Saudi Islamic banking percentage hits 76 % as UAE objectives over $697 billion by means of 2031 amid Gulf resilience
Gulf Islamic banks stay resilient as solid deposits and capital buffers offset slower expansion and regional disruption
Islamic banking continues to extend around the Gulf Cooperation Council, even supposing expansion possibilities range significantly as regional war, investment constraints, actual property publicity and marketplace adulthood form the outlook in every nation.
A sequence of nation checks by means of S&P World Rankings confirmed that Saudi Arabia stays the area’s dominant Islamic banking marketplace, with Sharia-compliant property representing about 76 % of the rustic’s overall banking property.
Islamic banks account for about 51 % of Kuwait’s banking sector, 27 % in Qatar, 19 % in Oman and 18 % within the UAE. In Bahrain, Islamic banks constitute just about 30 % of all the banking {industry}, together with wholesale establishments, and roughly 70 % of retail banking property.
Saudi Arabia and the UAE be offering probably the most most powerful growth possibilities, supported by means of nationwide building methods, massive funding programmes and regulatory reforms. Qatar faces extra restricted expansion, whilst consolidation is reshaping Bahrain, Kuwait and probably Oman.
Saudi marketplace dominates
Saudi Arabia’s Islamic banking {industry} is one of the global’s biggest and has expanded past its conventional retail focal point into company lending, mission finance and financing for small and midsize enterprises.
The field’s building is intently attached to Imaginative and prescient 2030, broader capital-market reforms and the financing necessities of monetary diversification and main infrastructure initiatives.
Islamic finance dominates the Saudi monetary method. Along with the 4 main Islamic banks—Al Rajhi Financial institution, Alinma Financial institution, Financial institution Albilad and AlJazira Financial institution—standard lenders most often be offering Sharia-compliant merchandise.
On the finish of 2025, Islamic financing represented 83 % of Saudi Nationwide Financial institution’s mortgage ebook and 62 % of Riyad Financial institution’s lending portfolio.
The 4 main Islamic banks greater than doubled their mixed property over the 5 years thru 2025, expanding them by means of 2.1 instances. That exceeded the 1.8-times growth recorded by means of the six biggest standard banks.
Mortgages pressure growth
Residential mortgages had been a significant expansion engine since 2018 as a result of housing finance in Saudi Arabia is typically structured based on Sharia rules.
Islamic banks have concurrently expanded into company financing connected to non-oil industries, govt tasks and main infrastructure initiatives.
SME financing has received momentum with make stronger from the Kafalah credit-guarantee programme. SMEs now account for greater than 11 % of overall credits in Saudi Arabia.
Retail shoppers represented roughly 53 % of Islamic banks’ mortgage books on the finish of 2025, whilst company debtors accounted for 38 %. The retail focus basically displays Al Rajhi Financial institution’s massive shopper franchise, whilst Alinma and a few different establishments care for a more potent company focal point.
Buyer deposits represented roughly 87 % of Islamic banks’ investment at March 31, 2026, when compared with 82 % for standard banks. Wholesale investment accounted for approximately 14 %, under the 21 % recorded by means of standard competition.
Saudi investment tightens
Islamic banks diminished their reliance on wholesale investment after the Center East war started, whilst home deposit expansion sped up, in particular amongst public-sector entities. Interbank investment additionally changed into costlier.
Liquid property represented 15.2 % of Islamic banks’ overall property at March 31, when compared with 17.7 % for standard banks. The adaptation displays the restricted availability of Sharia-compliant liquidity tools and lending expansion that has outpaced the buildup of liquid property.
Islamic banks nonetheless held extra money and central-bank balances, similar to nearly 5 % of property, when compared with 3.7 % for standard establishments.
Profitability was once extensively similar, with each segments recording returns on reasonable property of roughly 1.8 % at March 31. Islamic banks’ web intermediation margin reached about 2.8 % on the finish of 2025 however had narrowed on account of better reliance on costlier time period deposits and wholesale investment.
Running potency typically remained weaker than at standard banks, with Al Rajhi representing the foremost exception on account of its scale.
Credit score high quality holds
The typical nonperforming financing ratio for Saudi Islamic banks and the nonperforming mortgage ratio for standard establishments each stood at roughly 0.95 % on the finish of 2025.
