Bahrain's central bank has urged five Islamic banks to merge early next year as it seeks to strengthen the banks' capital bases, a senior official said on Sunday.

Under the plan, Al Salam Bank would merge with Bahrain Islamic Bank, while Capivest, Elaf Bank and Capital Management House would merge with each other.

Bahrain Islamic Bank and Al Salam announced in August that they were in merger talks to form Bahrain's largest Islamic lender with assets of 1.7 billion dinars ($4.5 billion). 

'We pushed for that because it is positive, it will strengthen their capital and balance sheets,' Ahmed Abdul Aziz Al-Bassam, director of licensing and policy at the central bank, told Reuters, referring to both mergers.

The mergers are awaiting approvals by shareholders, he said, adding: 'We expect it to take place in the first quarter 2012.'     
Al-Bassam was speaking on the sidelines of an Arab Monetary Fund meeting on banking supervision in the capital of the United Arab Emirates.

Standard & Poor's is reviewing credit ratings on 50 banks in the Middle East and North Africa under a new set of criteria,    a senior S&P executive told Reuters. Last month, the agency classified Bahrain's banks as the riskiest in the Gulf Cooperation Council.

Al-Bassam also said Bahrain's central bank had granted in-principle approvals for two Geneva-based investment houses as well as a Hanover-based reinsurance company to set up offices in the country, which was hit by political unrest earlier this year. He declined to name the companies before a formal announcement.

'This indicates European financial institutions are willing to be in the Middle East looking for business,' he said.

'Those financial institutions think long-term. What happened in Bahrain was only for a couple of months, what they call the Arab Spring.'     

Bahrain will soon set up an internal committee to study the readiness of banks to implement the Basel III global banking standards, Bassam said, adding that banks were unlikely to face problems as they were adequately capitalised.

Asked about the main risks that Bahrain's banking system was facing, he said: 'The liquidity risk and also the capital. For us, what is happening in Europe is not that much of a problem.' - Reuters