Islamic banks continue to outperform conventional banks, helped by lower funding costs and a higher proportion of retail financing.
Islamic banks will be the biggest beneficiaries in Saudi Arabia's banking sector from rising interest rates this year, according to Fitch Ratings.
Fitch said that the offsetting impact of higher funding costs will be less for Islamic banks than conventional banks, which will also be driven by higher proportion of non-profit bearing deposits.
Saudi Arabia's central bank raised the official repo rate from two per cent at end-2017 to 2.25 per cent in March and 2.5 per cent in June.
The rating agency expects Saudi Arabia banks' capital buffers to remain strong and sufficient to absorb a potential mild deterioration in asset quality, although financing growth is likely to remain muted.
Islamic banks in Saudi Arabia, like conventional banks, have benefitted from improved liquidity conditions. The Ministry of Finance established a Saudi riyal-denominated Sukuk programme which has been issuing regularly, a positive development to help Islamic banks manage their liquidity.
Saudi Arabia has the largest Islamic banks' financing base at 78, allowing commercial banks to operate alongside Islamic banks. Four of Saudi Arabia's 13 licenced commercial banks are fully Shari'ah compliant, while the other nine provide a mix of Shari'ah-compliant and conventional banking products and services.
Islamic banks are well capitalised, with an average Fitch Core Capital ratio of 18.6 per cent at end-2017, added Fitch Ratings.