Islamic banks’ direct publicity to actual property and development was once under 10 % of lending, when compared with a banking-industry reasonable of 16 %. Oblique publicity thru residential mortgages remained really extensive, however wage assignments and solid employment amongst Saudi debtors diminished the related dangers.
Al Rajhi held $280.1 billion in property at March 31, 2026, representing 21.3 % of overall Saudi banking property and 28.1 % of Islamic property. Alinma had $86.4 billion, Financial institution Albilad $48 billion and AlJazira $46.1 billion.
S&P expects persisted growth as Islamic banks finance Imaginative and prescient 2030 and get pleasure from sukuk issuance, funding banking, Islamic fintech, sustainable finance and structured merchandise.
Alternatively, banks will have to stability expansion with capital necessities, tighter investment and restricted Islamic liquidity. Loan focus and housing affordability additionally depart the field delicate to rates of interest and actual property provide and insist.
UAE industry resilient
Islamic banks within the UAE held AED989 billion in property at April 30, 2026, similar to roughly 18 % of the rustic’s banking method.
Their marketplace percentage has remained extensively solid over the last 5 years. The field contains 9 stand-alone Islamic banks, 15 Islamic home windows operated by means of standard establishments and 9 Islamic finance corporations.
Islamic banks’ financing books have expanded sooner than standard mortgage portfolios. Their percentage of overall banking-system financing as a result greater to 23.4 % in April 2026 from 21.4 % on the finish of 2021.
Their percentage of systemwide deposits edged as much as 21.5 % from 21.2 % all the way through the similar length.
Asset high quality remained extensively similar. Level 3 financing on the 4 biggest Islamic banks represented 2.7 % in their portfolios at March 31, handiest relatively above the two.5 % reported by means of the six biggest standard banks.
Direct financing focus
Islamic banks care for a significantly upper focus in direct financing, which represented roughly 64 % in their property at April 30. Financing accounted for handiest 45 % of standard banks’ property.
The adaptation displays the restricted vary of Sharia-compliant liquidity-management tools and the smaller dimension and liquidity of the sukuk marketplace.
The use of extra in their stability sheets for direct financing permits Islamic banks to generate upper profitability than standard competition. Alternatively, it additionally makes their profits extra delicate to adjustments within the running setting.
Their publicity to actual property remained extensively similar with standard friends.
Buyer deposits supplied roughly 83 % of Islamic banks’ overall liabilities at April 30, when compared with 67 % at standard banks. This construction improves investment steadiness and decreases refinancing dangers all the way through unstable sessions, together with the regional war.
Capital adequacy remained conveniently above minimal regulatory necessities, even supposing Islamic banks’ ratios have been less than the ones of standard establishments.
Technique objectives AED2.56 trillion
The Central Financial institution of the UAE has now not officially carried out the Accounting and Auditing Group for Islamic Monetary Establishments’ alpha-factor framework. S&P considers that method prudent since the company does now not be expecting Islamic banks to switch losses to depositors all the way through a monetary surprise.
The Center East war is predicted to gradual UAE Islamic banking task in 2026, however medium-term expansion possibilities stay sure.
The Nationwide Technique for Islamic Finance, introduced in Would possibly 2025, objectives to greater than double Islamic banking property to AED2.56 trillion (697.1 billion) by means of 2031.
Its primary targets come with harmonizing regulatory frameworks between the central financial institution and the Upper Sharia Authority, strengthening governance consistency and accelerating digital-first Islamic finance. The UAE’s retail sukuk initiative demonstrates how generation can open new expansion channels.
Dubai Islamic Financial institution held AED419.916 billion in property at March 31, representing 8.4 % of systemwide property. Abu Dhabi Islamic Financial institution held AED287.065 billion, Emirates Islamic AED149.442 billion and Sharjah Islamic Financial institution AED90.867 billion.
Qatar expansion restricted
Islamic banks in Qatar represented roughly 27 % of business banking property on the finish of the primary quarter of 2026, an build up of about 10 % from the tip of 2021.
S&P expects their marketplace percentage to stay between 25 % and 27 % over the following two to 3 years on account of restricted expansion alternatives.
Qatar Nationwide Financial institution dominates the wider banking sector and holds greater than 60 % of overall method property, proscribing the scope for different establishments to achieve really extensive marketplace percentage.
