Private credit and bonds transforming Middle East financial ecosystem

This transformation is happening at a time when the number of loans businesses are taking out with traditional lenders, like banks, is declining – loan volumes in the Middle East have significantly contracted this year, dropping at least 12% compared to the previous year for the same period. Across the broader Middle East and Africa (MEA) region, loan activity has declined by 30% to 40%. Despite this downturn in traditional lending, economic activity in the region remains strong with alternative financing mechanisms stepping in to bridge the gap.

Private credit

As banks adopt a more cautious stance to lending, particularly in high-growth sectors such as artificial intelligence, technology, and startups, private credit providers are increasingly stepping in to meet the demand for capital. This shift is reshaping the financial landscape, with private credit emerging as a vital source of funding. Although private credit typically comes at a higher cost than conventional bank loans, it offers borrowers greater flexibility, a broader range of financing options, and enhanced execution certainty. These advantages are proving attractive to businesses seeking capital in a risk-averse banking environment.

The growth of private credit across the region is being supported by progressive regulatory developments across the Gulf Cooperation Council (GCC). Jurisdictions such as Saudi Arabia, the Dubai International Financial Centre (DIFC), and the Abu Dhabi Global Market (ADGM) too, are introducing frameworks that enable asset managers to establish private credit funds. These reforms are making the GCC an increasingly attractive hub for alternative finance and are driving a surge in the establishment of such funds.

This evolution is shifting market dynamics in favour of borrowers. With a growing aversion to underwriting fees, many borrowers are turning to bilateral and club loan structures for faster execution and lower transaction costs.

Bonds

Bond issuance in the GCC has surged in 2025, driven by strong sovereign demand, corporate refinancing needs, and a strategic shift away from traditional bank lending. The Kingdom of Saudi Arabia (KSA) and the UAE lead the region in this regard, capitalising on favourable market conditions and investor appetite. According to the Kuwait Financial Centre (Markaz), primary debt issuances of bonds and sukuk reached $51.5 billion across 125 deals in the first quarter (Q1) 2025 alone, with KSA accounting for over $31 billion and the UAE following with $10.17 billion – up 61.6% year-on-year.

This pivot toward bonds is being fueled by rising interest rates and tighter bank lending standards, prompting borrowers to seek more flexible capital market solutions. Sovereign and corporate issuers have tapped global investors with multi-tranche offerings, while ESG-linked structures – particularly green and sustainability bonds – have broadened the investor base. These developments reflect the growing maturity and global integration of the region’s debt capital markets.

The bond boom has directly impacted loan volumes, with banks seeing reduced demand for syndicated and bilateral facilities, especially in higher-risk sectors. Dealogic data shows that Middle East debt capital markets volume reached $131.1 billion in Q1 2025, even as traditional loan activity contracted sharply. Liquidity from bond proceeds is being recycled into the banking system, shifting banks’ roles from primary lenders to secondary market participants and accelerating the move toward market-based financing.

Increased liquidity

The expansion of private credit and increased bond issuance have contributed to a surge in liquidity among local banks in the Middle East. Asian bank funding is also playing a growing role in diversifying funding sources across the Middle East with over $2 billion recently being made available to borrowers by Asian banks. This diversification of funding sources is enabling borrowers to access a wider array of currencies and tenors, extending beyond the traditional offerings of local markets.

A transforming financial ecosystem

The decline in traditional loan volumes is not a sign of economic slowdown but rather a reflection of a broader transformation in the region’s financial ecosystem. With private credit and bond markets stepping up, and regulatory frameworks evolving to support alternative finance, the Middle East is poised for a new era of capital deployment.

Co-written by Neelam Kaur of Pinsent Masons.