MANAMA, March 4 Bahrain's central bank governor said on Tuesday he expected further bank consolidation this year after a spree of tie-ups in 2013, and the regulator was encouraging Islamic banks in the kingdom to get credit ratings to improve transparency.
Mergers in the Middle Eastern banking sector are rare as powerful local shareholders are often unwilling to give up controlling positions except for vastly-inflated valuations.
However, in Bahrain, the central bank has been encouraging smaller lenders to merge to bolster institutions weakened by a local real estate crash and fall-out from the island kingdom's political unrest in 2011, which has continued sporadically since then.
Speaking on the sidelines of a finance conference in the capital, Rasheed al-Maraj said he expected further tie-ups to be announced by the end of the year.
"We are working on one or two now, so we will see how that goes," he said without elaborating further.
In 2013, there were four separate examples of consolidation in the Bahraini banking sector, including a three-way tie-up between sharia-compliant investment firms to create Ibdar Bank.
National Bank of Bahrain and a local pension fund bought a 51.6 percent stake in Bahrain Islamic Bank in March 2013, while a share-swap agreement between Al Salam Bank and BMI Bank was completed last month to create the kingdom's fourth-largest commercial lender.
A tie-up between Khaleeji Commercial Bank and unlisted Bank Al Khair is still being discussed. Khaleeji said in a statement earlier this week it had received the draft due diligence report from the consultant employed to review Bank Al Khair, which it was now studying.
Maraj told the finance event that the central bank was advising Islamic banks in the kingdom to get credit ratings.
Sharia-compliant lenders were among the hardest hit by the sector's problems, given their heavy exposure to the local real estate market and the business models of many which were tied to advising on transactions relating to property - deals which dried up once the market slumped.
Bahrain has a sizeable Islamic finance industry and is home to one of the main standard-setters for sharia-compliant banking: the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
Maraj said that the ratings could be from any of the three main rating agencies - Fitch Ratings, Moody's and Standard & Poor's - or from the Islamic International Rating Agency, which is backed by industry bodies including the Islamic Development Bank.
While securing a rating wasn't a regulatory requirement prescribed by the central bank, it was advising banks to do so to enhance transparency in Bahrain's Islamic banking sector.
"Transparency is very important for us," Maraj said. "This is part of the policy." He added he expected all banks would have a rating in the next two years. (Reporting by David French; Editing by William Hardy)