Islamic Banks Set to Outperform Conventional Peers in GCC: Moody’s
Islamic banks in the Gulf Cooperation Council (GCC) are poised to outpace conventional banks in growth, driven by rising demand for Shariah-compliant financial products and the resilience of their profit margins, according to a report by Moody’s Investors Service.
The report highlights that Islamic banks’ fixed-rate retail financing models provide a buffer against fluctuations in US Federal Reserve monetary policy, which helps stabilize their net profit margins. This stability, coupled with growing interest in Shariah-compliant products, is expected to fuel faster expansion for Islamic banks across the GCC.
Moody’s forecasts strong profitability for GCC Islamic banks over the next 12 to 18 months, supported by stable oil prices, ambitious government economic diversification initiatives, and robust business confidence. Saudi Arabia, in particular, is projected to witness significant growth in its non-oil sectors, contributing to the broader expansion of Islamic finance in the region.
In a separate projection, Moody’s anticipates the global sukuk market will see substantial growth in 2024, with issuances expected to reach $200 billion to $210 billion, up from just under $200 billion in 2023. This surge will be largely driven by sovereign issuances in the GCC, with Saudi Arabia leading the charge. The Kingdom saw a 138% increase in sukuk issuance in the first half of 2024, accounting for 37% of the global total.
The report also notes that the asset quality of Islamic banks will remain stable, bolstered by conservative lending practices and a focus on secure, low-risk financing—particularly in government-backed projects. Moderate inflation across the region is expected to further mitigate financing risks. However, Moody’s warns that Saudi banks may encounter rising funding costs as non-interest-bearing deposits struggle to keep pace with growing credit demand.
Saudi Arabia’s significant government expenditure, sustained by steady oil prices, is expected to remain strong over the next 12 to 18 months. As the largest Islamic banking market both in the GCC and globally, Saudi Arabia is well-positioned to benefit from continued business and investor confidence, particularly in its expanding non-oil sectors and in the UAE.
The report also foresees further consolidation in the Islamic banking sector, with smaller banks likely pursuing mergers to enhance profitability and reduce costs. Notable recent mergers include Kuwait Finance House’s acquisition of Ahli United Bank, as well as a proposed merger between Boubyan Bank and Gulf Bank. These consolidations are expected to boost Islamic banking’s market share in the region. Moody’s overall outlook underscores the growing influence of Islamic finance within the GCC, particularly as the region’s economies diversify and demand for Shariah-compliant products continues to rise.
