Bahrain-based Islamic lender Ithmaar has put the planned merger of its unit Shamil Bank with partly owned retail bank BBK on hold due to market uncertainty.

Ithmaar said in a statement its board had "reviewed its 2009 strategy in light of the ongoing financial uncertainty" and would put the planned merger on hold, without providing further details.

The surprise move marks a setback for expectations that the global financial crisis, which has battered Gulf Islamic and conventional banks alike, would spur consolidation in the region.

In February, ratings agency Fitch said it was considering downgrading its so-called individual rating on BBK, saying liquidity was tight and that it had exposure to market risks from debt securities and equities investments.

Bahrain's central bank last week lowered reserve requirements to 5 percent from 7 percent, citing lower inflation expectations, but economists said this was a move to free up liquidity in the banking system.

Ithmaar had said in December it planned to increase its 25.38 percent stake in Bahraini conventional retail lender BBK by swapping new BBK shares with its fully owned Shamil Bank, effectively merging the two banks.

Abdulkareem Bucheery, chief executive of BBK, told Reuters last week that the banks were waiting for Bahrain's central bank to approve the share swap, and would then start doing due diligence.

Ithmaar would have owned a maximum of 40 percent in the new bank. - Reuters