S&P Global Ratings said that the Islamic banking sector in Saudi Arabia continues to grow supported by the targets of 'Vision 2030' and capital market reforms, noting that Islamic finance represents about 76 percent of the total assets of the banking sector in the Kingdom.

The agency explained in a report that Saudi Islamic banks have expanded in recent years from a model mainly reliant on the retail sector to corporate financing, major projects, and small and medium enterprises, with rising financing needs to support economic diversification programs and projects related to 'Vision 2030'.

The report indicated that the total assets of the largest four Islamic banks in the Kingdom more than doubled over the past five years, recording growth of 2.1 times, surpassing the growth of the largest six conventional banks, which reached 1.8 times over the same period.

According to S&P, the growth was mainly driven by expansion in Sharia-compliant residential mortgage financing, along with increased financing for non-oil sectors, government projects, and infrastructure. Financing for small and medium enterprises also rose, currently representing more than 11 percent of total credit.

The report showed that Saudi Islamic banks' financing portfolios are more concentrated in the retail sector at about 53 percent, followed by the corporate sector at 38 percent by the end of 2025.

The agency noted that Islamic banks benefit from a strong deposit base, as customer deposits accounted for about 87 percent of their funding sources by the end of March 2026, compared to 82 percent for conventional banks, while reliance on wholesale financing remained limited at about 14 percent.

It added that the profitability of Islamic banks remained close to their conventional peers, with return on average assets at about 1.8 percent by the end of March 2026, while the net financing margin stood at about 2.8 percent by the end of 2025.

Regarding asset quality, the agency stated that the average non-performing financing ratio for Islamic and conventional banks reached about 0.95 percent by the end of 2025, noting that direct exposure to the real estate and construction sectors for Islamic banks is less than 10 percent of loans.

S&P expects the continued expansion of the Islamic banking sector in Saudi Arabia in the coming period, supported by growth in sukuk issuance and the development of capital markets, Islamic finance, and financial technology, with banks needing to balance growth and capital requirements amid liquidity challenges.