The banking sector across the Gulf region is massively overbanked and in need of consolidation. In Bahrain, the situation is no different, and the central bank is putting pressure on banks to find merger partners.

Four mergers are now underway as a result. One of them could involve three banks joining up to form one much larger institution.

This is good news for Bahrain’s banking sector for two reasons. Some of these smaller banks are likely to have been established at the peak of the region’s economic and real-estate boom. Since both sectors are struggling to grow at the moment, several of these lenders risk becoming banks with massively devalued property assets, meaning they are unable to invest further. Takeovers by healthier banks should help sort out those problems.

Secondly, consolidation would help create larger banks that can play a more significant role in the Bahraini and regional economies.

The Central Bank of Bahrain’s (CBB’s) actions also show a more mature attitude towards the financial sector than many of its peers. The CBB acknowledges that there are too many banks and is helping to steer the market towards consolidation, while leaving commercial decisions to dictate what happens next.

In the rest of the region, consolidation is occurring only at the behest of rulers, with scant regard for the commercial rationale of a deal, or is not occurring at all.

The Gulf’s banking sector is currently too small and fragmented for real regional champions, which can drive competition in the market and also compete on a global scale, to emerge. For a strong financial sector to develop, more countries should follow Bahrain’s example.