Kuwait’s Islamic banking market share surpasses regional rivals
• Fitch, the credit rating agency, forecasted that Islamic banks in the Europe, Middle East, and Africa region would maintain strong liquidity, adequate capital reserves, and stable asset quality and stated that the outlook for these banks in 2025 is ‘neutral.’
Fitch, the credit rating agency, forecasted that Islamic banks in the Europe, Middle East, and Africa (EMEA) region would maintain strong liquidity, adequate capitalreserves, and stable asset quality. The agency stated that the outlook for these banks in 2025 is ‘neutral,’ according to Al Rai newspaper.
The agency expects continued healthy profitability despite low interest rates, which will remain restricted in most markets, such as the main Islamic banking markets in the Gulf, where it anticipates further cuts of 125 basis points to 3.5 percent by the end of 2025.
While lower oil prices (which Fitch’s fund expects to be $70 per barrel in 2025) may impact these key markets, stronger financing growth, particularly in non-oil sectors, would help mitigate this effect.
The agency highlighted that two-thirds of the default ratings assigned by Fitch to Islamic banks in the EMEA region are investment grade. It revealed that 59 percent of these ratings are primarily based on sovereign support, 25 percent are driven by the banks’ independent creditworthiness, as reflected in their viable ratings (VRs), and 16 percent are supported by shareholders.
Fitch also explained that upgrades since 2019 have been mainly due to improved sovereign capacity to support banks, while downgrades from 2019 to 2023 are largely attributed to weakened sovereign support for banks.
More mergers among Islamic banks
Fitch expects more mergers among Islamic banks, particularly smaller ones with weaker market positions, higher costs, and insufficient capital. This merger and acquisition activity may lead to the rise of regional banking giants, as seen in the recent acquisition of Al Ahli United Bank by Kuwait Finance House. A possible merger between Boubyan Bank and Gulf Bank would create a large Islamic bank with assets of about $53 billion and a market share of 15 percent.
Strength of Kuwait’s Islamic banks
Fitch recently confirmed in a report the strength of Islamic banks in Kuwait during the first half of 2024, thanks to a favorable work environment and high interest rates.
The agency noted that these banks have a strong presence in the Kuwaiti market, holding a large share of total banking assets, with a wide customer base and a high profit margin compared to their traditional counterparts. However, the report also indicated a slight increase in the percentage of non-performing financing, reflecting the sector’s vulnerability to higher interest rates and slowing economic growth.
In its report on Islamic banks in Kuwait, Fitch pointed out that the average percentage of non-performing financing rose slightly to 2 percent (48 basis points higher than traditional banks) by the end of the first half of 2024, reflecting some pressures from high interest rates and slower financing growth.
Assets of Islamic banks remain stable
Fitch expects the quality of Islamic banks’ assets to remain stable in 2024-2025, although exposure to the relatively high real estate sector continues to pose a significant risk to asset quality.
According to data from the end of fiscal year 2023, Kuwait held the second-highest market share in Islamic banking, after Saudi Arabia, surpassing markets such as the United Arab Emirates, Bahrain, Turkey, Jordan, and Qatar.
