Saudi Arabia's Islamic banking continues to grow, supported by the sector's central role in financing Saudi Arabia's Vision 2030 program and capital market reforms, S&P Global Ratings said in a report published this week, adding that the sector is one of the largest in the world, representing about 76% of the country's banking assets.
From a retail-led model, S&P said Islamic banks have been expanding into corporate, project finance, and small and midsize enterprises (SMEs) to support diversification and mega projects in the past years.
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, the rating company said.
It noted that 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).
S&P also said that since 2018, growth has been driven primarily by the rapid expansion of residential mortgage financing, which is typically Sharia compliant.
“Islamic banks have also increasingly expanded into corporate financing, linked to 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%).
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.
The rating company also showed that Islamic banks benefit from a strong foothold in the retail segment, supporting a robust deposit base.
“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,” it said in the report.
Meanwhile, profitability 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,” S&P said.
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.
Also, it said, direct exposure to cyclical real estate and construction is estimated at less than 10% of loans for Islamic banks.
In the future, S&P expected Islamic banks to focus on balancing growth with capital requirements, given tighter funding conditions and the relatively lower availability of Islamic liquidity.
