DIB, the emirate’s third-largest bank by market value, had said in June it may increase its one-fifth stake in Tamweel.

“The deal effectively renders Tamweel a subsidiary of Dubai Islamic Bank which is now its biggest shareholder at 57.33 percent,” the government of Dubai media office said in a statement.

“This strategic move is the culmination of intensive efforts over the past few months to resolve the stalemate at Tamweel that will allow the company to resume its core activity of providing mortgages and real estate financing,” it added.

The statement did not provide a value for the deal.  “This probably tells you that DIB will have to recapitalize the company (Tamweel) and inject more cash. They might have to consolidate Tamweel and this might make their balance sheet weak but will be a positive move for Tamweel,” said Robert McKinnon, managing director of equity research at Al Mal Capital.

The deal is also likely to put an end to a long-planned merger between Tamweel and rival Islamic mortgage lender Amlak.

“This could most likely mean that the merger is not going to happen,” McKinnon said.

The United Arab Emirates government said in November 2008 it intended to merge Amlak and Tamweel and has been working on a plan to restructure them. Shares in the two firms have not traded since.

“This (the deal) is very positive for Tamweel, but also a broader positive for the UAE financial sector that has had to deal with many uncertainties over the past year,” said Khalid Howladar, senior credit officer at Moody’s Middle East.

“As a retail bank DIB has cash that Tamweel can apply to the relatively tight home finance sector,” he added.  House prices in Dubai have fallen some 60 percent since their peaks in 2008, billions of dollars worth of projects were put on hold or canceled, and lending all but dried up.  In December, the Dubai government said it formed a judicial committee to protect creditors and companies related to Amlak and Tamweel, in what was seen as a bid to boost transparency.