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 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.

Our problem is the liquidity. We haven't lost anything. We have been making profits. But we are suffering because of the lack of liquidity, he said.

Layoffs await the sector as well, he said.

The $10 billion in crisis rescue funds raised by Dubai have provided some relief to the local economy and some have been deposited with local banks to encourage lending, but they only begin to address the outstanding need for financing, he said.

Dubai, the self-styled tourism hot spot and regional financial hub, was hard hit by the financial crisis, which popped a real estate bubble that saw the emirate construct the world's tallest building and palm-shaped islands in the sea.

The central bank of the United Arab Emirates provided a bailout of sorts by buying a $10 billion bond issue from the emirate, which said it may issue $10 billion more to restore liquidity and provide financing to a cash-strapped economy.

We are only scratching the surface but at least it is better than not having it, he said.

Islamic banks are unlikely to lead the consolidation process themselves and political leaders will probably show the way, as has already happened with the proposed merger of mortgage lenders Amlak and Tamweel, Zubairi said.

Islamic banks will not take any voluntary measures at all, he said. Islamic banks need to get bigger and one way could be a merger.

Government officials are leading the merger of Amlak and Tamweel, who ran into trouble after the collapse of the Dubai real estate sector, with two state banks into the Emirates Development Bank.

(Editing by Sam Cage and Jon Loades-Carter)

Dubai