The potential merger between Oman’s shariah-compliant lender Alizz Islamic Bank and United Finance Company (UFC), a conventional leasing firm based in the sultanate, could face challenges due to divergence in their operating models.

Alizz on 6 June expressed interest in possibility of a strategic merger with UFC, which it said was subject to due diligence. No legally binding commitment has been made and the transaction requires approval by the regulators and other stakeholders, the lender said in a statement to Muscat Securities Market (MSM), where its shares are traded. UFC, in a separate bourse filing confirmed receiving the interest and said Alizz’ merger proposal has been forwarded to the company’s board.

This is the second time UFC is approached for merger by a financial institution in Oman. It was previously pursued by Bank Nizwa, but the deal did not materialise.

The merger transaction is complicated due to Islamic and conventional operating models of the two financial institutions and the end result is “unpredictable at this point in time” in terms of assets, as some of UFC clients may not transfer business under the shariah banner, according to a research note by Oman investment Fund-backed investment and research house, Ubhar Capital (U-Capital).

“This merger would require a lot of due diligence and accountancy adjustments and hence would prolong for a considerable time,” according to U-Capital.

Although, the potential merger poses procedural difficulties, it fits within the overall financial market dynamics of Oman. It opens up new avenues of business for combined entity with an asset base of OMR375.68m (975.82m) as both Alizz and UFC bring a different set of skills and portfolio to the table. It also present the opportunity of consolidation in an already crowded financial services sector of the Qatar where some firms are generating sub-par returns relative to more mature markets.

Financial institutions in other GCC markets including Saudi Arabia, the region’s biggest economy, Qatar and the UAE are actively pursuing merger and acquisition opportunities to gain scale and be more competitive.

The merger of the Abu Dhabi’s two biggest banks National Bank of Abu Dhabi and the First Gulf Bank already became effective on 1 April and Saudi British Bank has initiated talks for a potential combination of its balance sheet with Alawwal Bank in Saudi Arabia. Three lenders in Qatar are already in the process of combining their businesses.

At a time, when revenues are depleting are on the decline due lower oil prices and the state needs its financial sector to support the funding of multi-billion dollar infrastructure and development projects, larger Omani financial instituions with bigger balance sheets in the Sultanate makes perfect sense.