Growth of Islamic banking assets in Bahrain has generally averaged about 9%-10% over the last five years, which is faster than that of conventional retail assets, which averaged 5%-6% over the same period, says an S&P Global Ratings report.

Across Bahrain, there are nine active Islamic banks (six retail, three wholesale), in addition to several conventional retail banks that offer Islamic banking products and services. Islamic retail banks had total assets of $70.3 billion as of March 31, 2026. Islamic banks represent close to 30% of Bahrain's banking industry, including wholesale banks, and 70% of the industry's retail banking assets. 

Against the backdrop of the Middle East war, asset quality could come under pressure, but central bank support measures are likely to help keep this contained, it said.

Over the past several years, Bahrain's Islamic banking sector has seen a wave of consolidations. Notably, in 2024, Kuwait Finance House (KFH) acquired conventional bank Ahli United Bank (AUB) and through rebranding became KFH Bahrain, the country’s largest retail lender. Following the merger, KFH Bahrain was converted to Islamic banking. Also, before this, in 2022, Al Salam acquired retail lending assets from Ithmaar Bank and the carved-out assets of the previous subsidiary of KFH in Bahrain in 2024. As a result of these transactions, Islamic banking in Bahrain is highly concentrated, with these two banks representing about 80% of the Islamic retail market.

Over the past several years, Bahrain's Islamic banking sector has seen a wave of consolidations. Notably, in 2024, Kuwait Finance House (KFH) acquired conventional bank Ahli United Bank (AUB) and through rebranding became KFH Bahrain, the country’s largest retail lender. 

Consolidation can unlock cost efficiency 

In 2025, both conventional and Islamic retail banks in Bahrain delivered robust earnings performance, although conventional banks' earnings have historically been stronger and more stable. The average return on assets for Islamic banks over the past five years was 0.9% and improved to 1.2% in 2025. Some of this reflects Islamic banks' relatively more diverse income mix, as well as their more efficient cost bases. With the increase in Islamic retail banks' size and scale, returns are expected to continue to converge, the report said. 

Islamic banks and conventional retail banks have somewhat similar asset compositions, with lending typically representing 45%-50% of total assets and investment securities 25%-30%. 

Islamic banks have in the past relied heavily on customer deposits, which includes profit-sharing investment accounts (such as Wakala and Mudaraba accounts). Exposures funded by such Islamic investment accounts receive more favourable regulatory treatment than similar conventional accounts, since the risk-weight applied is reduced to reflect the theoretical capacity of such accounts to absorb losses. This in turn has supported somewhat higher capital adequacy ratios for Islamic banks relative to conventional banks, the report said. - TradeArabia News Service