Fitch: Strong capital buffers fortify Gulf Islamic banks
- Islamic banks in GCC countries have expanded their financing instruments in recent years
- Expansion of liquidity management tools strengthens Islamic banks’ resilience despite regulatory gaps
- 85% of Fitch-rated Islamic banks maintain a stable outlook
Fitch Ratings stated that Sharia-compliant liquidity management tools have seen significant expansion across many major markets over the past decade, enhancing Islamic banks’ ability to meet their financing needs and invest liquidity surpluses. However, the agency confirmed that gaps persist compared to conventional banks, particularly in markets where Islamic banking is still in its early stages.
In a report on liquidity management in Islamic banks, Fitch added that recent geopolitical developments, including the Iran war, have once again highlighted the importance of having effective liquidity management tools and policies as a key element in strengthening Islamic banks’ capacity to withstand volatility and crises.
Fitch noted that many Islamic banks in the Gulf Cooperation Council (GCC) countries have broadened their financing instruments in recent years through certificates of deposit, structured Islamic financing facilities, and special-purpose issuances, alongside growing use of Islamic repurchase agreements (Islamic repos), supported by rising holdings of sovereign sukuk that are now used as eligible collateral for such transactions.
The agency pointed out that approximately 62% of its rated Islamic banks hold an investment-grade rating through the first half of 2026, while about 85% maintain a stable outlook. It emphasized that Islamic banks in GCC countries benefit from strong capital, liquidity, and asset quality buffers, enhancing their ability to withstand the fallout of a prolonged conflict if its scope remains limited.
It noted that the lack of standardization remains one of the key challenges hindering the expansion of the Islamic repo market, highlighting that the International Islamic Financial Market (IIFM), in collaboration with the International Capital Market Association (ICMA), has developed standardized documentation for Islamic repos to help reduce operational costs and Sharia-related complexities. It also mentioned that the First Saudi Bank executed the first Islamic repo transaction using blockchain technology.
The agency explained that most central banks in major markets, including those in the GCC, Malaysia, Turkey, Indonesia, Pakistan, Bangladesh, and Tunisia, have provided Sharia-compliant liquidity facilities. It noted that some GCC central banks have launched support programs and loan payment deferrals since the outbreak of the war, which included Islamic banks. Conversely, such tools remain absent in markets like Morocco, Egypt, and Kazakhstan.
It added that interbank money markets for Islamic banks remain less deep than their conventional counterparts, particularly in countries with a limited number of Islamic banks. Differences in the application of certain Sharia contracts and regulatory constraints contribute to limiting the efficiency of these markets. It noted that Bangladesh plans to launch an interbank Islamic money market to address these challenges.
Regarding sukuk, Fitch said that the expansion of sovereign issuances has provided Islamic banks with greater opportunities to invest liquidity surpluses in high-quality, highly liquid assets, noting that sukuk accounted for around 42% of the debt instruments market in Gulf countries, 59% in Malaysia, 18% in Indonesia, and 8% in Turkey by the end of the first half of 2026, with markets such as Egypt, Bangladesh, and Algeria making progress in this area.
Despite this development, the agency clarified that the shortage of short-term sukuk remains one of the most significant constraints on liquidity management, as sukuk rated by Fitch with maturities within one year account for no more than 3% of total rated sukuk.
Fitch confirmed that liquidity management challenges and financing constraints topped the list of the most prominent challenges facing Islamic financial institutions this year, according to its 2026 survey, warning that limited access to liquidity sources, whether due to shallow markets or regulatory restrictions, could negatively impact the funding and liquidity assessments and self-ratings of Islamic banks, whereas the availability of deep and flexible repo markets and official liquidity sources supports their creditworthiness.
