Saudi Arabia: Islamic financing in the Gulf Cooperation Council is expected to grow faster than conventional banking, according to a report by Moody’s Investors Service.

The report attributes this anticipated growth to rising demand for Shariah-compliant financial products and the inherent stability of Islamic banks’ net profit margins, which are shielded from potential shifts in US Federal Reserve monetary policy due to their fixed-rate retail financing models.

Consequently, GCC Islamic banks are projected to maintain a net profit margin advantage and superior returns on assets compared to conventional banks.

The report indicates that the profitability of Islamic banks in the GCC will remain robust over the next 12 to 18 months, driven by steady oil prices, large-scale economic diversification plans by governments, and strong business confidence. In particular, Saudi Arabia is expected to see pronounced growth in its non-oil sectors.

In a separate forecast, Moody’s predicts strong expansion in the global sukuk market for 2024, with issuance projected to reach $200 to $210 billion, an increase from under $200 billion in 2023. This growth is largely attributed to substantial sovereign issuance within the GCC, with Saudi Arabia leading the surge. The Kingdom saw a 138 percent increase in sukuk issuance in the first half of 2024, representing 37 percent of the global total.

The report also highlights that asset quality for Islamic banks will remain stable, supported by conservative lending practices and a focus on secure, low-risk financing, particularly in government-backed projects. Moderate regional inflation is expected to further reduce financing risks. However, the report notes that Saudi banks might face higher funding costs as non-interest-bearing deposits struggle to keep up with rising credit demand.

Saudi Arabia’s substantial government spending is anticipated to be sustained by oil prices over the next 12 to 18 months. As the largest Islamic banking system in the GCC and globally, Saudi Arabia will benefit from continued business, consumer, and investor confidence in non-oil sectors, particularly in the UAE.