Islamic financing expansion is predicted to reasonable in 2026 because the regional war impacts Qatar’s financial system. The slowdown in liquefied herbal gasoline manufacturing and weaker financing call for from actual property, hospitality, business and industrial products and services are anticipated to limit growth.
Actual property accounts for between 20 % and 25 % of Islamic banks’ financing, averaging 23 % on the finish of the primary quarter. The field faces decrease costs and rents on account of extra capability.
Solid deposit investment
Qatar’s Islamic banks stay strongly capitalized and exceed each Qatar Central Financial institution necessities and Basel III requirements.
Deposits supplied about 80 % in their overall investment on the finish of 2025. This was once similar with Qatar Nationwide Financial institution however significantly upper than the 55 % to 60 % recorded by means of midsize standard establishments.
Nonresident deposits represented not up to 10 % of Islamic banks’ visitor deposits, when compared with roughly 19 % to twenty % around the banking method. Their focal point on public-sector deposits and decrease reliance on exterior investment have advanced steadiness all the way through the geopolitical disruption.
Focus in cyclical sectors stays an important threat. Level 2 financing represented roughly 13 % of Islamic portfolios all the way through the primary quarter of 2026.
Asset high quality was once nonetheless relatively more potent than at standard friends, with modestly decrease nonperforming financing ratios and better provisioning. Qatar Islamic Financial institution was once the primary contributor to this benefit, whilst midsize Islamic lenders exhibited weaker credits high quality.
Qatar profitability moderates
S&P expects the typical nonperforming financing ratio at Qatar’s 4 main Islamic banks to upward thrust to between 3.8 % and four % in 2026 from 3.5 % on the finish of 2025.
Precautionary provisions accrued all the way through earlier years, along side recoveries and write-offs, will have to lend a hand stabilize asset-quality signs.
Islamic banks have decrease cost-to-income ratios than standard competition on account of sturdy margins and running potency. Profitability will most likely weaken relatively in 2026 as financing expansion slows and the financial system probably contracts.
Impairment losses and tax bills are anticipated to extend. Upper tax prices replicate international laws requiring massive multinational corporations to pay a minimal degree of tax in each and every jurisdiction the place they perform.
Qatar amended its Islamic Banking Industry Prudential Regulations in 2024 to enhance alignment with Islamic Monetary Services and products Board requirements and portions of Basel III.
Sharia laws decentralized
Qatar operates a decentralized Sharia-governance framework. Person establishments can practice their very own supervisory forums quite than being required to watch each and every usual issued by means of a central Sharia board.
The method supplies flexibility however may just produce other interpretations of Sharia necessities between banks.
Qatar Central Financial institution’s partnership with the Global Islamic Liquidity Control Company advanced get entry to to top of the range Sharia-compliant liquid property. Its treasury sukuk programme, presented in 2022, additionally diverse investment and bolstered momentary liquidity leadership.
Contemporary Islamic banking growth in large part resulted from two mergers. Barwa Financial institution and Global Financial institution of Qatar mixed in 2019 to create Dukhan Financial institution, whilst Al Rayan Financial institution merged with Al Khalij Business Financial institution in 2021.
S&P considers further mergers between Islamic and traditional establishments not likely over the following two years.
Qatar Islamic Financial institution held $61.5 billion in property within the first quarter, adopted by means of AlRayan Financial institution with $48.1 billion, Dukhan Financial institution with $34.7 billion and Qatar Global Islamic Financial institution with $17 billion.
Kuwait holds part
Kuwait’s 4 absolutely fledged Islamic banks held KWD53 billion, or roughly $172 billion, in mixed property at Would possibly 31, 2026.
Kuwait Finance Area, Boubyan Financial institution, Kuwait Global Financial institution and Warba Financial institution represented 51 % of banking-system property, making Kuwait some of the few markets the place Islamic and traditional establishments compete on extensively equivalent phrases.
Islamic banks have expanded sooner over the last six years. Their percentage of overall banking property greater to 51 % from 46 % in 2020, whilst their percentage of home credits climbed to 53 % from 48 %.
Asset high quality remained similar with standard banks as a result of each segments face the similar prerequisites, together with oil-price actions, govt spending, geopolitical trends and actual property tendencies. They’re additionally topic to an identical prudential, provisioning, underwriting and credit-classification necessities.
