DUBAI  - Talks to merge three Qatari banks have ended after they were unable to reach an agreement, the lenders said in a joint statement on Thursday.

Islamic lender Masraf Al Rayan and conventional lenders Barwa Bank and International Bank of Qatar (IBQ) have been in talks since December 2016 over a potential tie-up.

"The three banks could not reach an agreement to complete the transaction," the lenders said in a bourse statement, without elaborating.

Sources close to the matter told Reuters the talks stalled over the past year as shareholders could not agree on valuations and due to client concerns about the possibility of converting IBQ into an Islamic lender.

Qatari regulations do not allow a bank to operate both types of lending, so IBQ would have had to convert its business to being Sharia-compliant should the deal have gone ahead.

A shake-up has long been mooted in the Qatari banking sector, given that 18 local and international commercial banks serve a population of 2.6 million.

The argument for consolidation has become more compelling after a diplomatic boycott by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt, which could further dent bank performance, analysts said.

KPMG was advising Masraf Al Rayan on the merger, with Perella Weinberg advising IBQ, the sources said. Credit Suisse was advising Barwa, they added.

(Reporting by Hadeel Al Sayegh; Editing by Mark Potter) ((Hadeel.AlSayegh@thomsonreuters.com; +971566883310;))