Islamic financial institutions across Bahrain and the wider GCC are well-positioned to maintain superior credit strength and outpace conventional lenders despite a challenging regional operating environment, according to a report by Moody’s Ratings.
The sector-in-depth report highlights that while ongoing geopolitical turmoil – particularly the closure of the Strait of Hormuz – has disrupted supply chains and slowed non-oil growth across confidence-sensitive sectors like real estate, construction, and logistics, Islamic banks possess structural advantages that insulate them from severe fallout.
The kingdom’s Islamic banking sector continues to hold a dominant position, commanding a 69 per cent market share of total financing as of year-end 2025.
Over the past five years, Islamic financing in Bahrain expanded at a Compound Annual Growth Rate (CAGR) of 4pc, performing on par with conventional banking growth.
Despite macroeconomic pressures, Bahrain’s Islamic banks demonstrate formidable core capital buffers.
As of the first quarter of 2026, Islamic banks in Bahrain posted an aggregate Common Equity Tier 1 (CET1) ratio exceeding 22pc, significantly higher than around 17pc recorded by conventional peers.
While Bahrain remains exposed to trade disruptions due to lower foreign-exchange reserves relative to its regional neighbours, local Islamic banks maintain manageable non-performing financing levels backed by strong coverage ratios, insulating the sector against potential loan quality deterioration.
Zooming out to the wider GCC, Islamic finance continues to drive overall growth in the region’s banking industry, supported by high demand for Sharia-compliant products, state-backed vision initiatives, and ongoing industry consolidation.
“We expect Islamic banks to continue expanding faster, supported by solid demand for Sharia-compliant finance, while higher exposure to the public sector across both their retail and corporate books underpin superior loan quality. Capitalisation and loan-loss reserves remain sound across both banking segments, although Islamic banks are likely to outperform on earnings given their structurally higher margins and lower credit cost,” said Moody’s Ratings assistant vice-president Abdulla Al Hammadi.
“Increasing demand for Sharia-compliant products across retail and corporate segments will continue to support long-term growth, with Islamic banks maintaining significant market shares across GCC banking systems, and leading positions in Saudi Arabia and UAE,” he added.
Market penetration varies across the Gulf, with Saudi Arabia leading at an 86pc market share ($700 billion+ in total financing), followed by Kuwait at 45pc, the UAE at 30pc, Qatar at 29pc, and Oman at 22pc.
Asset quality across the region remains exceptionally strong, as GCC Islamic banks entered 2026 with an aggregate Non-Performing Financing (NPF) ratio of 1.75pc, compared to 2.23pc for conventional banks.
Moody’s attributes this superior loan quality to the sector’s heavier exposure to public-sector employees whose financings are backed by salary assignments and collateral.
Additionally, structurally higher net profit margins, lower provisioning charges, and modern digital cost efficiencies will allow Islamic banks to outpace conventional institutions in bottom-line profitability, even as conservative provisioning temporarily squeezes earnings sector-wide.
Funding and liquidity also remain key structural advantages, anchored by strong, stable retail deposit bases.
GCC Islamic banks have further reinforced their tier 1 capital buffers by maintaining active access to international debt markets, as demonstrated by major tier 1 and Mudaraba sukuk issuances across Saudi Arabia and Kuwait earlier this year.
Although energy price volatility and tight monetary conditions will keep non-oil GDP growth moderate through the end of 2026, Moody’s expects trade flows to normalise by early 2027, setting the stage for accelerated Islamic financing expansion across the Gulf.
avinash@gdnmedia.bh
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