The Middle East non-performing loan (NPL) space is evolving from a niche market into a major growth opportunity as banks in the region take initial steps to offloading weaker loans.
NPL ratios for banks in Saudi Arabia and the United Arab Emirates (UAE)—key Middle Eastern financial centers—are in the low single digits, according to data provider CEIC. Nevertheless, banks in these jurisdictions have made a strategic decision to review loan books and are being encouraged by their respective regulators to take a more rigorous approach to recognizing, disclosing and offloading their NPL exposures.
Landmark deals pave the way
As Saudi and Emirati banks have prioritized disposing of NPLs on their books, an increasing number of deal opportunities have opened up in the region for global private credit funds, banks and NPL investors over the past 24 months.
In 2023, US hedge fund Davidson Kempner secured a deal to acquire a portfolio of 44 non-performing corporate loans with a face value of around US$1.1 billion from Abu Dhabi Commercial Bank PJSC (ADCB), the Emirates’ second biggest lender. This landmark deal—the first by ADCB and at the time, appeared to be the largest ever NPL portfolio deal in Abu Dhabi—sparked subsequent Middle Eastern NPL transactions. Shortly thereafter, ADCB closed a second NPL deal, selling a US$357 million debt portfolio to an asset recovery fund advised by Grant Thornton.
Two years later, in 2025, Deutsche Bank acquired an NPL portfolio valued at around US$800 million from the UAE’s largest bank, First Abu Dhabi Bank PJSC, after prevailing in a competitive sales process. Meanwhile, ADCB is reportedly considering offloading another package of NPLs of around the same size as that sold to Grant Thornton in 2025, according to Bloomberg.
In Saudi Arabia, lenders are exploring options for offloading underperforming loans to free up capital for new lending, with the Saudi National Bank leading the way, per Bloomberg. Stakeholders believe 2025 will see the first large NPL deal come to market in Saudi Arabia.
Cleaning up balance sheets
Historically, banks in Saudi Arabia, the UAE and elsewhere in the Middle East have opted to sit on NPLs to avoid crystallizing losses and to eschew bad press. With NPL ratios very low and posing limited systemic risk, there was no impetus or requirement for banks to address NPLs early.
However, these dynamics have shifted since 2021. For example, in the UAE, legacy portfolios of non-performing debt have accumulated over the course of several credit cycles. This has been the case for lenders with exposure to large, distressed situations involving borrowers such as payments firm Finablr and construction business Arabtec, all of which collapsed.
With the first block of NPL deals involving UAE banks complete, lenders are now more comfortable and familiar with the process. This has encouraged banks in the region to use NPL deals to access liquidity and strengthen balance sheets.
UAE banks that have forged ahead with NPL deals have reaped the benefits. For example, ratings agency S&P upgraded ADCB’s credit rating in recognition of the steps the bank had taken to derisk its balance sheet.
Domestic banks in Saudi Arabia will play a crucial role in financing the “giga projects” that will drive the Vision 2030 plan, which will require around US$1 trillion in funding. As banks in the region accelerate lending to help develop huge tourism- and infrastructure-related projects, keeping a tighter grip on NPL exposures and capital ratios will be key.
Regulatory advances
NPL activity in the region is also benefitting from reforms to insolvency regimes. These have aligned Saudi Arabia and the UAE’s structures with international frameworks, providing greater familiarity for global investors considering NPL deals in these markets.
Regulators are also paying closer attention to banks’ exposure to weak loans. They are encouraging lenders to deal with any exposures early to maximize the broader banking system’s efficiency, Bloomberg reports.
For global banks and funds, the rise of the Middle East’s NPL market offers an opportunity to expand their emerging market businesses and gain exposure to resilient, cash-rich economies like Saudi Arabia and the UAE.
However, it will be important for both inbound and domestic banks and investors to manage expectations. As mentioned, NPL ratios in the Middle East are low and the NPL space in the region will be much smaller than that of sophisticated jurisdictions like Europe.
Prospective investors should also be prepared to acclimatize to the specific documentation and legal frameworks governing NPL transactions in the Middle East. These will offer broadly similar terms and enforcement rights to which US and European investors will be accustomed, but with unique nuances that will have to be reviewed and understood.
Recent changes to Federal Decree Law No. 23 of 2022 serve as an example of domestic enforcement subtleties that investors must factor into NPL deals in the region. This is an amendment to the UAE banking law that says for a loan to be enforceable, licensed financial institutions must have obtained sufficient guarantees. There has been some disagreement regarding the interpretation of the term “sufficient” in rulings in Dubai and Abu Dhabi, which has led to some uncertainty around what can and cannot be enforced.
However, these complexities are navigable and not dissimilar to minor differences between NPL regimes in individual European jurisdictions. With the right advice, international investors can work through these small areas of divergence.
The Middle East’s NPL market is still early in its development, but for investors who are realistic about its growth trajectory and invest in building knowledge of local frameworks, an attractive pipeline of NPL opportunities will surely open in the years ahead.