Sadly, it was not to be. The merger was to be achieved partly by means of a capital increase by TII, whereby AlBaraka would attain a 35 per cent stake. At the last minute, one of the biggest subscribers to the share issue pulled out. The blow proved fatal. A statement was issued claiming both parties would work 'amicably to ensure that the unwinding process is carried out in a speedy, effective and friendly manner'. The referral of outstanding contractual issues to international arbitration by TII suggests the break-up was anything but amicable. As merger and acquisition lawyers busied themselves with the legal niceties, it was clear the marriage was off.

However, the planned fruit of the union has survived. In 1999, AlBaraka began the process of bringing nine of its Islamic banking units under a single umbrella, headquartered in Bahrain. TII was initially only involved as financial adviser. Four years later, and Ernst & Young will produce the consolidated 2003 accounts of the third-largest Islamic financial institution in the Middle East, behind Al-Rajhi Banking & Investment Corporation and Kuwait Finance House (KFH), neither of which can boast comparable geographic reach. Called AlBaraka Banking Group (ABG), the new entity has paid-in capital of some $300 million and shareholders' equity in excess of $400 million. Its branch network stretches from Turkey to South Africa (see table).

The logic of the consolidation is clear. The tie-up creates huge potential for cross-selling products and services developed in one part of the network to another. ABG is also able to offer unrivalled cross-border Islamic banking services, with Algerians in Tunisia or Jordanians in Lebanon benefiting from a bank that straddles the two countries. However, ABG's management insist the constituent parts will not lose their local character. 'The strong and well-established local identity of the individual units will prevent any loss of market focus,' says deputy general manager Othman Ahmed Suliman. 'In Algeria and Jordan, for example, we were the first Islamic bank to enter, and in Egypt we have built a very strong market share.' Obvious cost-cutting opportunities have been created. All back-office administration is being centralised in Manama. 'We can save a great deal through economies of scale - central planning, standardised IT systems and so on,' says Suliman.

The very existence, never mind quality, of a regulator was another important factor behind the ABG venture. Since the parent company has no bank in Saudi Arabia, there was no home regulator to point to when AlBaraka spread its banking wings abroad - a problem that led to eviction from the UK in the 1990s. Under Saudi Arabian Monetary Agency (SAMA - central bank) legislation, there is no mechanism for distinguishing between Islamic and conventional banks, thus arguing against the kingdom as ABG's base. 'Since there is no bank in Saudi Arabia, where the majority stake is based, we had the idea of setting up a holding company for the banks somewhere else so that we had a home regulator,' says Suliman. 'The BMA [Bahrain Monetary Agency - central bank] has won international approval for its regulation of Islamic banking, so it was a natural choice.'

The appeal of the TII merger was the complement of AlBaraka's traditional retail and commercial banking strengths by the Kuwaiti institution's investment focus. However, the presence among the nine consolidated units of Al-Amin Company for Securities & Investment Funds offers an opportunity for the expansion of investment offerings throughout the ABG stable. 'Hopefully we will see some of the units becoming more investment-orientated in years to come,' says Suliman.

The assumption is that further consolidation of AlBaraka banking assets will follow. Al-Tawfeek Company for Investment Funds, which has paid-in capital of some $400 million, is an oft-cited candidate and would provide a boost to ABG's investment banking ambitions. Subsidiaries in southern Asia have also been passed over in the first round. Suliman says ABG will wait for the initial consolidation to bed down before looking at a second phase.

AlBaraka also has long-standing ambitions to enter new markets, for which ABG can now provide the vehicle. The passage of the Islamic banking law in Kuwait in July offers one opportunity. And AlBaraka could be about to return to the UK through the planned Islamic Bank of Britain, of which it is one of the founding shareholders. A licence application has been lodged with the UK regulator, the Financial Services Authority, and the omens are promising. Within two years, the UK bank would be permitted to enter other EU markets without applying to the local regulator, offering a potential outlet to Europe's 15 million-18 million Muslim population.

The future looks bright for the young ABG. A complex consolidation process has finally and successfully borne fruit. And with so many growth opportunities, Al-Rajhi and KFH might be advised to watch their backs. No one can accuse AlBaraka of lacking ambition.

CD