Middle East Banks Face Neutral Outlook for 2025

TDT | Manama

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The outlook for Middle Eastern banks in 2025 is classified as "neutral," according to Fitch Ratings' latest report, Middle East Banks Outlook 2025. The assessment reflects expectations of stable economic conditions and resilient financial metrics across the region.

Fitch projects that credit growth will see an upswing in 2025, bolstered by sustained high oil prices and reasonable non-oil sector growth. This balanced growth is expected to provide a stable environment for the banking sector.

The report highlights that around two-thirds of the Issuer Default Ratings (IDRs) for Middle Eastern banks are at investment-grade levels, driven largely by sovereign support (63%). Only 33% of these ratings are based on the banks’ standalone creditworthiness, as indicated by their Viability Ratings (VRs), while a marginal 4% depend on potential shareholder support. Fitch also notes a wide distribution in IDRs, ranging from ‘AA-’ to ‘CCC,’ with the lowest ratings concentrated in Iraq. This disparity is attributed to the wide sovereign rating spectrum in the region, reflecting varied economic and political conditions among Middle Eastern countries.

Outlook for Islamic Banking

Meanwhile, Fitch Ratings also maintains a neutral sector outlook for Islamic banks in the Europe, Middle East, and Africa (EMEA) region for 2025, as detailed in their EMEA Islamic Banks Outlook 2025. The report cites continued solid economic conditions as a key driver. Islamic banks in the region are expected to maintain solid liquidity, adequate capital buffers, and stable asset quality, with sound profitability continuing despite lower rates that will remain restrictive in many markets.

Two-thirds of Fitch-rated Islamic banks in EMEA have investment-grade IDRs, with 59% driven by potential sovereign support. A further 25% of IDRs are based on standalone creditworthiness, while 16% reflect shareholder support. Similar to conventional banks, the IDRs range widely from ‘A+’ to ‘CCC,’ with the lowest ratings again seen in Iraq. This reflects the broader sovereign rating distribution across the region.

Fitch anticipates that Islamic banks’ market shares will continue to grow in established markets, supported by sharia-sensitivity, higher awareness, and favourable regulatory environments. In emerging markets, organic growth is expected to drive similar expansion. Consolidation is likely to shape the sector, particularly for smaller Islamic banks with weaker franchises.

In the GCC, Jordan, Iraq, and Türkiye, Islamic banks already hold market shares of between 9% and 85% of sector assets, with growth forecasted to outpace that of conventional banks in 2025. Higher confidence in sharia-compliant banking, combined with supportive regulations, is driving this growth. In regions where Islamic banking remains nascent, government strategies and increasing banking penetration in general are set to promote the sector further.

The adoption of the AAOIFI Sharia Standard No. 62 could introduce new risks and challenges for Islamic banks. These will depend on the standard’s final form, its adoption across jurisdictions, and the manner of its implementation. However, Fitch remains optimistic that established Islamic banks are well-positioned to navigate these changes while continuing to expand their market share.

Both reports highlight a tempered yet optimistic view of banking in the Middle East and the EMEA region for 2025, with stable economic conditions and supportive regulatory frameworks expected to underpin the sector’s resilience.