Actual property and development represented roughly 28 % of Islamic financing on the finish of 2025, when compared with 21 % for standard banks.
Kuwait profitability leads
Some Islamic actual property transactions are disconnected from the underlying belongings sector’s efficiency since the belongings serves basically as an asset required to verify Sharia compliance.
Islamic banks typically generate upper profitability than standard friends, supported by means of more potent financing margins, managed prices and balance-sheet expansion.
They allocate a bigger share of incomes property to visitor financing. Typical banks grasp extra funding securities, interbank placements and company loans, which most often generate decrease returns.
The profitability hole widened after 2024, basically on account of Kuwait Finance Area. Its Turkish industry supported web financing margins, whilst its acquisition of Ahli United Financial institution Kuwait created charge efficiencies.
The traditionally restricted availability of home Islamic liquidity-management tools, govt sukuk and central-bank sukuk additionally influenced Islamic banks’ balance-sheet composition.
Resident deposits represented roughly 67 % in their liabilities at Would possibly 31, when compared with 62 % at standard banks. International liabilities accounted for 14 %, when compared with 26 % at standard establishments.
Pageant intensifies forward
Kuwait applies extensively constant capital, liquidity, governance and risk-management laws throughout Islamic and traditional banks. Islamic establishments are moreover topic to law masking Sharia compliance and interior Sharia supervisory forums.
The rustic does now not supply preferential regulatory capital remedy for transactions funded thru profit-sharing funding accounts. S&P considers this prudent as a result of sharing losses with depositors may just cause liquidity drive.
Islamic banking expansion is predicted to gradual in 2026 earlier than getting better in 2027. Pageant will stay intense following Kuwait Finance Area’s acquisition of Ahli United Financial institution Kuwait.
Smaller lenders are anticipated to be aware of generation, visitor revel in and specialised financing to give protection to their positions. Geographic and sector focus stay vital, however sturdy capitalization, solid investment and sound asset high quality make stronger resilience.
Kuwait Finance Area held KWD43.555 billion in property at March 31, similar to 33 % of the property of Kuwait’s 9 biggest banks. Boubyan held KWD10.358 billion, Warba KWD6.13 billion and Kuwait Global Financial institution KWD4.571 billion.
Oman expansion continues
Islamic banking in Oman represented roughly 19 % of banking-system property on the finish of 2025, an build up of more or less 200 foundation issues over two years.
The field incorporates Financial institution Nizwa, Alizz Islamic Financial institution and 5 Islamic home windows operated by means of standard banks.
Islamic property reached $25 billion on the finish of 2025. The field’s stocks of deposits and credits have been relatively upper at 22 % as a result of Islamic establishments care for smaller securities portfolios.
Company financing represented 63 % of gross financing on the two stand-alone Islamic banks, whilst retail shoppers accounted for 37 %, down from 42 % in 2020.
Company financing grew at a compound annual price of 12 % between 2020 and 2025, when compared with 8 % for retail financing. Enlargement in non-oil industries and traditional banks’ established retail franchises supported this shift.
Oman credits dangers upward thrust
Islamic banks’ nonperforming financing ratio greater from 2.3 % in 2020 to a few.6 % on the finish of 2025 and four.2 % in March 2026.
The ratio is shifting towards the 4.6 % recorded by means of standard banks all the way through the primary quarter as Islamic portfolios mature. Level 2 financing could also be upper than at standard competition and features a really extensive percentage of restructured exposures.
S&P expects Islamic banks’ asset high quality to method the {industry} reasonable over the medium time period. Actual property and development account for about 12 % in their portfolios, a share that has remained solid in spite of company expansion in buying and selling and production.
Islamic banks recorded a go back on reasonable property of 0.9 % and go back on reasonable fairness of seven.4 % in 2025. Typical banks produced 1.2 % and eight.3 %, respectively.
Islamic establishments’ cost-to-income ratio was once roughly 50 %, when compared with 44 % for standard banks, reflecting weaker economies of scale.
Merger may just enhance scale
Financial institution Nizwa’s proposed acquisition of Alizz Islamic Financial institution may just create a countrywide Islamic banking chief with higher running potency and profitability.
