DUBAI, July 1 (Reuters) - Shareholders of three Islamic banks in Bahrain have approved plans to merge them all into a single entity, a joint statement said, paving the way for a rare example of consolidation in the Gulf Arab banking sector.

The move was approved at separate shareholder meetings at Capivest, Elaf Bank and Capital Management House on Thursday, the statement said, adding it would be the first three-way merger in any sector of the Bahraini economy.

The tie-up, which will create a bank with assets worth more than $400 million, still requires final sign-off from the Central Bank of Bahrain and the Ministry of Industry and Commerce, the statement added.

"The aim of this merger is to establish a strong banking institution that is able to compete solidly in a changing market," Isa Habib, vice chairman of Elaf Bank, said.

"The merger will bring instant diversification of assets and revenues. Also, the bank will be able to capture larger projects and will enable it to diversify its capital sources," he added.

Kuwait Finance House's KFIN.KW Bahraini arm, which is advising on the deal, said last month that due diligence on the merger had been completed and the deal would be completed in the second half of the year. ID:nL5E8HC42S

Although a commercial case for banking sector consolidation in the Gulf is largely accepted, mergers are uncommon because main shareholders, often powerful local families, are reluctant to cede control and can demand exaggerated valuations.

Bahrain Islamic Bank BISB.BH and Al Salam Bank SALAM.BH said in February that merger talks between the two to form Bahrain's biggest Islamic bank by assets had collapsed because of disagreement on pricing. ID:nL5E8DG3N5

If the tie-up had been completed, the combined entity would have held assets worth about $4.5 billion.

(Reporting by David French; Editing by Rachna Uppal)

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Keywords: BAHRAIN BANKS/MERGER