Dubai: Kuwait Finance House (KFH) said on Monday it had invited Bahrain's Ahli United Bank to begin a due diligence process for a potential merger, Kuwait's biggest Islamic lender said on Monday.
KFH also asked AUB to sign a non-disclosure agreement.
If the merger goes ahead, it would be the latest of several recent tie-ups to create bigger and stronger lenders in an over-banked region where some central banks have called for consolidation.
The scope of the agreement includes valuation studies and work to assess the feasibility of establishing a new banking entity, KFH said in a bourse statement.
No potential terms of a deal have been made public.
If a merger proceeds, the total assets of the two banks would be $90.57 billion, making it the sixth largest bank in the Gulf on that measure, according to Thomson Reuters data.
The major shareholders in the two lenders are Kuwait state-owned entities. The Public Insitution for Social Security owns 18.59 per cent of Bahrain's Ahli United Bank, according to data on the Bahrain bourse. The Kuwaiti sovereign wealth fund, the Kuwait Investment Authority (KIA), is the largest shareholder in Kuwait Finance House, Thomson Reuters data shows.
The agreement to begin due diligence demonstrates seriousness in the deal process and backing from the lenders' major shareholders, according to a source familiar with the matter.
KFH published a letter from the KIA in September saying it had appointed a consultant to conduct a feasibility study on a merger of the two banks.
The statement did not elaborate whether financial advisers were appointed or were acting on behalf of either party.
In other regional bank mergers, First Abu Dhabi Bank, one of the largest banks in the Middle East and Africa, was recently created in the UAE after a tie-up between two Abu Dhabi lenders, while mergers are under way in Qatar and Saudi Arabia.