The net profitability of Islamic banks in the GCC will remain strong and exceed their conventional peers in 2025 , keeping their margin advantage even in a lower interest rate environment, Moody's said in a new report.

"Now that interest rates are coming down, Islamic banks in Saudi Arabia are well-positioned to regain their margin advantage," the rating agency said, expecting the US Federal Reserve to cut rates by 50-75 basis points this year.

The retail-skewed portfolios of Islamic banks, particularly in Shariah-compliant mortgages, will benefit from lower funding costs while maintaining stable asset yields, positioning them for stronger performance relative to their conventional peers in the coming year.

"We expect GCC Islamic banks' provisions to remain low this year, supported by operating conditions and ample loan-loss reserves," Abdulla AlHammadi, AVP-Analyst, wrote in the report.

According to Moody's, Saudi Arabia has remained the largest and fastest-growing Islamic banking market, supported by Vision 2030 initiatives and a government push for higher home ownership.

Islamic banks have also gained market share in the UAE, Qatar and Kuwait through organic expansion and mergers. 

In several markets, Islamic banks accounted for more than 40% of the total system financing as of March 2025, the report said.

Demand for Shariah-compliant products has remained strong, despite an uncertain global environment, the rating agency said, adding it expects the positive momentum to continue.

(Editing by Brinda Darasha; brinda.darasha@lseg.com)