DUBAI, (Reuters) – Bahrain Islamic Bank and Al Salam Bank are in merger talks to form the Gulf Arab state’s largest Islamic lender with assets of 1.7 billion dinars ($4.5 billion), according to a statement on the Bahraini bourse website.

“The two boards of directors … stated that consolidation is the way forward for local banks in general and Islamic banks in particular in the aftermath of financial crisis and economic downturn and greater competitive banking environment in the region,” the statement said.

“The combined entity would have total assets of 1.7 billion Bahraini dinars and shareholders’ equity of 337 million dinars. The combined entity would be the third largest domestic bank in terms of total assets and the second largest in terms of equity,” the statement added.

Bahrain’s central bank has said lenders in the island kingdom have not been adversely impacted by protests earlier this year. But bankers and analysts have said banks would be hit as international lenders could curb financing, and tourism and retail firms might be forced into debt restructurings.

In March, Bahrain Islamic Bank postponed a planned $143 million rights issue, citing market conditions.