KUALA LUMPUR – Malaysia’s Islamic banking sector on path to lead regional growth, says S&P Global Ratings.
According to the S&P’s South and Southeast Asia associate director Nikita Anand, Southeast Asian Islamic banking sector is expected to expand at a compound annual rate of 8% in the coming three years and the forecast for Malaysia’s Islamic banking sector alone is expected to increase between 6% to 8% over the coming five years.
During the ‘Southeast Asia Islamic Banking Outlook’ webinar by S&P, Nikita stated that the Islamic banks in Malaysia could make up 45% of the total commercial banking loans by end of 2026. That would be an increase from the current 37.5%.
She added that a large part of Malaysia’s Islamic banking sector saw a positive profit rebound in 2021 following the decline recorded in 2020.
Nevertheless, some small banks still continue to struggle and have yet to regain their footing with many reporting losses with the trend likely to continue, she added.
In regards to the risks, Nikita stated that the sector remains dependent on the pandemic recovery, struggling households especially the lower income segment, and the small and medium enterprises (SMEs) as well.
“Additionally, geopolitical tensions and the Russian-Ukraine war have driven up prices for energy and commodities. Higher food prices will have an impact on household incomes.
“We also anticipate a rate hike of at least 50 basis points in Malaysia and Indonesia, and the higher interest rates will also have an impact on the vulnerable borrowers,” she explained.
Despite that, Nikita stated that the impact from the interest rate increase will take a longer time to be reflected on Islamic banking’s profitability.
Answering the question about the possibility of the Islamic fintech sector replacing Islamic banking’s role, she said there would be challenges to implement it particularly since there are still many conventional bank’s Islamic businesses growing rapidly.
“Over the recent one to two years, a number of smaller Islamic banks have received financing from foreign investors and they have since expanded their digital services.
“Therefore, Islamic fintech firms will need to provide cheaper products and services and they have to be technologically superior in order to replace these banks,” she continued.
Non-performing loans ratio expected to rise
Additionally, Nikita also stated that Malaysia’s Islamic banking sector may see a hike of 100 basis points in non-performing loan (NPL) ratio over the next 12 to 24 months from the recorded 1.3% as of February this year.
According to her, the increase will be after various moratoriums and relief programmes expires in the middle of 2022.
“In terms of profitability, banks have been accumulating provisions because they had time to smooth out the effects of these possible impacts.
“We believe that the earnings should have the capacity to absorb these credit costs. In fact, we also anticipate higher or elevated credit costs for the banking system this year,” she continued.
For Indonesia, she explained that the country is predicted to see NPL ratio hikes of 100-150 basis points as well by the end of next year, in tandem with elevated credit costs.
She further stated that regulatory forbearance which allowed the restructured loans to be categorised as performing will expire in March of 2023.
Malaysia leading ESG policies
Meanwhile, S&P Global Ratings South and Southeast Asia associate director Nancy Duan reported that Malaysia is leading in environmental, social and governance (ESG) investing strategies within Southeast Asia.
“Bank Negara Malaysia and the Securities Commission Malaysia have made significant efforts in the past to standardise the underwriting credit process and the banks have voluntarily conformed with those ESG rating requirements.
“That is a positive development and we expect other countries in the region to follow suit,” Duan stated.
According to S&P, 81% of Southeast Asia’s Islamic banking assets are from Malaysia. Indonesia comes next with 15% while Brunei records 4%.
Both Malaysia and Indonesia account for 96% of the region’s sector assets.
S&P also reported that Southeast Asia holds 17% (US$290 billion) worth of the total global Islamic banking assets valued at US$1.7 trillion.
Join our Telegram group for the latest updates!
Read more: Rafiza Ghazali to lead KAF’s Digital Islamic Bank
Discussion about this post