MALAYSIA’S Islamic banking sector has continued to expand amid economic challenges from the coronavirus pandemic.
The share of Islamic financing in the banking system reached 37% by end-2020 (end-2019: 35%) with Islamic financing contributing nearly all of the banking sector’s growth in 2020, driven by household financing and banks that promoted Islamic products as part of the “Islamic First” strategy.
In 2021, Fitch Ratings expects the Islamic banking sector’s credit profile to remain stable with adequate loss-absorption buffers despite near-term pressure on asset quality and profitability.
“We expect credit impairments to accelerate and credit provisions to remain high following a moratorium and other loan repayment relief provided to vulnerable borrowers which have masked banks’ underlying asset quality from 2020,” projected the credit rating agency.
“In the medium-term, the penetration of Islamic finance is likely to continue to rise due to an economic recovery (2021F gross domestic product [GDP] growth: 6.7%), a supportive regulatory environment, and banks that continue to promote Islamic products.”
Unique features of Malaysia’s Islamic banking industry, according to Fitch Ratings, include risk-sharing investment accounts (mudaraba and musharaka) which, among other areas, are not guaranteed under the deposit insurance scheme (DIS).
“Investment accounts in other jurisdictions are typically covered by DIS or government guarantee,” noted the rating agency. “Although these accounts are contractually loss absorbing, we have not seen cases of depositors bearing losses.”
The need to comply with sharia principles makes the banks’ transition away from London Interbank Offered Rate (Libor) more complex than for conventional products.
While legacy Islamic contracts will need to be individually re-negotiated, Islamic banks’ exposures to Libor are manageable.
“Malaysia continues to be the largest Islamic banking, sukuk (Islamic bond) and takaful (Islamic insurance) market in ASEAN,” added Fitch Ratings – Mar 1, 2021