Islamic Banks in GCC Poised for Solid Profit Edge in 2025

Islamic banks across the Gulf Cooperation Council are expected to deliver higher net profitability than their conventional counterparts in 2025, according to a Moody’s analysis. The rating agency highlights that even as interest rates decline, Islamic lenders will maintain a margin advantage driven by their retail-heavy portfolios and stable asset yields.

Moody’s projects that the U. S. Federal Reserve will cut interest rates by 50 to 75 basis points across the year. These cuts are expected to reduce funding costs for Islamic banks, particularly benefiting segments such as Shariah-compliant mortgages which tend to rely heavily on deposit funding.

Another factor contributing to projected outperformance is the relatively stable asset yields Islamic banks typically command. Despite falling rates, their income from existing fixed-rate assets is likely to cushion profit erosion. The retail skew of their businesses amplifies this effect, as many customers hold fixed-rate financing or mortgages, which under Islamic banking do not shift with short-term rate movements in the same way as conventional floating-rate loans.

On the conventional banking side, margins are under pressure from rising funding costs and competitive pressure on loan pricing. The conventional banks’ dependency on non-deposit and higher-cost funding sources means lower rates will squeeze net interest margins more sharply.

Moody’s report also draws attention to the broader macroeconomic environment in the GCC: oil revenues remain strong, government programmes continue to support economic diversification, and consumer demand is steady. These conditions provide stability to credit quality and support growth in financing and deposit bases for Islamic banks.