S&P: Gulf Islamic banking will remain resilient despite challenges
Standard & Poor’s Ratings Services has forecast that Islamic finance markets in the Gulf Cooperation Council (GCC) countries will remain resilient despite regional geopolitical tensions, with strong capital buffers of Islamic banks and stable funding structures helping to mitigate a slight decline in asset quality and a slowdown in growth.
This assessment comes in a series of reports on the Islamic banking sector published yesterday, covering Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman, and Bahrain.
In a report titled “Kuwait: A Strong Domestic Model,” the agency noted that Islamic banks in Kuwait account for approximately half of the country’s banking system assets. This sector benefits from a stable funding base among retail customers and strong capital, and Kuwaiti Islamic banks are expected to continue expanding in line with the broader banking system, supported by domestic demand and ongoing digital transformation.
Under the title “Saudi Arabia: Vision 2030 and Market Reforms Drive Growth,” the agency stated that Saudi Arabia’s Islamic banking sector is one of the largest Islamic finance sectors globally, representing about 76% of the country’s banking assets at the end of 2025. Building on a model initially focused on retail, Islamic banks have expanded their services to include corporate banking, project finance, and small and medium-sized enterprises (SMEs) to support diversification and large-scale projects. This continued expansion will help meet the substantial financing needs of major projects and drive growth in Islamic sukuk markets, Islamic fintech, sustainable finance, and structured products.
The share of Islamic banks in total assets of the UAE banking system has remained stable at around 18% over the past five years. The Islamic finance sector benefits from the presence of several large, established Islamic banks with strong customer bases. The UAE’s 2031 Islamic Finance and Halal Industry Strategy is likely to support sector growth.
The agency expects the share of Islamic banks in Qatar’s banking sector to remain stable between 25% and 27% over the next two to three years, due to limited growth opportunities. Asset quality of Islamic banks in Qatar is expected to weaken in 2026 owing to the war in the Middle East, but strong capitalization and shareholder support are anticipated to help absorb potential losses. While reliance on external funding remains relatively limited compared to the system average, both sides of their balance sheets remain heavily concentrated in the public sector.
Islamic banking accounted for approximately 19% of total assets in Oman’s banking sector as of March 31, 2026, after growing by about 200 basis points over the past two years. The sector is concentrated in two integrated Islamic banks, Nizwa Bank and Al Waha Islamic Bank, which together account for more than one-third of Oman’s Islamic banking sector assets. Growth in the Islamic banking sector is expected to continue outpacing that of conventional banks, although it will gradually slow as the sector matures.
In Bahrain, Islamic banks represented nearly 30% of the banking sector, including wholesale banks, and 70% of retail banking assets in the sector as of March 31, 2026. The sector has experienced a wave of mergers and acquisitions in recent years, which are expected to continue improving efficiency. Amid the war in the Middle East, asset quality may come under pressure, but support measures taken by the Central Bank are likely to help contain the situation.
