https://arab.news/v8j42
RIYADH: Against the backdrop of Gulf Cooperation Council countries’ economic diversification efforts, Islamic banks are poised to outperform their conventional counterparts in profit margins, as per a recent report by Moody’s Investors Service.
Fueled by stable oil prices and steadfast economic agendas, increased business activities within Islamic financial institutions over the next 12 to 18 months are anticipated in the GCC region.
In its latest report, the global credit rating agency forecast that the profitability margins of these Shariah-compliant banks will surpass those of traditional outfits in 2024, largely attributed to their inherent margin advantage.
As the regional economy expands, the asset quality of GCC Islamic banks is expected to remain robust.
Additionally, their strong capital and liquidity positions will better equip them to meet the growing regional demand for Islamic banking services, as outlined in the report.
The stable asset quality is set to be supported by the Islamic banks’ focus on household financing, which is expected to remain strong. Moreover, a large proportion of the banks’ activity is in the retail sector, which is likely to continue with a steady performance.
“While Islamic banks focus mainly on the retail market, corporate financing remains a significant component of their credit exposure, including to the historically cyclical and confidence-sensitive construction, contracting and real estate sectors,” the report added.
The review stated that Saudi Arabia is set to maintain its dominant position in market penetration while highlighting significant growth potential in other regions.
Elevated oil prices are rendering valuable ripple effects across the GCC region, resulting in consistent government spending, especially in the Kingdom.
This will lead to a surge in confidence among businesses, consumers, and investors in non-oil sectors, such as in the UAE, where banks primarily lend, the report indicated.
Meanwhile, Moody’s predicts that inflation across GCC banking markets will remain relative to advanced economies, primarily driven by the substantial subsidies governments provide.
“As of March 2023, the market penetration of Islamic banks in Saudi Arabia, which is 83 percent, and Bahrain, 69 percent, were the highest in the region, while room for growth is more significant in the UAE, with a penetration rate of 28 percent, Qatar, 31 percent, and Oman, 19 percent,” the report stated.