Established in 2007, Dubai-based Noor Islamic Bank said it planned to become the world’s largest Islamic lender within five years, and would consider acquisitions to reach that goal. But the global financial crisis dented those plans, and today Noor Islamic is focused on its domestic retail and takaful (Islamic insurance) businesses, with much of its overseas activity concentrated in Turkey and Tunisia.

"There are no plans to acquire any operations," chief executive Hussain Al Qemzi told Reuters in an interview. The priority is improving efficiency and cost-cutting, as part of efforts to strengthen the bank’s financial position, he added.

Similar stories have played out across the Gulf. Islamic finance is still growing, but a major aspect is missing: the development of big cross-border banks that could spread ground-breaking products and best practice around the region, as multinational banks have done in conventional finance.

Saudi Arabia-based Al Rajhi Bank, for example, moved into Malaysia in 2006 predicting it would have 50 branches there by 2010. It now has about half that number, and a statement by the bank in March said it was focusing on improving operational efficency; it did not stress expansion. Al Rajhi, the largest Islamic bank in Saudi Arabia by assets, has also opened one branch in Kuwait and two in Jordan.

Islamic banks’ regional reach generally lags far behind that of big, Western conventional banks operating in the Middle East, such as HSBC Holdings, and major Arab conventional banks including Jordan-based Arab Bank Group, which has a presence in 30 countries across five continents.

One exception is Bahrain-based Al Baraka Banking Group, an Islamic institution which has a presence in 12 countries, such as Jordan, Turkey and Pakistan. It plans to expand its network in North African countries, such as Tunisia, where Islamic finance is being promoted by democratic governments that took power after last year’s uprisings.

But even Al Baraka has not expanded much in the Gulf; it has no major, permanent presence in that region outside Bahrain. In Indonesia, another centre of Islamic finance, it maintains only a representative office.

Strains in the global financial system over the past few years are one reason for the slowness of Islamic banks to form wide regional networks. But they are not the main reason; after all, the volume of Islamic finance has managed to continue growing rapidly despite, and perhaps because of, the crisis of conventional banking. Islamic financial assets worldwide rose 150 percent over the past five years to around $ 1.3 trillion, according to an estimate by financial lobby group TheCityUK.

Another factor is restrictions on the entry of foreign banks into many national markets, said Alexander von Pock, principal at consultants A T Kearney.

Capitalisation requirements in markets such as Oman and Kuwait limit regional expansion, making it difficult to justify deploying large amounts of capital from already-strained balance sheets, a senior Islamic banker told Reuters. Conventional banks have coped with such obstacles in many cases, however.

The underlying problem, bankers and analysts say, is that Islamic banks tend to be younger than their conventional peers and multiple launches have left the sector fragmented, making economies of scale harder to achieve. Islamic banks now command a 25 percent share of the banking market in the Gulf Cooperation Council, but their average asset base is a third the size of conventional banks, according to Ernst & Young.

Mergers could change this, but Islamic banks have often proved reluctant to merge. In many cases, powerful shareholders have constrained merger plans, fearing loss of control, said Abdul Rahman Mohammed Al Baker, executive director of financial institutions supervision at Bahrain’s central bank. “Look at the nature of the boards...these are family-held businesses,” he said.

Last year Bahrain’s central bank urged five local Islamic banks to merge early in 2012 as a way to strengthen their capital bases. But in February this year, Bahrain Islamic Bank and Al Salam Bank ended their merger talks because of disagreement over valuations, while CAPIVEST, Elaf Bank and Capital Management House have not yet achieved a union.

Some mergers in the Gulf have gone ahead. Last month Al Salam Bank and Bahraini Saudi Bank, both Bahrain-based, completed a merger of their operations. The Dubai government ordered Emirates Bank and National Bank of Dubai to join in 2007, and the combined entity, Emirates NBD , is now absorbing Dubai Bank, a debt-laden Islamic lender, at the behest of United Arab Emirates authorities.

All these mergers are domestic rather than international, however, and Emirates NBD’s takeover of Dubai Bank was viewed primarily as a way to heal a weak spot in the banking system rather than as a step to expand Islamic banking across borders.

In the long term, the rise of large, multinational Islamic banks is inevitable, many bankers say - but it could take many years. “Ultimately there might be some mergers between small-to-medium sized banks who want to become bigger players regionally,” said Salah Jaidah, head of Islamic finance at Deutsche Bank.

Al Baker at Bahrain’s central bank said governments should consider offering incentives such as tax exemptions or subsidies in order to entice Islamic banks to merge. Ultimately, competitive pressures may prove to be the biggest factor encouraging mergers. The margin of Islamic banks’ growth above conventional banks’ growth has been decreasing across the Gulf, said an April report by A T Kearney. Meanwhile, staff expenses at Islamic banks have been growing faster than for conventional banks, according to Ernst & Young.

As Islamic banks finish penetrating their natural customer bases of loyal Islamic banking customers, they may need to seek growth by targeting the “floating mass” - clients who base their choice of bank only partly on religious permissibility, and are also swayed by factors such as pricing and service quality. To attract these customers, Islamic banks may have to compete head-on with the regional networks of conventional banks.