DUBAI (Reuters) - Bahrain is still in the early stages of a series of bank mergers designed to strengthen the sector in the face of regional competition, the central bank governor said.
The tiny kingdom's banking industry, once the most vibrant in the Gulf, was hit hard by the global financial crisis and, since 2011, by political unrest which has deterred some foreign investment.
But Rasheed al-Maraj said there were signs of recovery in the sector, which would be aided by a central bank policy of encouraging mergers and acquisitions.
Islamic lender Al Salam Bank SALAM.BH said in September it had agreed to merge with fellow Bahraini lender BMI Bank, an affiliate of Oman's Bank Muscat BMAO.OM, through a share swap. The deal is expected to create the kingdom's fourth-largest commercial bank.
Khaleeji Commercial Bank, 47 percent owned by Gulf Finance House GFHB.BH, said in June that it was evaluating a potential merger with local lender Bank Al Khair.
And in March, National Bank of Bahrain NATB.BH and a local pension fund bought a 51.6-percent stake in Bahrain Islamic Bank BISB.BH from Kuwait's Investment Dar in a deal worth around 34.9 million dinars ($92.6 million).
Maraj, in an email interview during the Reuters Middle East Investment Summit, said the merger wave was still only starting and would eventually have a bigger impact on the sector.
"What has evolved to date is the beginning of what the CBB believes will be a structured, focused, and properly implemented series of mergers and acquisitions which are designed to enhance both the specific institutions and the overall health and strength of the financial industry," he said.
"By doing this, Bahraini banks will be better equipped to compete in the regional markets."
The central bank lists 75 conventional bank licensees and 24 Islamic bank licensees in Bahrain, a large number for a country of just 1.3 million people.
Bahrain has faced sporadic political unrest and demonstrations since February 2011, when mass protests led by the mostly Shi'ite Muslim opposition were suppressed by the Sunni-led government.
This, along with damage to the international banking system from the global financial crisis, contributed to a drop in the combined assets of wholesale banks in Bahrain from $156.7 billion at the end of 2010 to $118.3 billion in August this year, according to central bank data.
Maraj said that in the wake of the global crisis, banks in Bahrain had restructured their businesses by shifting focus towards relatively stable activities and reducing their real estate exposure. Most international banks were focusing on their domestic markets.
But the veteran corporate executive and economic policy maker, who has held his central bank post since 2005, said growth had returned to the industry, with the aggregate balance sheet of Bahrain's entire banking system rising from $190.7 billion in August 2012 to $193.5 billion in August this year.
"We have seen a small reduction in the balance sheet of the wholesale banks since 2011 but recently we witnessed a steady recovery in the total assets," he said.
Bahrain faces tough competition as a financial centre in the Gulf from Dubai and Qatar. In particular Bahrain is a top centre for Islamic banking, but Dubai announced this year that it aims to become a hub for that industry.
Maraj indicated Bahrain, the base for a key standards-setting body in Islamic finance, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), was prepared to cooperate with Dubai.
"The evolution of the Islamic financial industry in Dubai and elsewhere complement those which are underway in Bahrain, therefore they are welcomed and encouraged," he said.
"The region will benefit from enhancements to the current level of expertise in Islamic finance, and this can be used as a foundation to further the goals of the industry." ($1 = 0.3770 Bahraini dinars)
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Editing by Andrew Torchia