* Merger to create fourth-largest bank in Bahrain
* Share swap involves 11 Al Salam shares for each BMI share
* Latest Bahraini bank tie-up as cenbank pushes consolidation (Adds context, share prices)
DUBAI, Sept 9 (Reuters) - Bahrain's Al Salam Bank has agreed to acquire fellow Bahraini lender BMI Bank, an affiliate of Oman's Bank Muscat, through a share-swap deal as small banks in the kingdom consolidate operations to remain competitive.
Islamic lender Al Salam will exchange 11 of its shares for each BMI Bank share to create the kingdom's fourth-largest commercial bank. The tie-up is still subject to shareholder approval, with meetings to vote on assent due to be held in either September or October, BMI said in a statement.
Shares in Al Salam were 5.9 percent higher at 0726 GMT in muted trading. Bank Muscat, which owns 49 percent of BMI, was trading 1.4 percent lower as part of a wider sell-off in Oman.
BMI Bank and Al Salam first announced in May that they were considering a merger. The tie-up will create a bank with assets worth 1.79 billion dinars ($4.75 billion), according to second-quarter results from both institutions.
It would be the third merger in the Bahraini banking sector this year, and comes as the Gulf state tries to encourage consolidation among smaller Islamic banks hit hard by a local real estate crisis and an Arab spring-inspired political uprising which still sees sporadic unrest.
National Bank of Bahrain and a local pension fund said in March it would buy a 51.6 percent stake in Bahrain Islamic Bank (BIsB), and Capivest, Elaf Bank and Capital Management House completed a three-way merger in January.
BIsB had previously been a merger target for Al Salam, but talks collapsed in February 2012 over valuation disagreements.
One other merger being considered is a tie-up between Bank Al Khair and Khaleeji Commercial Bank. The former's acting chief executive and head of investment banking told Reuters in June the new entity would have assets worth between $600 million to $1 billion. ($1 = 0.3770 Bahraini dinars) (Reporting by David French; editing by Dinesh Nair and Tom Pfeiffer)