The mixed establishment would nonetheless stay rather small, with a marketplace percentage under 7 %.
Islamic banks’ reasonable Tier 1 capital ratio stood at 15.1 % in 2025, roughly 210 foundation issues under standard banks however conveniently above regulatory necessities.
Buyer deposits supplied 98 % of Islamic banks’ investment, when compared with 91 % at standard establishments. This is one of the absolute best deposit-funding stocks within the area.
The 2025 Banking Legislation broadened the monetary actions that the Central Financial institution of Oman might license beneath Sharia rules, together with products and services presented by means of finance and leasing corporations.
The central financial institution’s advent of Islamic liquidity-management tools on the finish of 2025 will have to enhance get entry to to liquidity and cut back Islamic banks’ aggressive drawback.
Govt measures make stronger
Oman’s Islamic derivatives marketplace stays at an early level, whilst the restricted home sukuk marketplace restricts funding choices.
Asset-quality deterioration represents the primary threat as financing portfolios mature. The regional war may just additionally weaken actual property, development and hospitality.
S&P expects the affect to be much less critical than in other places as a result of Oman’s geographical place lets in oil and different exports to proceed with out the use of the Strait of Hormuz.
Pageant from Islamic home windows operated by means of higher standard banks will position drive on stand-alone establishments. Alternatively, capital buffers, solid investment and one hundred pc nonperforming-financing protection make stronger resilience.
Financial institution Nizwa held $5.3 billion in property at March 31, similar to a few.9 % of Oman’s banking method and 21 % of Islamic property. Alizz held $3.9 billion, representing 2.9 % of method property and 15.5 % of the Islamic phase.
Bahrain consolidation advances
Bahrain’s Islamic banking sector incorporates six retail banks, 3 wholesale establishments and Islamic operations inside of a number of standard retail banks.
Islamic retail banks held $70.3 billion in property at March 31, 2026, representing roughly 70 % of overall retail banking property.
Islamic property grew by means of a median of between 9 % and 10 % every year over the last 5 years, exceeding the 5 % to six % expansion recorded by means of standard retail banks.
Consolidation has remodeled the marketplace. Kuwait Finance Area received Ahli United Financial institution in 2024, transformed it to Islamic banking and rebranded it as KFH Bahrain, the rustic’s biggest retail lender.
Al Salam Financial institution received Ithmaar Financial institution’s retail property in 2022 and the carved-out property of KFH’s earlier Bahraini subsidiary in 2024.
KFH Bahrain and Al Salam now regulate roughly 80 % of Bahrain’s Islamic retail marketplace.
Potency improves returns
Each Islamic and traditional retail banks generated sturdy profits in 2025, even supposing standard establishments have traditionally produced extra solid and more potent effects.
Islamic banks’ reasonable go back on property was once 0.9 % over the last 5 years earlier than making improvements to to at least one.2 % in 2025. Their extra diverse revenue and making improvements to charge potency contributed to the rise.
S&P expects returns at Islamic and traditional banks to converge as consolidation will increase the dimensions of Islamic establishments.
The 2 segments care for an identical asset constructions. Lending typically represents between 45 % and 50 % of property, whilst funding securities account for between 25 % and 30 %.
Islamic banks depend considerably on visitor deposits, together with Wakala and Mudaraba profit-sharing funding accounts. Exposures funded by means of those accounts obtain beneficial regulatory remedy as a result of their threat weights are diminished to replicate their theoretical capability to take in losses.
This remedy contributes to raised reported capital adequacy ratios for Islamic banks.
Asset high quality careworn
S&P does now not make the similar adjustment in its capital research on account of uncertainty over whether or not Islamic banks may just switch losses to shoppers with out growing critical liquidity drive.
Islamic and traditional retail banks typically care for balanced publicity to shoppers, firms and SMEs. KFH Bahrain is an exception, with company and SME shoppers representing roughly 80 % of web financing.
Maximum of the ones exposures are out of doors Bahrain, which accounts for handiest about 10 % of KFH Bahrain’s financing portfolio.
Mortgages represented roughly 28 % of Islamic retail financing all the way through the primary quarter, whilst development and industrial actual property contributed every other 13 %.
Those sectors had been main assets of nonperforming financing and stay delicate to weaker financial task.
