How Enhanced Risk Frameworks are Strengthening the Gulf’s Banking Sector
The GCC banking sector enters 2025 from a position of strength, with robust profitability, strong capital buffers, and healthy asset quality indicators. However, as regional banks navigate evolving risks – from geopolitical tensions to digital transformation challenges – sophisticated risk management and reporting frameworks have become essential for sustained success.
The Current State: Resilience Amid Uncertainty
According to EY’s GCC Banking Sector Outlook, banks across the region demonstrated sustained credit growth during 2024, supported by robust transformation plans and resilient economic conditions. Asset quality has remained strong, with non-performing loans (NPLs) dropping to 4% of gross loans by September 2024 according to S&P Global Ratings.
The sector’s stability is reflected in decreasing exposure to riskier loans, showcasing the effectiveness of proactive asset management. Stage 2 and stage 3 loan exposures declined significantly in 2024 as some stage 2 loans were reclassified to performing status and stage 3 loans were written off.
Emerging Risk Landscape
Despite strong fundamentals, GCC banks face an evolving risk environment requiring heightened vigilance:
Interest Rate and Margin Risk
Following rate reductions in late 2024 and further cuts in September 2025, net interest margins have compressed from 2.8% in H1 2024 to 2.6% in H1 2025. While the overall impact is manageable – S&P Global estimates 25-50 basis points margin impact – banks must actively manage repricing risk and diversify revenue streams.
Real Estate Sector Concentration
Despite improved asset quality metrics, risks remain from high exposure to the real estate sector across several GCC markets. With infrastructure development driving credit growth particularly in Saudi Arabia and the UAE, monitoring and managing real estate exposure requires sophisticated risk analytics.
Geopolitical and Market Volatility
The region faces ongoing geopolitical tensions that could impact macroeconomic conditions. Additionally, oil price volatility—despite forecasts of $75 per barrel through 2025-2027—creates uncertainty requiring robust stress testing and scenario analysis.
Cybersecurity and Digital Risk
As banks accelerate digital transformation and AI adoption, cybersecurity threats have intensified. In a regional survey of GCC CEOs, over 60% cited cybersecurity as their top risk, while more than 50% identified compliance challenges related to digital innovation.
Best-Practice Risk Management Frameworks
Research examining risk management practices across 20 MENA countries demonstrates that effective risk governance frameworks play a pivotal role in mitigating systemic financial vulnerabilities while fostering sustainable economic development. For GCC banks specifically, several elements are critical:
Integrated Risk Measurement
Modern risk frameworks must capture credit risk, market risk, liquidity risk, operational risk, and increasingly, ESG (Environmental, Social, and Governance) risks in an integrated manner. Siloed risk management is no longer sufficient in today’s complex environment.
Enhanced Risk Reporting
Real-time risk dashboards, stress testing capabilities, and forward-looking risk metrics enable management and boards to make informed decisions quickly. AI-driven analytics are increasingly supporting risk identification and scenario planning.
Regulatory Alignment
GCC banks are preparing for evolving regulatory requirements including Basel III implementation, Anti-Money-Laundering and Countering the Financing of Terrorism (AML/CFT) standards, and emerging ESG disclosure requirements. Gulf Bank Kuwait, for example, completed its sustainability governance infrastructure in 2024 and is preparing to implement IFRS S1 and S2 sustainability disclosure standards in 2025.
Risk Culture and Governance
Effective risk management requires more than systems and processes—it demands a strong risk culture. Banks must ensure clear accountability, appropriate risk appetite frameworks, and alignment of incentives with risk-adjusted performance.
The AI Revolution in Risk Management
Artificial intelligence is transforming risk management capabilities across the GCC. According to a comprehensive regional analysis, AI applications in financial services are particularly advanced in:
Fraud Detection: AI-driven systems analyze transaction patterns in real-time, identifying anomalies and preventing fraudulent activities more effectively than traditional rules-based approaches
Credit Scoring: Machine learning models incorporate alternative data sources and detect subtle patterns, improving credit decisioning while maintaining fairness and explainability
Risk Forecasting: AI enhances stress testing and scenario analysis, enabling banks to anticipate risks under varying economic conditions
Compliance Monitoring: Automated systems screen transactions, monitor regulatory changes, and flag potential compliance issues, reducing manual effort and improving effectiveness
However, AI adoption also creates new risks. Over 60% of GCC firms identify compliance challenges as a top concern, while data quality issues, model governance, and explainability requirements demand careful attention.
From Risk Management to Strategic Advantage
Leading GCC banks are moving beyond viewing risk management as purely defensive to recognizing it as a source of competitive advantage. By implementing sophisticated risk frameworks, banks can:
- Price products more accurately, incorporating risk-adjusted returns
- Allocate capital more efficiently to highest-return opportunities
- Make faster, more confident decisions on complex transactions
- Build customer trust through transparent risk governance
- Meet regulatory expectations proactively rather than reactively
Implementation Priorities for 2025
As GCC banks continue their positive trajectory, several risk management priorities emerge:
Enhance Margin Risk Management: Develop sophisticated analytics to monitor and manage margin compression in a declining rate environment
Strengthen Cybersecurity: Invest in advanced threat detection, incident response capabilities, and security awareness programs
Implement ESG Risk Frameworks: Develop methodologies to assess and report climate risks, social impacts, and governance practices
Upgrade Risk Technology: Invest in integrated risk platforms, AI/ML capabilities, and real-time reporting infrastructure
Deepen Risk Culture: Ensure risk awareness permeates all levels of the organization through training, communication, and aligned incentives
Conclusion: Risk as Resilience
The GCC banking sector’s resilience stems not from avoiding risks but from managing them effectively. As Mayur Pau, MENA Financial Services Leader at EY, notes: “”With solid capital buffers, healthier balance sheets and improved efficiency, banks are well-positioned to navigate near-term pressures and pursue long-term opportunities.””
Institutions that invest in sophisticated risk management and reporting frameworks—supported by advanced technology and embedded in strong governance—will not only weather challenges but emerge stronger and more competitive. In the dynamic GCC market, effective risk management is the foundation of sustainable success.
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References:
- EY. GCC banking sector outlook Year-end report 2024. https://www.ey.com/content/dam/ey-unified-site/ey-com/en-ae/technical/banking-and-capital-markets/documents/ey-gcc-banking-sector-outlook.pdf
- S&P Global. Profitability, asset quality to boost GCC banking sector resilience in 2025. Economy Middle East, November 13, 2024.
- Consultancy Middle East. GCC banking sector remains resilient with strong performance in H1 2025.
- MDPI.The Impact of Risk Management on Countries in the MENA Region. Journal of Risk and Financial Management, May 1, 2025.
- ResearchAndMarkets.com. AI in the Middle East Adoption Trends, Readiness, and Risk Landscape Analysis Report 2025.
- Kuwait Times. Gulf Bank issues its fifth Annual Sustainability Report for 2024. April 28, 2025.