Consolidation in the Gulf Arab Islamic banking industry is becoming more urgent due to the downturn, but bankers say financial institutions are still wary of teaming up.
Islamic finance boomed for years on the back of high oil prices, before growth started to slow in the wake of the global economic crisis last year.
"I think you will see a trend toward consolidation in real estate ... but I think banking not yet. Consolidation now through mergers I don't think will help liquidity," Hussein al-Qemzi, chief executive of Noor Islamic Bank, told a conference in Dubai.
Islamic banks, in particular investment houses, mushroomed to tap into the oil wealth accumulated in the region.
But the downward correction in regional real estate markets to which Islamic banks are heavily exposed has raised concerns some might not survive and has heightened speculation of a wave of consolidation.
"You tell me how an Islamic investment bank that invested in real estate and in private equity, that has a big refund this year, how it's going to find this money, what is it going to do?" said Simon Eedle, managing director of global Islamic banking at France's Calyon.
"This market is going to consolidate either by default, by merger, or by government intervention. I don't think it will be a question of prices paid, I think it will be twisting arms to solve problems," he added.
SMALL BANKS
The Gulf Arab region's largest Islamic banks, such as Kuwait Finance House and Saudi's Al Rajhi Bank, are still small compared with Western conventional banks.
That reduces their ability to compete with the wholesale banking offered by the Islamic subsidiaries of the major Western conventional banks.
"Islamic banking cannot be taken seriously until we have some global Islamic banks ... They don't have to be present everywhere in the world, but they need to be in the top one hundred," Eedle said.
Sheikh Saleh Kamel, chairman and shareholder of Bahrain-based Albaraka Banking, in January reiterated plans to establish an Islamic megabank with a paid-up capital of around $10 billion, but experts say these high-flying plans are not realistic in the current climate.
Bahrain-based Islamic lender Ithmaar in March put on hold the planned merger of its unit Shamil Bank with partly owned retail bank BBK citing market uncertainty.
Analysts said the pricing of assets had been too difficult in the current climate and banks had other priorities such as improving earnings.
"Ideally this merger (of Islamic banks) should take place in normal times and when you have a strategy that fits both parties, but a merger between two entities that have issues, that doesn't solve the problem," said Yousif Khalaf, chief executive of Ajman Bank.
Before the crisis there had traditionally been few mergers and acquisitions in the Gulf Arab region and many Islamic banks in particular remain dominated by strong individual or family shareholders.
"Consolidation is something that we have been talking about (for) a long time. The biggest issue with consolidation is ego and that is a problem that you can't really address," said Ahmed Abbas, chief executive of Bahrain-based Islamic bank Liquidity Management Center.