By Jason Benham and Tamara Walid
DIB said that it is 'currently evaluating the possibilities' of increasing its stake.
Dubai Islamic Bank (DIB) may increase its one fifth stake in Tamweel, signalling a long awaited merger between the UAE's two largest mortgage lenders could be scrapped.
A government committee has been reviewing a merger between Tamweel and rival Amlak since 2008, and resolving the matter is seen as key to kick starting lending in Dubai's battered property market.
In a statement on Wednesday, Dubai Islamic Bank said: "The bank is currently evaluating the possibilities of increasing its stake in Tamweel."
Raising its investment in Tamweel could make DIB more active in the mortgage market, said Deepak Tolani, vice president of equity research at Al Mal Capital.
Tolani said: "Tamweel is still an okay company and if DIB can have more control over the company and its management, they may be able to control its future activities a bit more."
He added: "It helps them to an unlock an investment they have made."
DIB, Dubai's third largest bank by market value, did not comment on a report in Arabic language daily Alrroya Aleqtissadiya that it planned to take over Tamweel and was in talks with the mortgage lender's creditors to restructure debt.
Alrroya Aleqtissadiya, citing sources familiar with the matter, said the long planned merger had been ended.
The paper said: "A proposal to merge the two companies has been dropped to be replaced with the option of Dubai Islamic Bank stepping in to save Tamweel."
It added: "While other information suggested that a Dubai government-linked company could take a similar step towards Amlak."
Tamweel's chairman declined to comment while Amlak officials could not be reached immediately.
The collapse of Dubai's once booming property sector hit Tamweel and Amlak hard. Both shares were suspended in 2008 and have not traded on the Dubai Financial Market since.
Merging the two into a single Islamic lender or creating a four way tie up with two other state controlled banks were among the proposals under consideration.
UAE Economy Minister Sultan bin Saeed al Mansouri has headed the government panel's review of the merger since November 2008.
Mansouri said in October the committee had a preliminary agreeement that shareholders, the federal government and the government of Dubai would each own a third of the new Islamic bank, but That the cabinet would make the final decision.
Talks to boost DIB's stake in Tamweel have begun and hinge on creditors' agreeing to reschedule the mortgage lender's debt, according to a letter the newspaper said it had seen.
The report said DIB proposed Tamweel creditors agree to a minimum five year moratorium on their debt, with a 4 percent annual return.
The newspaper said: "Sources said that Dubai Islamic's next step is the full acquisition of the company."
Saud Masud, head of research and senior real estate analyst at UBS in Dubai, said: "If these transactions help facilitate financing then it will be a positive move."
He added: "But I don't see how DIB adding more exposure to Tamweel would help putting financing back in the market. We still have concerns about Dubai and UAE banking in general." (Reuters)