Turning Non-Performing Loans from Risk to Opportunity

Non-performing loans (NPLs) are a significant concern for banks and regulators in the Middle East, as high NPL levels can bring heightened risks around, capital adequacy, and overall financial stability. Experts from IMAP Haykala reflect on the state of the region’s NPL market and outline what banks can do to turn risk into opportunity.

Non-Performing Loans (NPLs) have long been a barometer of financial stress within banking systems. As macroeconomic headwinds persist and regional debt profiles evolve, the management and resolution of NPLs have become a priority for regulators, investors, and institutions alike.

According to S&P Capital IQ data as of March 2025, the GCC ranks 5th globally in terms of total NPLs, with a reported SAR 215 billion in defaulted loans. While the region only comprises 2.8% of global banking assets, it accounts for 5.5% of the world’s NPLs – a disproportionate share that reflects structural pressures and asset quality dynamics.

A high level of non-performing assets has wide-reaching implications. For banks, elevated NPL levels mean higher provisioning costs, constrained capital, and reduced ability to extend fresh credit. For borrowers, it results in strained relationships with financial institutions, tighter liquidity, and often, operational slowdowns.

The broader economy meanwhile suffers from inefficient allocation of financial resources and slower investment cycles.

Saudi Arabia stands out

Encouragingly, Saudi Arabia stands out as a beacon of prudence within the region. The Kingdom has the lowest NPL-to-asset ratio among GCC nations, underpinned by strong capital adequacy and high profitability.

Median NPLs among Saudi banks represent just 0.9% of total assets, compared to 2.3% in the UAE and a striking 3.6% in Oman. This resilience indicates better asset quality and prudent lending practices. It also strengthens investor confidence and reduces capital impairment risk.

However, even in this relatively healthy ecosystem, impairments made against bad loans are taking a toll on profitability. Saudi banks are allocating an average of 8.4% of net interest income (NII) to provisioning – essentially eroding earnings that could otherwise be returned to shareholders or reinvested into the economy.

The impact is more severe in other GCC countries. In Qatar, for example, banks are diverting a staggering 33.5% of their NII to cover impairments, while UAE banks allocate around 17.3%. These figures highlight the drag that unresolved NPLs pose to the financial system.

Provisioning for loan impairments significantly eats into the net interest income across the region. This reinforces the need for proactive NPL resolution strategies to preserve profitability and credit availability.

Systemic stability

From a regulatory standpoint, managing NPLs has become central to maintaining systemic stability. Under IFRS 9, banks are required to recognize impairments much earlier in the credit lifecycle than before. This includes Stage 1 loans, which may show no signs of distress, but carry a non-zero probability of default.

While the standard introduces forward-looking transparency, it also places greater responsibility on banks to proactively identify and mitigate credit risks. The rise in stage 2 and stage 3 loans under IFRS 9 seen in the Middle East underscores the urgency.

Turning challenge into opportunity

Banks that manage NPLs effectively not only protect their capital but also unlock shareholder value. Doing so is however easier said than done – it requires strategic insight, financial agility, and stakeholder trust

At IMAP Haykala, we specialize in restructuring and turnaround services for institutions navigating financial distress. We help banks and borrowers redesign debt structures, negotiate with creditors, and realign capital for stability. Through detailed financial modeling and risk diagnostics, our team ensures that recoveries are maximized and stakeholder interests are preserved.

IMAP Haykala supports such loan restructuring processes through a mix of technical expertise, regulatory alignment, and practical execution – delivering tangible results in turnaround cases.

In addition to our financial engineering capabilities, we also serve as trusted intermediaries in delicate creditor-borrower negotiations. These discussions require not just financial savvy but also a deep understanding of regulatory expectations, stakeholder sensitivities, and value preservation mechanisms. Our team helps expedite resolutions and reduce the risk of value-destructive litigation or enforcement actions.

Moreover, our partnership with the global IMAP network allows us to leverage cross-border restructuring expertise, giving GCC-based stakeholders access to international best practices in distressed asset resolution. This global-local synergy is particularly important in cases involving foreign lenders, cross-listed companies, or multi-jurisdictional assets.

The outlook

Looking ahead, GCC’s financial institutions will likely face a new wave of credit assessments as part of post-pandemic recovery evaluations, Vision 2030 initiatives, and environmental, social, and governance (ESG) alignments. In this evolving environment, the ability to manage and reduce NPLs will remain a key differentiator in the financial services landscape.

NPLs are not merely a legacy issue – they represent a pressing strategic challenge with financial, operational, and reputational consequences. At IMAP Haykala, we stand committed to helping stakeholders across GCC turn these hidden threats into opportunities for recovery and renewal.