Moody’s: GCC Islamic banks to continue outpacing conventional peers

GCC Islamic banks are expected to continue expanding faster than conventional banks, backed by strong demand for Shariah-compliant financing and higher public-sector exposure across their retail and corporate portfolios, which supports loan quality, Moody’s Ratings said.

Islamic banks’ structural strengths will continue to underpin stronger credit metrics than those of conventional peers, despite a more challenging operating environment.

Islamic banks may also outperform in terms of profitability, supported by structurally higher margins and lower credit costs. Funding and liquidity remain underpinned by a strong retail deposit base and continued access to the sukuk market.

Although Shariah-compliant liquidity management options remain limited, liquidity is generally ample, while Islamic banks have stronger funding profiles than comparable conventional banks.

Moody’s noted that the closure of the Strait of Hormuz continues to disrupt exports and regional supply chains. Non-oil economic growth is likely to slow in 2026, particularly in tourism, real estate, construction and logistics, sectors that are sensitive to confidence and reliant on trade connectivity.

GCC Islamic banks retain substantial capacity to absorb a decline in loan quality alongside balance-sheet growth, supported by strong earnings retention and continued market access through recent Additional Tier 1 (AT1) sukuk issuances.