At least four bank mergers are being planned in Bahrain after pressure from the central bank for consolidation among the country’s smaller institutions.

The Central Bank of Bahrain (CBB) has been trying to foster consolidation in the banking sector throughout much of 2011. It hopes that by doing so, it will create larger banks that can play a more active role in regional finance markets, particularly Islamic finance.

“We have been going through a process of encouraging some banks to find merger partners,” says Khalid Hamad, executive director of banking supervision at the CBB. “We were mostly targeting the Islamic banks.”

He says there are currently three small Islamic investment banks all looking to merge with each other. An Islamic retail bank is also planning to merge with a conventional retail bank. A third deal to unite two banks is also under way, as are talks between Bahrain Islamic Bank and Salam Bank.

Hamad says Islamic investment banks, which are able to establish in Bahrain with a minimum capital of $100m, are too small. “Going forward, for Islamic finance to grow the banks need to be bigger in size and have more capital,” he adds. This should help them to put larger commitments into deals, enabling Islamic finance to be used to fund larger investments.

The move has been welcomed in the Islamic finance and Bahrain banking sector. “It is important for Islamic banks to go through some consolidation,” says Khairul Nizam, deputy secretary general of the Accounting and Auditing Organisation for Islamic Financial Institutions (Aaoifi). “Banks with larger balance sheets and more capital can do more syndicated work, lend more and be more active in the market.”

How quickly the newly merged entities will be able to start playing a bigger role in the finance sector is unclear. “There are a lot of zombie banks in Bahrain that started in 2005-07, but haven’t really done anything since, because they were overexposed to things like regional real estate,” says one international bank in Bahrain.