Qatar's Islamic banks surged on Sunday after the Gulf state's central bank instructed conventional lenders to stop their Islamic operations.
Most regional markets gained as fears over Egypt unrest.
Qatar Islamic Bank, Qatar International Islamic Bank and Masraf Al Rayan all rose more than 9 per cent. A fourth Islamic lender, Barwa Bank, is unlisted.
The central bank issued a circular over the weekend, saying "it has been decided to terminate the activities of the Islamic finance services" of conventional banks.
"We expect banks either to wind down, convert (mainly corporate) Islamic finance into conventional loans or to sell their Islamic finance loans to Islamic banks," Jaap Meijer, AlembicHC senior analyst, wrote in a note to clients.
The gains by the bank shares were justified, said Patrick Rahal, senior analyst at Doha's The First Investor, but could prompt profit-taking on Monday.
Qatar National Bank dropped 4.8 per cent. Islamic finance accounts for more than a tenth of QNB's assets and a sixth of loans, Meijer added, so it is likely to be most negatively impacted by the central bank ruling.
In Saudi Arabia, Samba Financial Group climbed 0.9 per cent and Arab Bank rose 1.7 per cent.
Sofia El Boury, Shuaa Capital assistant vice-president for research, said Saudi banks had the most potential regionally.
"The catalyst will be increased lending growth to corporate borrowers. There will be a number of drivers... with the biggest being large government infrastructure spending," said Boury.
"The contribution of local banks in terms of providing project financing will increase, it's just that 2010 was a year of risk aversion and insufficient credit demand.
"There's a will from the authorities to channel excess liquidity into lending. Banks' liquidity positions are comfortable and have the capacity to lend, but they need an extra push to make that happen," she said.
In December, Saudi Arabia announced a record budget for 2011 of $155 billion.
The index rose 0.8 per cent, its fourth straight gain.
"We're expecting a choppy few weeks and won't get massive moves in either direction unless there are major political developments in Egypt, which is the main driver," said a Riyadh-based trader who asked not to be identified.
"Stocks should amble along without much conviction."
Egypt tried to get the nation back to work on Sunday with banks reopening, and the vice president held unprecedented talks with a banned Islamist group and other opponents about their demand that President Hosni Mubarak quit.
Dubai Islamic Bank rose 3.6 per cent to a three-month high, helping Dubai's index gain for a third session in four.
"This is probably in line with the numbers coming out of the UAE banking sector - people are now expecting lower provisions, so the numbers should be good," said Haissam Arabi, chief executive and fund manager at Gulfmena Alternative Investments.
Last week, Fitch Ratings gave Dubai Islamic a stable outlook, while National Bank of Abu Dhabi's quarterly profit rose 71 per cent. The latter fell 0.4 per cent.
"Markets in the Gulf are up following the improving picture in Egypt," added Arabi. "We're still playing catch-up after the irrational sell-off last week and interest is gradually coming back."
QATAR: The index rose 1.5 per cent to 8,891 points.
SAUDI ARABIA: The index climbed 0.8 per cent to 6,585 points.
DUBAI: The measure rose 1.6 per cent to 1,606 points.
ABU DHABI: The benchmark climbed 1.1 per cent to 2,674 points.
KUWAIT: The index fell 0.4 per cent to 6,747 points.
OMAN: The index rose 0.4 per cent to 6,886 points.
BAHRAIN: The measure climbed 0.6 per cent to 1,451 points.
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