THERE is growing belief in Southeast Asia’s US$290 bil (RM1.27 tril) Islamic banking market. Over the next three years, the market is poised to grow at a compound annual growth rate (CAGR) of about 8%, primarily led by Malaysia and Indonesia.
That’s according to a report published by S&P Global Ratings entitled “Growing Belief in Southeast Asia’s US$290 Bil Islamic Banking Market”.
Southeast Asia is currently the world’s third largest Islamic banking market, forming 17% of the US$1.7 tril in global Islamic banking assets.
“In the major markets of Malaysia and Indonesia, we believe Islamic banks will grow faster than conventional banks, riding on the robust demand,” S&P credit analyst Nikita Anand pointed out.
In Malaysia, local Islamic banks could account for about 45% of the overall commercial banking loan book by end-2026, the report finds. In Indonesia, the sector’s market share could improve to about 10% by end-2026.
In Brunei, Islamic financial institutions constitute about half of the total financial system assets and growth should mirror that of the broader banking system.
In the Philippines, the sector is small but there is an untapped market and regulators are striving to increase transparency in a bid to encourage local and foreign investment.
S&P expects this trajectory to face inevitable hurdles given the region’s recovery from COVID-19 has been uneven with pandemic-related loan relief having distorted the true health of asset quality.
Moreover, geopolitical shockwaves have also pushed up energy and commodity prices which could affect domestic demand.
Despite this, Islamic banks in both Malaysia and Indonesia are making greater efforts at digital transformation to narrow the wide technology gap with conventional peers.
“On the environmental, social, and governance (ESG) front, we believe top-tier Malaysian Islamic banks will benefit from the issuance of international sustainability sukuk (Islamic bond),” projected S&P’s credit analyst Rujun Duan.
“Such benchmark issuances will widen the investor base and facilitate broader awareness of Islamic finance and its intrinsic ESG connection in the international debt capital markets.” – May 11, 2022
