A new wave of merger and acquisition (M&A) activities in the Islamic banking space is plausible, although the timing remains the key risk, says AllianceDBS Research.

Potential M&A candidates include the Malaysia Building Society Bhd (MBSB), and Bank Muamalat Malaysia Bhd (Muamalat), it said in a statement today.

AllianceDBS said MBSB was appealing because of its lucrative personal financing business and sizeable Islamic banking assets while the unlisted Muamalat potential was from a long awaited pare down in ownership by its largest shareholder, DRB-Hicom Bhd.

Albeit indirect, it added, Bursa was also a proxy to growth in Islamic banking as transactions on its commodity trading platform, Bursa Suq al-Sila (BSAS), were expected to increase in conjunction with Islamic financing growth.

The research house added domestic Islamic financing growth was expected to continue outpacing conventional loans growth, driven by regulatory push for internationalisation of Islamic finance.

"We expect domestic Islamic financing growth to continue outpacing conventional loans growth with a four-year compound annual growth rate of 12 per cent over financial year 2015 until 2020, opposed to two per cent for conventional loans," said AllianceDBS.

This, it said, was mainly underpinned by a growing push by banks to fulfil Bank Negara Malaysia's target of 40 per cent proportion of Islamic financing to total system loans.

AllianceDBS said there was hope for further growth pinned on the increase in financial inclusion for the industry through product innovation.

"Product innovation will be the game-changer.

"Given the knowledge and expertise acquired through actively pioneering initiatives and delivering solutions in the Islamic banking industry, Malaysia is indisputably making inroads to becoming the global hub for Islamic finance," it said.

The research house named the main Islamic banking proxy -- the BIMB Holdings Bhd (BIMB) - as the largest Bursa-listed Shariah compliant financial institution with strong potential to lead product innovation.

"We like BIMB (holding company of Bank Islam) for its deep-rooted expertise in the industry, which we believe forms a strong competitive advantage as it positions them as a likely leader in product innovation.

"Maybank Islamic complements the Islamic banking scene for its size and established regional presence which will work to its advantage in competing on the global front," it added. -- Bernama