KUALA LUMPUR – Malaysia’s Islamic banks are expected to expand at a compound annual growth rate (CAGR) of between 6% to 8% in the coming five years.
The S&P Global Ratings firm explained that it would mean Malaysian Islamic banks may attribute up to 45% of overall commercial banking loans by the end of 2026.
In a published report titled ‘Growing Belief in Southeast Asia’s US$290 billion Islamic Banking Market,” it states that the estimates would mark a 37.5% increase from this year’s January numbers.
According to the report, long-term expansion for Malaysia’s Islamic banking sector is optimistic and the industry would likely benefit from the issuance of international sustainable sukuk.
Despite that, the report also highlights that there may be short-term headwinds that might hamper loan growth recovery with the Islamic banks’ retail and small and medium enterprise (SME) portfolios. However so, the SME and retail sector is expected to recover gradually, in line with economic trends.
The ratings agency stated that just like their conventional peers, Islamic banks cater to portfolio skewed more towards mass consumer banking and SMEs and also less toward big companies, which fulfils a significant part of their financing via capital market borrowings.
Due to that, the skew could reflect a weaker comeback of loan growth this year, while credit costs may need to stay elevated for longer.
S&P also stated that Malaysia’s Islamic banking sector may see an increase of ratio on gross nonperforming loans (NPL). The ratio is expected to rise by 100 basis points within the coming 12-24 months, an increase of 1.3% from February 2022’s figures, brought on by expiry of moratoriums and relief programs in the middle of this year.
In terms of environmental, social and governance (ESG), the agency is anticipating Malaysian regulators and the local Islamic finance companies to place greater emphasis on incorporating ESG factors into shariah banking.
It stated that measures taken by regulatory bodies have allowed for increased lending to priority sectors and issuing of green and sustainability bonds within the domestic market.
Furthermore, S&P had highlighted that Malaysia’s Islamic banks in the top-tier would gain from issuing international sukuk carrying an ESG label.
“These benchmark issuance will result in a broader investor base that would ultimately pave the road for better understanding of Islamic finance as well as its ESG connection on the international debt capital market.
“It could further lead to decreasing issuance costs attributed to the standardisation of the issuance process,” it continued.
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