Islamic banks have traditionally recorded upper nonperforming financing and credits prices than standard competition. Their nonperforming financing is predicted to extend in 2026, even supposing central-bank measures will have to stay deterioration manageable.
Central financial institution responds
Fiscal tightening and the regional war are anticipated to gradual Islamic and traditional banking expansion all the way through 2026.
The Central Financial institution of Bahrain presented a make stronger package deal that incorporated three-month loan-payment deferrals for people and firms and 6 months of limitless liquidity thru a repurchase facility when required.
The central financial institution additionally diminished reserve necessities to a few.5 % from 5 % and eased different investment and liquidity laws.
Exterior investment remained solid all the way through the war however continues to constitute a vulnerability for Bahrain’s retail banks.
The rustic’s Islamic finance ecosystem stays supported by means of law and specialist establishments. The central financial institution presented Islamic liquidity home windows in past due 2024 to replicate amenities to be had to standard banks.
Bahrain could also be house to the Accounting and Auditing Group for Islamic Monetary Establishments and different our bodies that give a contribution to the improvement of global Islamic finance requirements.
KFH Bahrain held $28.376 billion in property within the first quarter, adopted by means of Al Salam with $22.545 billion, Ithmaar with $7.418 billion, Bahrain Islamic Financial institution with $4.663 billion, Khaleeji Financial institution with $4.555 billion and Al Baraka Islamic Financial institution with $2.765 billion.
Regional expansion slows
The six checks shape a part of S&P World Rankings’ broader Islamic Finance 2026–2027 file, which warned that geopolitical disruption and weaker financial prerequisites would gradual {industry} growth in 2026.
World Islamic finance property grew 10.2 % in 2025. Islamic banking accounted for about 74 % of the {industry}’s expansion, when compared with 54 % in 2024, whilst Gulf markets generated about two-thirds of the rise in banking property.
Saudi Arabia and the UAE have been the primary participants, supported by means of credits expansion, govt building programmes and big financing necessities.
The outlook is dependent closely at the length of regional instability, power exports, oil costs, govt spending and the facility of banks to care for investment and liquidity. S&P expects Islamic finance expansion to get better regularly in 2027 if geopolitical tensions ease and international business and effort flows normalize.
Requirements form building
The Islamic Monetary Services and products Board develops prudential requirements masking capital adequacy, threat leadership, liquidity and supervision for establishments providing Islamic monetary products and services.
Its paintings is especially related as Gulf regulators search to align Sharia-compliant banking with Basel necessities whilst accounting for contractual constructions that range from standard finance.
The Accounting and Auditing Group for Islamic Monetary Establishments develops accounting, auditing, governance, ethics and Sharia requirements utilized by Islamic monetary establishments the world over.
Variations in nationwide adoption stay vital. Qatar lets in decentralized Sharia supervision, the UAE maintains a central Upper Sharia Authority and Kuwait calls for interior Sharia forums beneath devoted law.
The remedy of profit-sharing funding accounts additionally varies. Bahrain supplies beneficial regulatory remedy, whilst Kuwait does now not and the UAE has now not officially followed the AAOIFI alpha component.
Those variations affect reported capital ratios, risk-weighted property and the comparison of establishments around the GCC.
Generation broadens get entry to
Digitalization is changing into a central aggressive component as smaller Islamic banks search to give protection to their marketplace stocks towards higher establishments.
Saudi Arabia’s fintech growth, the UAE’s digital-first nationwide technique, Kuwait’s emphasis on visitor revel in and Oman’s regulatory reforms all create alternatives to develop get entry to to Sharia-compliant merchandise.
Retail sukuk platforms can deliver capital-market merchandise to person buyers, whilst electronic onboarding and cell banking can cut back customer-acquisition and servicing prices.
Structured sukuk, sustainable finance and Sharia-compliant liquidity tools may just additionally diversify investment and income past conventional shopper and company financing.
Alternatively, the field’s persisted growth relies on addressing chronic constraints, together with restricted sukuk-market liquidity, the early building of Islamic derivatives and a narrower vary of tools to be had for managing momentary liquidity.
Around the six markets, solid deposits and robust capital supply really extensive coverage. The principle check will probably be keeping the ones strengths whilst financing nationwide building plans and managing the credits penalties of slower expansion and regional disruption.
