THE COVID-19 pandemic has wrought unprecedented havoc on the domestic economy.
Nonetheless, Malaysia’s Islamic banking sector managed to post a respectable 8.1% financing growth in 2020, while conventional banks merely inched up 1%, according to RAM Ratings.
Roughly similar to growth in 2019, the growth in 2020 was supported by the six-month blanket financing repayment moratorium and Government funding schemes.
Credit growth of the overall banking system continues to be fuelled by Islamic financing underpinned by the Islamic First agenda adopted by several major banking groups in the country.
The latter contributed to more than 80% of total incremental loans in 2020.
With the inclusion of financing from development financial institutions, the overall exposure to Islamic financing is estimated to have exceeded Bank Negara Malaysia’s (BNM) target of 40%.
Thus, RAM Ratings maintains its stable outlook on the Malaysian Islamic banking sector, in line with its view on the overall domestic banking system.
The rating house’s main expectations for the industry in 2021, as outlined in its annual publication, Islamic Banking Insight, include the following:
- Islamic financing to drive overall banking system’s credit expansion in 2021; financing to widen by 7% compared to 2% by conventional banks. Growth is underpinned by household financing.
- Asset quality indicators to be upheld by forbearance measures; Islamic banks’ gross impaired financing (GIF) ratio expected to rise to about 2% by end-2021 (end-December 2020: 1.3%), which still fares better than that of the conventional banks’ at around 2.5%.
- Sound liquidity position; higher current and savings account (CASA) balances largely aided by financing moratorium.
- Profitability to improve with broader margins and absence of modification losses, although provisioning will remain elevated.
- Still-strong capital position to cushion pressure on asset quality.
Despite the second movement control order (MCO 2.0) inflicted less damage on businesses compared to MCO 1.0, it has dampened economic recovery.
“We have therefore pencilled in a softer financing growth of about 7% for the Islamic banking industry this year,” projected RAM’s co-head of financial institution ratings Wong Yin Ching.
Meanwhile, the local Islamic banking sector’s financing quality fares better than conventional banks. Its GIF ratio stayed sound, clocking in at 1.35% as at end-January 2021 (end-December 2019: 1.45%), according to RAM. – March 25, 2021
