The Central Bank of Bahrain (CBB) expects the country's investment houses to consolidate and raise more capital after being hit hard by a regional real estate crash, a bank official said on Tuesday.

Bahrain's investment houses relied on fees they booked on investor money raised for private equity and property projects during a five-year oil and real estate boom that ended in 2008. They have largely failed to generate new revenue streams  and are struggling with illiquid assets whose valuations have sharply fallen.

'You still need several of those investment companies to merge and consolidate activities for the sake of having better capital (levels) and being able to meet client expectations,' A Rahman Moh'd Al Baker, executive director of financial institutions supervision, told Reuters in an interview.

Analysts and bankers say consolidation in the Gulf banking and investment industry is overdue, but in Bahrain complicated ownership structures have made mergers and acquisitions difficult, with many banks and investment houses having shareholders from several other Gulf countries.

Bahrain has established itself as an offshore banking hub catering to the oil wealth accumulated in the region, and in particular manages funds from Saudi Arabia and Kuwait where regulations are less liberal.

Ithmaar concluded in April its conversion to an Islamic retail bank by merging with its unit Shamil Bank, after it was hard hit by the crisis.

'There are others in the pipeline for sure,' Al Baker said.

He also said he expected the sector to raise more capital.

Gulf Finance House (GFH), among the hardest hit, plans to raise $300 million fresh capital through Islamic convertible products.

The sector has been largely shut out of regional and international loan and bond markets, leaving capital increases as the only funding option.-Reuters