GCC Islamic banks show resilience amid geopolitical tensions

Islamic banks across the Gulf Cooperation Council (GCC) are demonstrating resilience amid heightened geopolitical tensions in the Middle East, supported by improved credit fundamentals and strong sovereign backing, according to a new report by Fitch Ratings.

In its latest report, Global Islamic Banks Hotspots April 2026, Fitch notes that Islamic banks entered the current period of uncertainty from a position of strength. Strengthened financial profiles including robust capital adequacy, ample liquidity buffers, and stable asset quality have helped cushion the immediate impact of regional instability on the sector.

The agency highlights that GCC-based Islamic banks are well positioned to absorb shocks if tensions remain contained. A key driver of this resilience is continued sovereign support, which underpins the majority of banks’ Long-Term Issuer Default Ratings (IDRs). This backing, combined with conservative risk management practices, has enabled Islamic banks to maintain stability despite volatile external conditions.

Fitch also points to favourable pre-existing economic conditions across the GCC, including elevated oil revenues, improved fiscal balances, and steady economic growth. These factors have supported stronger profitability and allowed banks to build capital buffers ahead of the current period of uncertainty, reinforcing their ability to navigate potential stress scenarios.

However, the report cautions that risks remain in the event of prolonged or escalating geopolitical tensions. Under a more adverse scenario, Islamic banks could face slower financing growth as economic activity moderates and business sentiment weakens. Asset quality may deteriorate, particularly in sectors exposed to external shocks, while profitability could come under pressure due to higher funding costs and increased provisioning.

Liquidity and capital buffers, although currently strong, could also be tested if financial market conditions tighten. Fitch warns that refinancing risks may rise amid weaker investor confidence, potentially affecting banks’ access to external funding markets and increasing the cost of capital.

Early indications of market disruption are already visible in the sukuk segment. Fitch notes that no sukuk issuances were recorded in March 2026, reflecting a pause in activity as issuers and investors adopt a cautious stance. This marks a deviation from earlier expectations of strong U.S. dollar-denominated debt issuance in the GCC and Turkey during 2026, following record issuance volumes in 2025.

The slowdown in issuance aligns with broader trends in regional debt capital markets, where volatility and uncertainty have led to delayed transactions and repricing of risk. Historically, such disruptions have proven temporary, with issuance activity rebounding once geopolitical conditions stabilise, although the timing and pace of recovery remain uncertain.

Beyond market dynamics, the report also highlights ongoing regulatory developments that could shape the future of Islamic finance. In particular, Fitch references the draft Shariah Standard No. 62 issued by the Accounting and Auditing Organisation for Islamic Financial Institutions. While the draft standard has not yet affected bank ratings, uncertainty persists regarding its final scope and implementation, with potential implications for product structures and compliance frameworks across jurisdictions.

Despite near-term headwinds, Fitch observes that regulatory authorities continue to support the expansion of Islamic banking, particularly in frontier and emerging markets across Africa, Asia, and the CIS+ region. Demand for Shariah-compliant financial services is growing in these regions, supported by demographic trends, financial inclusion initiatives, and evolving regulatory frameworks.

The report also identifies key credit themes in several Islamic banking markets, including Morocco and Nigeria in Africa; Malaysia and Indonesia in Asia; and Uzbekistan in the CIS+ region, alongside Turkey. These markets present varying risk profiles but collectively underscore the globalisation of Islamic finance beyond its traditional GCC stronghold.

Overall, Fitch’s assessment underscores the sector’s relative resilience in the face of geopolitical volatility, while highlighting the sensitivity of Islamic banks to external conditions, particularly in funding markets. While current buffers provide a degree of insulation, the outlook for the sector remains closely tied to the trajectory of regional tensions and global investor sentiment.