RIYADH: Islamic banks account for about 76 percent of the sector’s assets in Saudi Arabia, with Vision 2030 driving growth in corporate finance, infrastructure and small-business funding, a new analysis showed.
In its latest report, S&P Global Ratings said the Kingdom has one of the world’s largest Islamic banking systems, with growth supported by market reforms and the financing needs of its economic diversification program.
The Saudi trend mirrors a global Islamic finance boom, with worldwide assets climbing roughly 15 percent year on year to about $5.2 trillion in 2025 and projected to exceed $6 trillion by the end of 2026, according to AlHuda Center of Islamic Banking and Economics.
In the report, S&P Global stated: “Islamic banking in Saudi Arabia is well positioned for continued expansion. This will be supported by the sector’s central role in financing Saudi Arabia’s Vision 2030 program and the economy’s sustained funding needs, despite recent reprioritization of public projects and potential impacts of the Middle East war.”
Over the past five years, the combined assets of the Kingdom’s four largest Islamic lenders — Al Rajhi Bank, Alinma Bank, Bank Albilad and Bank AlJazira — have more than doubled, growing 2.1 times compared with 1.8 times for the six largest conventional peers, the report noted.
Even conventional lenders have increasingly adopted Islamic finance, with Shariah-compliant financing accounting for 83 percent of Saudi National Bank’s loan book and 62 percent of Riyad Bank’s at the end of 2025.
Lending mix shifts beyond retail
Growth since 2018 has been driven primarily by residential mortgage financing, alongside a push into corporate lending tied to non-oil diversification and infrastructure projects.
“SME financing has also gained traction, supported by the Kafalah guarantee program, with SMEs now accounting for more than 11 percent of total credit,” the report noted.
Retail still dominates, accounting for about 53 percent of Islamic banks’ loan books, followed by corporates at 38 percent, largely due to Al Rajhi’s dominant retail franchise, while peers such as Alinma maintain a more corporate-focused profile.
Funding and liquidity
Customer deposits accounted for about 87 percent of Islamic banks’ funding as of March, compared with 82 percent for conventional banks, while wholesale funding stood at roughly 14 percent.
That reliance on customer deposits has increased since the Middle East war began, as interbank funding became more expensive and banks reduced their dependence on wholesale funding.
Liquidity remains tighter at Islamic banks, with liquid assets accounting for 15.2 percent of total assets versus 17.7 percent at conventional lenders. However, Islamic banks typically maintain higher cash balances with the central bank, helping offset the limited availability of Shariah-compliant liquid investment instruments.
Profitability and asset quality
Both banking models posted a return on average assets of about 1.8 percent as of March, while Islamic banks’ net intermediation margin narrowed to about 2.8 percent at the end of 2025 because of greater reliance on costlier term deposits and wholesale funding.
“The average nonperforming financing ratio across both types of banks was about 0.95 percent at year-end 2025,” S&P said. The agency also noted that Islamic banks’ direct exposure to cyclical real estate and construction sectors is estimated at less than 10 percent of loans, below the banking industry average of 16 percent.
Outlook
S&P expects future growth to increasingly come from capital markets, as sukuk issuance, Islamic fintech, sustainable finance and structured products create new revenue streams.
The report said Islamic banks remain well positioned to support Vision 2030 projects but cautioned that the sector’s heavy exposure to residential mortgages means lenders will need to balance future growth with capital requirements and tighter funding conditions.
