Ratings agency Fitch warned on Monday that a merger plan by Malaysia's second largest bank CIMB Group with RHB Capital and Malaysia Building Society to create the country's biggest lender was fraught with risk.

"The proposed merger of CIMB, RHB and Malaysia Building Society (MBSB) is ambitious, and will bring inherent challenges and risks for the new banking group amid a complex integration process," Fitch Ratings said in a statement.

Last week, CIMB, RHB Capital, which is Malaysia's fourth largest bank, and MBSB said they had entered into a 90-day exclusivity agreement to negotiate the proposed merger of the three entities and "the creation of a mega Islamic bank".

Malaysia, Southeast Asia's third-largest economy after Indonesia and Thailand, hopes to become an important gateway into booming regional markets, while in Islamic finance it is determined to position itself as the leading international centre.

This is the second attempt at a merger between CIMB and RHB in three years, and is in line with the central bank's aspiration for further consolidation in the banking sector.

Fitch, however, cautioned that it would not be an easy process saying the merger could weaken capital buffers for CIMB if not funded by sufficient new equity, adding that any move to rationalise branches and staff could be "politically unpalatable".

"Furthermore, weakening credit growth and asset-quality pressures in the overall banking system will not make the process any easier. Combining entities as large as CIMB and RHB will be lengthy, and the addition of MBSB is likely to make the integration even more complex," it said.

The new proposed group would stand out as the largest bank in Malaysia and the fourth-largest lender in Southeast Asia, with total assets of $194 billion and a 23 percent market share of domestic loans versus current Malaysia top bank Maybank's 18 percent.

Fitch, however, said a successful merger would provide a stronger domestic platform from which CIMB's offshore aspirations could continue to expand -- in particular its share of regional lending and cross-border trade financing.

"The merger will also strongly position the new entity to build its shariah-compliant activities as the country's largest Islamic bank," it said.

Islamic banking fuses principles of Islamic sharia law and modern banking methods. Islamic funds are banned from investing in companies associated with tobacco, alcohol or gambling.

Sharia-based finance also bans interest, which is seen as usury, and risks are shared between the creditor and borrower.