will be maintaining the integrity of Islamic funds, as Islamic deposits and proceeds from Islamic financing cannot be used to finance conventional products.

"The Islamic bank would have to remain separate from the conventional banks in many ways, which means that the economies of scale or exploitation of synergies witnessed in traditional mergers would not exist in that case," she said.

On the contrary, the institution created by such a merger would be more difficult to manage, she further added. 

However, a study published last year highlighted a successful merger between two fundamentally different types of banks, as reflected by the union of Qatar's Masraf Al-Rayan (an Islamic bank) and Al-Khalij Commercial Bank (a conventional bank) in November 2021.

The paper contends that the merger succeeded due to two primary factors: a well-planned strategy to navigate regulatory challenges and a deep understanding and respect for cultural differences. 

It should be noted that to finalise the Exim-Padma merger, regulatory approvals must be secured from relevant bodies, including the Bangladesh Bank and the stock market regulator, given that Exim Bank is a listed company.

Shareholders of both banks will then vote on the proposed merger, needing a minimum of 75% approval for progress, alongside creditors' approval. 

Upon securing shareholder assent, approval from the High Court will be sought before executing the merger, followed by meticulous planning for integration encompassing systems, operations, technology, products, services, and human resources.

Still, going by this paper, Bangladesh's Exim Bank too can benefit from its merger with a conventional bank, as it gives an Islamic bank the opportunity to expand its customer base and increase its market share. 

Dr Md Main Uddin, professor and former chairperson of Banking and Insurance at Dhaka University, also seconds this perspective. 

"In a country like Bangladesh, operating two separate wings simultaneously shouldn't pose a problem; instead, it could enhance credibility, particularly considering the religious inclination of the majority of the population," he explained.

Merging with a weaker bank may also entail Exim Bank policy support such as relaxed regulations on minimum capital requirement (MCR), provisioning, cash reserve ratio (CRR), and statutory liquidity ratio (SLR), as well as assistance with maintaining liquidity coverage, foreign exchange support, tax incentives, and bond facilities.

However, there is also a widespread concern regarding whether the central bank might compel established banks to merge with weaker ones in the future, potentially forcing them to engage with questionable members in the board of directors.

Under the Bank Company Act 2023, Bangladesh Bank will have the authority to instigate forced mergers of any bank if the board of directors and management are discovered to be engaged in activities going against the interests of depositors.

As per the amended Bank Company Act, the central bank will be able to implement various measures to consolidate or reorganise any banking company if it is determined that the company has failed to execute the recovery action plan.

Based on this rule book, Bangladesh Bank has outlined plans to pursue forced mergers involving at least 10 banks by January next year.

However, Dr Main Uddin believes that mergers can be fruitful only if they come through mutual understanding. 

"There are often negative connotations associated with actions like mergers in our country, and if done forcefully, it may cause more harm than good," he said.

Dr Main Uddin advocated for well-planned strategies and commitments between the two parties involved before the merger, as a shared goal can propel the merged entity forward effectively.