Liquidity woes menace Islamic banks

(For other news from the Reuters Islamic Finance Summit, click here) * Islamic banks may face crisis if liquidity does not return

* Executive says a bank collapse could be possible

(Adds more details and comment)

By Thomas Atkins

DUBAI, April 13 (Reuters) - Islamic banks will face a crisis scenario by the end of September that could include forced consolidation if liquidity does not return to the financial sector, a leading banker said on Monday.

Sohail Zubairi, chief executive of Dar al-Sharia consultancy, said retail lending will be hit first if bank funding remains sparse through the third quarter but that worse could be in store, including a possible bank collapse.

"Anything is possible in this scenario," he told the Reuters Islamic Banking and Finance Summit in Dubai. Dar al-Sharia was set up in July 2008 by Dubai Islamic Bank DISB.DU to provide financial and legal expertise for the Islamic finance industry.

"There is a real threat to the business of Islamic banking," Zubairi said, referring to the Islamic lending sector overall. "If the liquidity does not return, we will not be able to continue doing our business."