ABU DHABI/DUBAI- The Sharjah government is weighing a merger between three of the emirate's banks that could create a lender with about 66.2 billion dirhams ($ 18.0 billion) of assets, sources aware of the matter told Reuters.

The potential merger between Bank of Sharjah, Invest Bank and United Arab Bank (UAB) reinforces the consolidation already underway in the United Arab Emirates' crowded banking industry. About 50 banks operate in the UAE with a population of about 9 million people.

Three Abu Dhabi banks are currently in talks to merge, while last year two of the emirate's biggest banks linked up to create First Abu Dhabi Bank . 

Invest Bank and United Arab Bank could be merged with Bank of Sharjah, in which the Sharjah government is a shareholder and is driving the process, the sources said, declining to be named as the plan is in its early stages and not yet public.

Invest Bank and UAB declined to comment, while Bank of Sharjah didn't respond to a request for comment. The Sharjah government could not immediately be reached for comment.

A spokesman for Qatar's Commercial Bank , which is the largest shareholder in UAB owning a 40 percent stake, said Commercial Bank was not involved in any discussions about a three-way merger.

JPMorgan is advising Bank of Sharjah on the potential merger, the sources said. JPMorgan declined to comment.

Bank of Sharjah is 17.2 percent owned by the Sharjah government, also its biggest shareholder, Thomson Reuters data showed. Invest Bank's biggest shareholder is Sharjah-based International Private Group which owns 15.5 percent.

Merger talks between Bank of Sharjah and Invest Bank began last year, sources told Reuters at the time.

But Sharjah is now working on a plan to merge all three banks, which are among the smallest in the UAE, to achieve economies of scale, said one of the sources. This source also said that Bank of Sharjah, the largest of the three, could buy the other two.

Proposals for the three-way merger have gained ground since Commercial Bank ended talks several months ago with United Arab Emirates (UAE)-based Tabarak Investment to sell its stake in UAB, two of the sources said.

Qatar has been embroiled in a diplomatic and commercial row with the UAE, Saudi Arabia, Bahrain and Egypt since June 2017.

Talk of bank mergers in the Gulf has intensified in the past two or three years after lower oil prices hit state revenues, pushed up bad loans and squeezed bank profit margins.

Tougher global capital rules are also adding to pressure on the banks.

Tariq Qaqish, managing director, asset management at MenaCorp said: "Definitely a bigger bank can scale up quickly, strengthen the balance sheet and meet requirements of Basel III," he said. "With banks going online, having branches with high costs is not feasible." The three Sharjah-based banks that serve mainly the northern Emirates are listed on the Abu Dhabi Securities Exchange.

(Reporting By Stanley Carvalho & Tom Arnold. Editing by Jane Merriman) ((stanley.carvalho@thomsonreuters.com; + 9712 6444431; Reuters Messaging: stanley.carvalho.thomsonreuters.com@reuters.net))