Regulatory changes, economic diversification efforts and digital advancements are shaping the GCC banking sector’s robust performance.

As of Q1 2024, the total assets of banks in the GCC alone were estimated to exceed $3.3tn, with conventional banking assets at $2.4tn and Islamic banking assets at $0.9tn, according to a recent report by Kuwait’s Kamco Invest.

This substantial asset base reflects the sector’s resilience and capacity to support economic activities across the region.

Profitability and returns

Despite global economic uncertainties, GCC banks have maintained strong profitability. Studies indicate that banks in the region are not only growing but also generating significant returns on their equity.

In Q1 2024, the GCC banking sector’s aggregate return on equity (RoE) improved to 13.5% from 13.4% in Q4 2023, reaching pre-pandemic levels, according to research from Kamco Invest.

Specifically, UAE-listed banks had the highest RoE at 16.9%, followed by Saudi banks at 12.8% and Qatari banks at 12.7%. Kuwaiti banks had an RoE of 10.4%, Bahraini banks 9.6% and Omani banks 8.7%.

Customer confidence and liquidity

Meanwhile, customer deposits in the GCC banking sector hit a record high of $2.5tn in Q1 2024, marking 12 consecutive quarters of growth, according to Kamco Invest. This surge in deposits indicates strong consumer confidence in the banking system and provides banks with a stable funding source for lending and investment activities.

The loan-to-deposit ratio for the GCC banking sector declined to 78.7% in Q1 2024, the lowest in four quarters, suggesting a steep increase in customer deposits compared to a more minor increase in loans. This ratio signifies that banks have a substantial liquidity buffer, enhancing their ability to withstand economic shocks.

Net interest income

Despite the overall growth, aggregate net interest income for GCC banks saw its first decline in four quarters, totalling $21.3bn in Q1 2024, a 0.4% decrease from the previous quarter, according to Kamco Invest.

This slight decline can be attributed to higher funding costs, which have affected net interest margins. However, the strong asset growth and profitability metrics indicate that lenders are effectively managing these challenges.

Financial inclusion efforts

According to the World Economic Forum 2021, efforts to promote financial inclusion are essential for sustainable economic growth and stability. Countries can foster inclusive growth and mitigate inequality by ensuring all individuals and businesses have access to essential financial services.

Such efforts have gained momentum across the GCC, but there is a marked divergence.

According to the Washington-based IMF, access to bank accounts is higher in the GCC, while low-income countries in the Middle East and North Africa region have the lowest access. In Morocco, for example, financial inclusion rates rose to 50% in 2022, up from 29% in 2017, as reported by the World Bank.

Governments in the region have launched initiatives to boost financial inclusion in their countries.

In Saudi Arabia, the Financial Sector Development Programme aims to strengthen financial institutions’ support for the private sector. The initiative seeks to increase the proportion of non-cash transactions from 36% in 2019 to 70% in 2025, thereby reducing reliance on cash transactions and enhancing financial accessibility.

Meanwhile, Egypt’s Financial Inclusion Strategy focuses on collaborating with state authorities to provide affordable banking services, as part of the Central Bank of Egypt’s ongoing efforts to boost financial inclusion in the country.

The UAE launched its Financial Infrastructure Transformation Programme in 2023 to modernise its financial infrastructure, leveraging digital transformation to promote financial inclusion. The initiative aims to improve cross-border cooperation through strategic partnerships to enhance financial transfer processes.

In line with these efforts, the UAE is also looking to participate in global initiatives such as the GCC’s Real Time Gross Settlement (GCC-RTGS) system and the Arab Regional Payments System (Buna), according to the country’s Finance Ministry.

Central banks also play an important role in promoting initiatives to bring the unbanked population into the formal financial system. One recent example is the development of central bank digital currency (CBDC), especially in emerging and low-income countries. CBDCs can help overcome barriers to financial inclusion and can be accepted by the financially excluded for digital payments, serving as a gateway to the formal financial system.

This progress is crucial for economic development and social inclusion, ensuring more people can participate in the financial system.

Regulatory changes

Regulatory changes are crucial as they not only protect the banking sector from emerging risks but also create an enabling environment for growth and innovation. Key reforms are being implemented in the GCC banking sector to improve transparency, risk management and compliance standards across the region.

In Saudi Arabia, the Saudi Central Bank (Sama) has introduced new regulations focused on strengthening cybersecurity measures and enhancing the resilience of financial institutions against cyber threats. These regulations are part of a broader effort to modernise the financial system and ensure it can withstand evolving risks.

The UAE has also been proactive in updating its regulatory framework. The central bank has issued new guidelines on anti-money laundering and counter-terrorism financing to align with international standards.

Bahrain, meanwhile, has implemented reforms to support digital transformation in banking. The Central Bank of Bahrain has introduced regulatory sandbox initiatives to encourage innovation and provide a controlled environment for testing new financial technologies.

Digital transformation

Digital banking services have also become mainstream and this trend is expected to accelerate.

In Egypt, for example, the number of mobile wallet users reached 22 million in 2023, according to the Central Bank of Egypt, reflecting a growing preference for digital financial services.

This shift towards digital banking is mirrored across the GCC.

The adoption of cloud services, artificial intelligence (AI) and machine learning for financial crime detection is significant, particularly in the UAE, where digital banking penetration is high. This is reflected in projections published by the Australian financial comparison website Finder, which expects the UAE’s digital banking penetration to increase by 22 percentage points to reach 41% by the end of 2027.

As banks continue to invest in technology to enhance the customer experience, improve operational efficiency and drive innovation, adopting AI, Big Data analytics and blockchain will be pivotal.