Saudi Arabia’s Islamic banking sector has continued its growth path, supported by the industry’s central role in financing the Kingdom’s “Vision 2030” program and capital market reforms, noted S&P Global Ratings in a report published this week.
Taking note of Islamic banking’s rise at the global level, the ratings agency also said that the sector represented about 76% of the Gulf major’s banking assets.
From a retail-led model, S&P found Islamic banks expanding into corporate, project finance, and small and midsize enterprises (SMEs) in order to support the ongoing diversification efforts and mega-projects.
“The development of Islamic finance is part of Saudi Arabia’s Vision 2030 objectives and broader capital market reforms, with the country being one of the largest sukuk issuers globally,” S&P said.
“Over the past five years, the combined total assets of the four major Islamic banks more than doubled (2.1 times), outpacing the six largest conventional peers (1.8 times),” it noted further.
S&P also said that since 2018, Islamic banking’s growth in the Gulf nation has been driven primarily by the rapid expansion of Sharia-compliant residential mortgage financing.
“Islamic banks have also increasingly expanded into corporate financing, linked to the development of non-oil sectors, and large-scale government and infrastructure projects,” it added.
“SME financing has also gained traction, supported by the Kafalah guarantee program, with SMEs now accounting for more than 11% of total credit. At year-end 2025, Saudi Islamic banks’ loan books were largely exposed to the retail segment (about 53%), followed by corporates (38%), S&P remarked.
“This large share reflects mainly Al Rajhi’s dominant retail franchise, while peers (in particular Alinma) maintain a more corporate-focused profile,” according to S&P.
While talking about the strong influence Islamic banks having in Saudi’s retail segment, the ratings agency said, “Customer deposits accounted for approximately 87% of Islamic banks’ funding as of March 31, 2026, compared to 82% for conventional banks. Wholesale funding remains contained at about 14%, compared with 21% for conventional banks, despite Islamic banks’ faster expansion.”
Profitability, on the other hand, remains broadly in line with that of conventional peers, based on both types of banks having a return on average assets of about 1.8% at the end of March.
“Islamic banks’ net intermediation margin (NIM) reached about 2.8% at year-end 2025. Concerning asset quality, the rating company said the average nonperforming financing (NPF) ratio across both types of banks was about 0.95% at year-end 2025,” S&P said.
Direct exposure to cyclical real estate and construction is estimated at less than 10% of loans for Islamic banks.
S&P expects Islamic banks, in the coming days, to focus on balancing growth with capital requirements, given tighter funding conditions and the relatively lower availability of Islamic liquidity.