Bahrain is set to see further bank mergers in 2014, as the country’s central bank continues to encourage consolidation in the sector.

Central bank governor Rasheed Mohammed Al-Maraj said that more mergers are likely to happen in 2014, after a number of deals were finalised last year. “We have some more. We are working on one or two now, so we will see how it goes,” he said on the sidelines of Euromoney’s GCC Financial Forum on 4 March.

Traditionally, Bahrain was the financial centre for the Gulf, but has since been overtaken by hubs in Dubai and Qatar.

Given the relatively small size of the Bahraini market and the negative impact the financial crisis had on the banking sector, many have decided to merge their operations.

“It is only natural to see further consolidation between banks,” Al-Maraj told delegates at the conference

Other bankers told MEED it made sense for some to join forces, due to the increasing cost of putting in place the latest banking technology, with smaller institutions struggling to keep up with this new and increasing expense.

Larger banks are also seen as more able to weather volatile economic conditions, as seen in recent years.

In October 2013, the sharia-compliant Al Salam Bank merged with BMI Bank, which is affiliated with Oman’s Bank Muscat, through a share swap. Last December, Ibdar Bank was launched, after Bahraini institutions Capivest, Elaf Bank and Capital Management House merged.

In June, Khaleeji Commercial Bank, an Islamic retail bank, and Bank Alkhair, an Islamic investment bank, signed a preliminary agreement to evaluate the possibility of merging the two institutions.

As of January 2014, Bahrain has 117 financial institutions, of which 28 are retail, 15 are foreign and 24 are Islamic banks. As of October 2013, total bank assets amounted to $186.1bn, while Islamic bank assets totalled $23.1bn. The financial sector as a whole contributes 16.8 per cent to Bahrain’s gross domestic product (GDP).

Bahrain’s central bank also wants to support the growth of the Islamic finance market in Bahrain, said Al-Maraj.

The Waqf Fund, a non-profit body set up by the central bank, has proposed an external audit for Islamic financial institutions to improve the image and transparency of the industry.

Following a meeting on 2 March, the Central Bank said: “The participants agreed upon the need for the Islamic financial institutions to be audited by an external sharia audit function to be part of the external auditor’s framework.”

The move will answer calls for greater independent oversight of the Islamic finance market, as many banks pay their own sharia boards to monitor their activities, which has led some to be sceptical about how objective the boards can be.

Demand for Islamic finance is strong in Bahrain, with Al-Maraj telling conference delegates that when the bank issues short-term domestic bonds treasury bills or sukuks to support the bank’s liquidity management, “demand for Islamic issuance is usually more than conventional”.