Islamic banks across the GCC have outperformed their conventional counterparts over the past year and are poised to continue this momentum, according to a new report by Moody’s Ratings.
The positive trend is driven by strong demand for Sharia-compliant products, robust non-oil economic growth, and government initiatives aimed at boosting the sector.
The report highlights that Islamic banks have maintained higher profitability and stable financing quality, along with strong capital and liquidity buffers, positioning them well for future growth.
Their return on assets is expected to remain above that of conventional banks over the next 12-18 months.
A key factor in this success is their focus on fixed-rate retail lending, which helps to protect profits from expected monetary policy easing and supports asset quality.
This focus on retail banking also provides better margins, making it a crucial driver of profit.
Islamic financing growth has continued to outpace conventional lending in most GCC countries, with Islamic deposits also growing faster than conventional ones.
“Saudi Arabia has remained the largest and fastest-growing Islamic banking markets, supported by Vision 2030 initiatives and a government push for higher home ownership. Islamic banks have also gained market share in UAE, Qatar and Kuwait through organic expansion and mergers. In several markets, Islamic banks accounted for more than 40pc of total system financing as of March 2025,” said Moody’s Ratings assistant vice-president and analyst Abdulla AlHammadi.
Government reforms and initiatives are helping to drive the growing demand for Sharia-compliant products.
Recent legal changes in Kuwait and the UAE are expected to provide Islamic banks with better tools for managing liquidity.
For instance, a new law in Kuwait will allow Islamic banks to invest excess liquidity in government-issued securities and earn additional returns.
While Islamic banks have historically had weaker efficiency due to investments in branch networks, digitisation and branch rationalisation have now brought their cost-to-income ratio broadly in line with conventional peers.
The sector’s asset quality is expected to remain stable over the next 12-18 months, supported by a higher exposure to retail lending and low-risk, government-backed projects.
System-level nonperforming loans (NPLs) for Islamic banks were below 2pc in Saudi Arabia and between 2pc and 4pc in most other GCC markets in 2024, which is either below or at a similar level to conventional peers.
Islamic banks also maintained strong capital and liquidity positions in 2024.
Their average common equity tier 1 (CET1) ratios were above 15pc in most markets, comfortably exceeding regulatory minimums.
However, despite robust deposit growth, liquidity generally remains lower than for conventional banks due to a limited availability of Sharia-compliant financial instruments.
In Saudi Arabia, specifically, banks are expected to increase their reliance on market funding as deposit growth struggles to keep up with the high demand for credit.
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