For almost a decade, retail banking has expanded briskly in the countries of the Gulf Cooperation Council—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Favorable oil prices, sustained GDP growth, high lending margins, and a young and growing population ready for consumer loans and credit cards have persuaded many institutions to go beyond corporate banking. That move has earned them solid profits (Exhibit 1). Indeed, by growing with the local lending markets and holding a considerable number of deposits from Islamic customers, who forgo interest because of religious considerations, many Gulf banks can boast higher levels of profitability than most retail banks in Western Europe.¹

But the growth of the simpler lending products has now slowed down, and with interest rates in decline the advantage of sitting on deposits that bear no interest shrinks day by day. As a result, Gulf banks now realize that continued revenue growth will come only from deeper market penetration, which means developing and selling more sophisticated products. Competition is already heating up. Top-performing local banks that entered the consumer market early, such as National Bank of Kuwait (NBK), are busy building their marketing, sales, and distribution skills. International institutions...