Dubai, UAE — Financial institutions across the Gulf should place greater emphasis on credit resilience as geopolitical and economic risks become more interconnected, according to a new analysis by KPMG, which urges lenders to adopt more forward-looking approaches to credit risk management.
The report, Credit Risk Considerations During Times of Geopolitical Upheaval, sets out a framework designed to help financial institutions strengthen credit risk management through scenario analysis, governance and dynamic portfolio monitoring.
The analysis comes as the GCC banking sector continues to post strong financial fundamentals. KPMG said earlier reports showed the sector maintained a capital adequacy ratio of 19.3 percent, reflecting years of prudent risk management and balance sheet discipline, providing a solid foundation as banks strengthen resilience in a changing operating environment.
Against heightened geopolitical tensions and disruption around the Strait of Hormuz, the report examines how external developments could affect borrower performance, funding conditions and portfolio quality across the region.
It says maintaining credit resilience increasingly depends on financial institutions’ ability to anticipate emerging risks before they result in credit deterioration.
Craig Wright, Partner and Head of Enterprise Risk Services at KPMG Middle East, said: “The GCC financial sector has done the hard work of building strong capital buffers and disciplined provisioning practices. That gives institutions a solid foundation. Today’s environment calls for continuous reassessment rather than periodic review. Institutions need to challenge assumptions, stress-test portfolios against multiple scenarios, and ensure credit decisions reflect emerging risks, not just historical conditions.”
At the centre of the analysis is a four-scenario framework that allows financial institutions to assess how different geopolitical and economic conditions could affect liquidity, funding costs and asset quality.
Rather than forecasting a single outcome, the framework is intended to support scenario analysis, stress testing and provisioning across a range of operating environments, from short-term disruption to prolonged structural change. The report also highlights the stabilising role central banks may play in supporting liquidity during prolonged market disruption.
Across all scenarios, the analysis identifies three recurring areas of pressure. Retail portfolios face income erosion and inflation-driven repayment stress, while corporate borrowers are exposed to revenue disruption, higher funding costs and drawdown pressure on credit facilities. Commercial real estate, particularly in markets with significant expatriate populations, faces collateral valuation risk as market conditions shift.
KPMG recommends that financial institutions update credit loss assessments to reflect changing macroeconomic conditions, regularly stress-test portfolios, strengthen oversight of higher-risk sectors and reinforce governance over credit risk management.
It also encourages financial institutions to embed geopolitical and macroeconomic developments more deeply into their credit risk frameworks while building on the financial strength that has helped the sector remain resilient during periods of heightened uncertainty.
